Question

Additional Revision Questions Question 1 Supercool Shops Ltd...

Additional Revision Questions

Question 1

Supercool Shops Ltd ("Supercool") is a publicly listed property development and investment company that specialises in purchasing large parcels of land on which they then develop and operate shopping centres. The board of Supercool consists of one executive director, Derek Manning (who is also the Managing Director) and four non-executive directors, Bob Doggett, Marlene Manning (who is the chairperson), Tom Johnson and Bill Rogers. Of all the directors, only Derek and Marlene have any financial experience, the others being ex-builders. Jeff Finster is the CFO of the company and often attends board meetings to advise on the financial position and financial reports of the company. His team is also engaged in the valuation of new development opportunities that arise.

The investment model used by Supercool has been reliant and very high leverage ratios. However, in the post-GFC era this has meant that their banks have been less willing to provide long-term finance. In the next six months, they have a substantial portion of their finance on a number of properties falling due, and discussion of options for refinancing these amounts has been the topic of a number of board meetings.

Recently, an opportunity arose for Supercool to purchase a profitable shopping centre from Small Shops Pty Ltd, who are looking to get out of the shopping centre game and focus on their speciality, small suburban strip shops. Not having available funds or access to any bank funding, Derek proposed to the board that they purchase the shopping centre from Small Shops, issuing shares as consideration for the purchase. The board requested that Jeff's team prepared a report on the opportunity for consideration at the next board meeting.

Jeff's team is over-worked because of a loss of staff, but they prepared a report on the opportunity and the benefits of financing it through a share issue, though the report fails to note the fact that the existing rental income from the shopping centre is much lower than the industry average. At the next board meeting, Jeff presents his report. After reviewing the report at a very high level, the board approves the purchase relying on Derek's statement that 'given my many years of experience, the numbers on this purchase stack up and we should go for it.'

At the same meeting, Jeff presents the end of year financial reports for approval and release to the market. In the rush to value the shopping centre from Small Shops, Jeff had not adequately reviewed the financial reports and missed the fact that the short-term debt that was to fall due in the next six months had been classified as a long-term liability. In presenting the accounts to the board, Jeff made assurances that the reports had been adequately prepared and that they reflected the company's financial position. All the directors approve the reports for release to the market.

Advise as to whether:

(a)All the directors of Supercool have breached any of their statutory duties under the Corporations Act 2001 (Cth) in approving the end of year financial reports;

(b)The non-executive directors have breached any of their statutory duties under the Corporations Act 2001 (Cth) in relying on Jeff and Derek in relation to the purchase of the new shopping centre;

(c) Jeff, the CFO, has breached any of his statutory duties under the Corporations Act 2001 (Cth) in relation to his recommendation of the end of year financial reports for approval.

In your answer, consider any defences that may apply.

Question 2

Lily and Morris are the directors and shareholders of Zap Graphics Pty Ltd. Recently, the company began to suffer cash flow problems and needed additional capital. Lily persuaded Rodney to invest $100,000 in Zap Graphics Pty Ltd. Lily and Morris held a directors' meeting and decided to issue Rodney with two shares in the company. A general meeting of shareholders also appointed Rodney as a director of the company.

The company's financial position improved as a result of Rodney's $100,000 investment, as well as the considerable efforts of Lily and Morris. Despite the company's increased profits, Lily and Morris decide not to increase dividends, leaving them at the same level as the previous year. Instead they gave themselves pay rises and arranged for the company to lease two new Mercedes-Benz cars for their personal use.

Rodney began to attend directors' meetings and made a number of suggestions to improve the profitability of the business. He also questioned Lily and Morris about their pay rises. Lily and Morris resented these questions and took the following actions:

-they formed another company, Lily, Morris & Carol Graphics Pty Ltd, in which Rodney was not involved, and diverted a valuable government design contract that they had been negotiating to their new company.

-They also called a shareholders' meeting at which it was resolved that Rodney would be removed from his position as a director. The meeting also approved the diversion of the government design contract to Lily, Morris & Carol Graphics Pty Ltd. Lily and Morris made sure that Rodney did not receive notice of this shareholders' meeting.

Advise Rodney as to whether:

A)Lily & Morris have breached any of their fiduciary duties to Zap Graphics Pty Ltd or their duties under the Corporations Act 2001 (Cth).

B)Rodney himself can take action against Lily & Morris or Zap Graphics Pty Ltd in relation to Rodney's removal as a director and the diversion of the contract to a new company.

Question 3

Street Motors Ltd, a listed company, is an importer and retailer of Mercedes-Benz cars and trucks. The directors and their associates own about 35% of the company's issued shares, Todd Swift owns 9%. The remainder is held by a large and diverse group of other shareholders.

At a recent board meeting, attended by all the directors, it was decided that Street Motors Ltd would sell all the company's showroom sites to White Knight Investments Pty Ltd. Unknown to the other directors, White Knight Investments Pty Ltd was the family company of Frank Street, chairman of Street Motors Ltd. One of the terms of the sale was that Street Motors Ltd would lease back all the showroom sites from White Knight Investments Pty Ltd. Because no independent real estate valuations had been obtained, the Street Motors Ltd directors were unaware that the sale price was considerably less than market prices and that the agreed lease-back rent was very high.

Todd Swift becomes aware of this transaction and believes that the directors have breached their duties in causing Street Motors to enter into it. Advise Todd as to what action he can take, if any, under the Corporations Act 2001 (Cth) in relation to the directors' breach of duties.