Question 1

Kemptron Ltd manufacture "WIZARD" hot water systems. The company was established in 1986 by Sharp (an inventor) and now owns the world-wide patents to Sharp's revolutionary solar powered water-heating technology.Through the use of this technology, "WIZARD" water heaters rapidly became the most popular water heater on the Australian market with a 70% market share.

The Board of Kemptron Ltd is made up of Sharp, his wife, and three directors nominated to the Board by Warlock Industries Inc. (a United States company). Warlock funded Kemptron in its initial development and still owns over 60% of the company's shares. (Sharp and his wife own 30% of the shares, the rest are held by institutional investors).Sharp is the Managing Director.The constitution provides that the quorum for a directors' meeting is 3 directors. The constitution also provides that a directors' resolution must be passed by a majority vote.

Sharp has recently developed an improvement to the design of the "WIZARD" heaters. He wants Kemptron to outlay funds to modify their existing manufacturing process so that they can build water heaters to his new design. The Board is unwilling to outlay the money in these hard economic times. Sharp is furious.

One day, when only one of the three Warlock nominee directors turns up to the regular weekly Board meeting, Sharp decides to act. He puts to the Board a proposal that, as Kemptron is not willing to make use of the improved technology, they should exclusively licence someone else to do so. He proposes that Edwards Pty Ltd (a company in which Sharp and his wife hold all the shares) be so licensed, for a once off fee of $150,000 (AUD). The Board agrees to this proposal by a majority of 2:1. The Warlock representative protests but he is out voted by Sharp and his wife. At no stage does Sharp reveal the interest he and his wife hold in Edwards Pty Ltd.

Edwards are now selling the improved water-heaters. They are proving very popular and, as a result of the new technology employed, they are half the cost of the "WIZARD" heaters. Edwards are expecting to sell over 3,000 units in the next twelve months. This would constitute about 50% of all new sales, on the basis of previous years' figures. Kemptron Ltd is facing the prospect of financial ruin. The Directors (other than Mr & Mrs Sharp) approach you for advice.

They tell you that the fact that Edwards Pty Ltd is controlled by Mr & Mrs Sharp was never made known to them and that they have only recently discovered the truth. They have also just obtained independent valuations of the new technology which puts its current capital value at over $15M (AUD). They say that $150,000 (AUD) is ridiculously cheap for an exclusive world-wide licence of such valuable technology.

(a) Advise them on the rights of Kemptron Ltd on the above facts.

(b) If Sharp and his wife owned 60% of the shares in Kemptron and controlled 3 positions on the Board how would that change the situation?