Starfire Ltd (Starfire) is a company involved in the mining and resources industry in

Western Australia, particularly gas exploration. The non-executive chair of Starfire's

board of directors is Perry, who also serves as chair of the audit and risk

management committee of the board. Perry had extensive experience in auditing

and financial accounting prior to retiring as an accountant to take on board positions.

However, Perry lives in Sydney and tries to avoid travelling to the company's head

office in Perth as much as possible. The managing director and chief executive

officer of Starfire is Harry. The three remaining directors are all non-executive

independent directors, including Hien a wealthy Perth business woman with interests

in several listed and unlisted companies. The company's shareholders are a mix of

employees and outside shareholders. Harry and Hien own 10 and 20% of the shares

respectively.

Starfire's main asset consists of rights to explore and exploit potential coal seam gas

reserves in the northwest of Western Australia. The market for gas has boomed in

recent times, and companies with gas assets are frequently the subject of takeover

activity as large overseas energy companies seek to guarantee supplies into the

future. The extensive market interest in coal seam gas presents an opportunity for

Starfire to expand its operations and hopefully attract either a friendly takeover that

will deliver big returns to shareholders or a big contract with an overseas customer

that will provide increased revenue. Another option is to list on the ASX.

The company needs further funds in order to exploit its commercial opportunities.

Harry is very active in seeking out funding opportunities to enable Starfire to expand

its operations, but finds little support from the banking community who are already

over-extended in their loan exposures to the mining and resources industry and

Harry has been unable to attract further loan funding from banks and informs the

board that he will continue to explore funding opportunities.

Hien is approached by a friend (Rocco) in Perth about a potential investment

opportunity. Hien includes Harry in the subsequent discussion. Rocco's proposal is

to expand on an existing gas exploration venture (RoxCo Pty Ltd) that is situated

close to Starfire's operations. Rocco believes that combining RoxCo with Starfire

could provide mutual benefits. However, Hien and Harry have different ideas and

reject this proposal to combine the business interests. Harry also spoke to Perry

about it and Perry expressed some doubt about the projected benefits.

Hien and Harry believe that Starfire won't succeed in the long term due to

inadequate funding. Hien and Harry set up a new company JCo Pty Ltd, and

propose that JCo enter into a joint venture with RoxCo. Hien funds this new venture,

which is notionally run by Zach as CEO, but in reality it is Harry that is in charge as

Zach only ever acts on the instructions of Harry. Harry mentions in passing to Perry

that he was doing some part time consulting for a friend in another company in

Perth. Perry is engaged by JCo to give some financial advice and receives $50,000

for this work, which is not declared to Starfire. Over the next year the joint venture is

spectacularly successful and its value exceeds $500 million. JCo's shareholders are

Hien (80%) and Harry (20%) so they have both made a lot of money from this

venture.

Harry and Hien decide that the success of the JCo venture would be increased if

they took over Starfire, but they don't want the minority shareholders in Starfire to

require a high premium for the takeover, so they want to squeeze the minority

shareholders. They decide that they will assign Starfire's exploration rights to the

JCo for 5 years on the basis that Starfire has been unable to obtain further funding to

expand its operations to take advantage of the buoyant gas market. The payment for

the assignment will only be made in 5 years, and only if certain project thresholds

are met (which are wholly under the control over JCo). There is no compensation for

the lack of revenue for 5 years, but then JCo is taking most of the risk in further

developing the project with its own money. Furthermore, continuing to hold the rights

without developing them would cost Starfire more money (that it doesn't have) and

could result in the WA Mines Board stripping the company of its rights. Harry has not

explored any other options for exercising the rights or recapitalising the company.

Harry and Hien both voted at the board meeting to approve the transaction. At the

same meeting, the board approved of Harry's proposal commence a new

experimental project on new mining technology. This will involve borrowing $20

million from Hien (with security over all assets registered on the PPSR), which will be

due in 3 years. The loan also provides Hien with options to acquire 51% of the

shares in Starfire at a 2021 valuation. The loan poses significant risks for the

company as it won't have any guaranteed revenue during the near future after it

assigns its main operations to JCo and might not be able to repay the loan. Hien tells

the board that she intends to roll over the loan after 3 years and "would always

support the company financially.

All of the material risks are outlined in a 1,000 page pack of board papers that Harry

and Hien prepared for the board which was presented to them by Harry. Harry's new

project for Starfire is a disaster, with the company racking up further debts and no

new money coming in. Shortly after this, the Starfire directors seek external advice

on what they should do, and that advice outlines the problems with the joint venture

and advises that the agreement should be amended to provide for earlier cash

payments.

The Starfire directors wait a further 6 months before seeking to vary the joint venture

after Harry defers their requests while he tries to get the project back on track.

By the end of the year, the Starfire shareholders have had enough and they convene

a quick members' meeting for 2 weeks later with over 40% of the shareholders

attending the meeting in Perth. At the meeting, which is chaired by the lead dissident

shareholder Eli, they remove the entire board of directors and install new directors by

passing a resolution at the meeting (i.e. 50.1% of the 40% of shareholders who

attended the meeting. Perry and the (former) board, rejects this action and convene

their own members' meeting for 30 days later where they will propose 2 changes to

the Starfire constitution: 1) allowing directors to have an interest in competing

companies without any required disclosure and 2) giving retrospective ratification for

all prior conduct of Perry, Harry and Hien. The meeting will also vote on a resolution

to give retrospective ratification for Perry, Harry and Hien's involvement in the

assignment to JCo and for the $20 million loan. Lastly, the meeting will resolve to

pay the board an increase of $500,000 for each director due to all of the extra work

that responding to Eli's allegations has generated.

Harry is the trustee of the company's employee share scheme, which holds 25% of

the voting shares in Starfire so he is confident that the proposed resolutions will pass

when his votes and Hien's votes are included. Just to be sure, he asks Perry to

refuse to recognise proxy votes from Eli (who has organised to act as proxy for a

number of minority shareholders), which are lodged 3 days before the meeting. The

meeting will be held in Jakarta, where Harry is undertaking testing of the

experimental technology.

1 Advise on the validity of the competing meetings and proposed

resolutions at both meetings and any potential contraventions of the

Corporations Act 2001 (Cth) relating to the convening or holding of those

meetings. Do not discuss members' remedies.

2 Advise Eli and the other shareholders as to what rights and potential

remedies they may have, if any, with respect to the conduct of Perry, Hien and

Harry. You may refer to any substantive argument previously made in Question

1 with respect to their conduct, but focus on what Erik and the other

shareholders rights may be in this situation.