In 2021, Macquarie University formed MQU Sharetraders Pty Ltd (hereafter "MQUS") a proprietary company with liability limited by shares, for the purposes of investing in the share market and making a profit from $10m in funds contributed by the University. Two staff members at Macquarie University, Eric and Bob assisted in setting up MQUS, helped to negotiate the terms on which MQUS got access to the initial funds from Macquarie University, and helped register MQUS with ASIC.

MQUS's registration documents disclosed that it issued 100 shares in total, one each to Eric and Bob for their roles in promoting MQUS in addition to their normal (quite significant) staff pay from the University, 51 shares to Macquarie University in exchange for the seed capital for MQUS (the $10m funds), 10 shares each to four directors (Cynthia, Tom, Steven and Rahat, all heads of departments in Macquarie University's Business School, and each of which agreed to be listed on the registration documents), and the remaining 7 shares to be held by the company for securing future investment or contributions. MQUS appointed a secretary and an external auditor.

MQUS's constitution states that it will pay an annual divided each year on the anniversary of its registration, in the amount of 10% of the net profits of the company calculated one week before the end of each year of trading. The constitution also provides that MQUS can enter into contracts with the signature of at least one director, and it requires monthly meetings of the directors. In the initial director's meeting, Cynthia, Tom, Steven and Rahat elect Cynthia managing director, and task her with the duties of running MQUS's day-to-day operations.

Cynthia uses some of the seed capital to rent space for a full year at WeWorking Sydney CBD with rent payable in monthly instalments, to purchase computers, and to hire and retain 45 students from the Macquarie University Business School (graduates of ACCG6014, of course) to start trading shares and options on the ASX for MQUS. Cynthia also offers employment contracts to each of the four directors, each of whom accept and join MQUS as employees alongside their existing jobs.

At the second meeting of the directors, Cynthia proposes and all four directors vote in favour of establishing a bonus scheme to be paid out every six months for the MQUS employees on top of their usual pay. The bonus scheme is designed to encourage the employees to purchase risky investments in an attempt to increase MQUS's potential return on its investments, and higher return payouts if possible to MQUS's shareholders.

In the first three month of operation, the investment choices of MQUS's employees are wildly successful, doubling its assets, and returning huge profits for the company. On the basis of these profits, MQUS's managing director Cynthia goes out and secures even more capital ($100m) from an excess tuition fund operated by University of Sydney in the form of a loan, with 5% interest per year, payable in monthly instalments. Cynthia does this without consulting the other directors and without securing shareholder approval. With the additional capital, MQUS's successes grow exponentially for another three months, and MQUS pays its employees a first huge six-month bonus.

Low and behold, a few months later (9 months after registration with ASIC) disaster strikes and soon every single one of MQUS's high-risk investments tanks, reducing MQUS's business value to more than a peppercorn, but not much more. MQUS is unable to pay for its super-fancy WeWorking space in the Sydney CBD, to pay its employees, or to pay even the interest on the loan from the University of Sydney.

Directors Tom and Steven issue public statements that they did not know about the loan from the University of Sydney. Macquarie University and the University of Sydney deny that the money came from excess student tuition funds.

Question 1: In your opinion, did the business regulation system fail? Why or why not?

Question 2: If you had been asked to set up this business, and you did, other than making better investment decisions, what would you have done differently?