Corporate Law Issues Related To Share Purchase By Welser Limited

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Question :

LAW 8500 Australian Commercial and Corporations Law

Question 1:  

At a recent board meeting of Welstar Ltd, Victor, one of the company’s directors, became aware that Welstar was about to buy a large parcel of shares in Flexizin Ltd, a listed company. After buying the Flexizin shares Welstar intended to make a takeover bid for the rest of Flexizin’s shares. Victor thought that when Welstar Ltd’s initial purchase became public knowledge it would signal Welstar’s takeover intentions and that Flexizin’s share price would increase significantly. He therefore arranged for his wife’s company, Spousal Investments Pty Ltd, to buy shares in Flexizin Ltd ahead of Welstar’s purchase. Spousal Investments Pty Ltd later sold the Flexizin Ltd shares after Welstar’s takeover bid was publicly announced and made a large profit.

You as a professional accountant are asked to write a formal letter to generally advise ASIC whether there has been a breach of the Corporations Act 2001 (Cth) in the above circumstances.    

You should consider to use both primary and secondary sources, e.g. legislation, case law, text books, journal articles and websites, to demonstrate your research skills in support of your advice in the letter.  

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Answer :


ASIC                                                                                                                   Date


I,as an authorized accountant feel obliged to inform you of certain ongoing incidents of Welser Limited. According to a recent board meeting Victor who is one of the directors of the mentioned company was notified of the fact this company is willing to buy a large share in Flexizin Ltd which is a listed company. After Welstar bought a part of the share in Flexizin Ltd Welstar intended to take over rest of Flexizin’s shares. However, it is important to note that Welstar ltd did not bid for the share and Spousal Investments Pty Ltd ultimately bought shares in Flexizin company. As a result after Welstar announced their bid publicly and took over Flexizin, Spousal Investment Pty Ltd sold their share.

The above mentioned circumstances resulted a huge profit for Welstar. The crux of this particular situation lies in the fact that Welstar directly did not involve in buying any share on the first hand and it seemed to be a clever move on the part of the company. As mentioned earlier Victor who is one of the directors of Welstar made a significant move by arranging for Spousal Investment Pty Ltd to buy the shares in Flexizin. Spousal Investment Pty Ltd is a company that is run by his wife. There is no evidence found that Welstar and Spousal investment Pty Ltd are under any legal or official contract(Moll, 2015). Therefore, they can not be considered as official partners. Hence,it is evident that Victor used the internal information of his company and influenced the consequential actions of Spousal Pty Ltd. Welstar gained huge profit due to the actions taken by Spousal Investment Pty Ltd. It is important to note that Flexizin somehow could not attain possible profit by the selling the share and they could have raised their bidding price if they would have well aware of Welstar’s actions. It can be stated that they did not have any notice that Welstar is willing to buy not only the share but also intends to take over the whole company. Therefore,there organizational strategies failed to perform accordingly(Moerman & van der Laan, 2015). Welstar meticulously planned the scenario that can be considered liable for the loss that Flexizin encountered. Another important point that worth mentioning is that Spousal Investment Pty Ltd sold the Flexizin Ltd shares afterwards Welster announced their bidding amount(Ferran & Ho, 2014). So, it is evident that the complete action took place for the entire profit of Welstar. There is no reasons found for the Spousal Pty Ltd to buy the shares in Flexizin.

Victor is one of the directors of Welstar which means his sole duty is to control the management of the company’s business. He is not a shareholder of the company therefore, he is not the owner of the company. On the other hand Flexizin is a ASX listed company that indicates it is important for ASIC to take care any possible breach that might happen through any internal or external factors or other agents. As a company both Welster and flexizin have their rights and liabilities. Spousing investments is a proprietary company therefore it indicates that they do not have the right of fund raising and evidently this company can not offer its shares to the public. The liability of the shareholders is limited to the value of the shares and their liability is not limited(Brand, 2014).

It is evident that The Corporations Act imposes few additional fiduciary duties on the directors of the companies of both proprietary and public proprietary and under the Corporations Act it is a relevant fact that the individuals who are appointed as the directors of those companies needs to comply with the rules and regulations that the Corporations act imposes upon them in order to carry out their duties properly (Black, 2014). It is known to us that under the Corporations Act the individuals who are appointed as the directors needs to follow several guidelines which includes

Acting for a proper purpose and acting in good faith, acting with diligence and care along with that it is also stated that they must not use the internal information in an improper manner. According to this act the directors needs to avoid the improper use of their authority and position and they also require to disclose certain interests(Filip, Labelle & Rousseau, 2015).

This incident is important because several breaches can be imposed on the people under this circumstances. According to section 181 of the Corporations Act, this section clearly imposes a civil obligation on the behaviour of the directors in order to control how they exercise their powers and perform their duties in good faith(Carnegie  & O’Connell, 2014). Their duties require to be solely for the betterment of the corporation in the best interest of the company. It is clearly mentioned that if the directors use their positional powers in order to benefit their self interest or the interest of any third party or sectional interest rather than the interest of the Corporation as an entire body, it can be very well considered to be a breach.

Under section 184(1) of the Corporation Act a breach of the mentioned duty can considerd to be a criminal offence if the breach occurs because of the intentional dishonesty of the director or any other officer.

Section 183 of the Corporations Act imposes a civil obligation someone who obtain certain information because of his or her designation as a director or employee or other officer of a corporation should not use the internal information of any company improperly for the of individual profit in order to gain advantage for someone else or themselves which might cause detriment to the corporation (Crockett  & Ali, 2015). This is particularly a significant duty as it is directly associated with the interest of the director who has interests in the industry that the Government Board relates with.

It is of significant importance that under section 184(3) of the corporation Act directors and other officers of similar designations can be accused of criminal offence due to violation of this act that is using the information dishonestly.

Section 182 of the Corporation Act also an obligation on the unjust use of the position of the directors and other officers of equal designation. If they use their authority in order to gain unlawful advantages for themselves or someone else or in order to cause detriment to the company. Section 184(2) of the Corporation Act also specifies another important issue which is that it is considered to be unlawful and will be considered as an offensive activity though not a criminal act.

Under Section 191 of the Corporation Act it is an unlawful activity for a director of any company to possess any kind of material personal interest in a company related issue or decision. It is considered to be a breach under such circumstances if the director of the subsequent company does not  give other directors notice of such interest unless some specific exceptions(Xu, Carson, Fargher  & Jiang, 2013). This notice is of remarkable importance and needs to include all details of the nature of interest and needs to be submitted in a director’s meeting officially soon enough so that the directors become aware of the interest in that matter. Any special interest into any business contract requires to be informed officially to the directors.

The detailed discussion of the several sections of the Corporation Act 2001 indicates that in this circumstances Victor can be accused of several breaches whether intentional or not. Firstly it is significant to note that both of the companies under discussion namely Welstar and Spousal Investment Pvt Ltd can not be considered as official business partners as no evidence of that sort has been found(Xu, Carson, Fargher& Jiang, 2013). Hence, these two companies will be considered to be completely separate entities. The designation of Victor’s wife in the company can not be of a shareholder as Victor is not a shareholder but a director of the company. Therefore, this incident can be considered as a case of Insider Trading. Victor can be accused to have the internal information related to his wife company otherwise it is not possible for him to assume that Spousal Pty Ltd can be willing to buy the shares in Flexizin in a similar manner that his company is planning to buy partial share in Flexizin has been informed to the other company in order to sustain their profit. Due to Victor’s act his wife’s company encountered huge profit, hence, it can be stated that his personal interest was related to this decision. Along with this from the detailed discussion of different sections of the Corporation Act Victor has failed to perform his duties as a director of the company and used internal official information unofficially.

Victor can be accused of breaching with reference to section 181,section 182, section 184 and section 191. It is evident from the discussion that he has violated the terms of the corporation asa director of an organization. Firstly, he has failed to secure his position of the director by practicing the violation of section 181 as he did not perform his duty with good faith and has focussed on his own self interest other than the wellbeing of the Corporation. He has not exercised his duties in good faith and for a proper purpose. This intentional or unintentional dishonesty and the act of breach can be considered as a criminal offence.

As a director it is expected that he will perform his duty to avoid improper use of information. But Victor has failed to do so. He has shared the information that was delivered in a board meeting of his company with someone who is not a part of his company as they are not in terms of partial shareholders of the company under discussion. The information has been used to influence the decision of some other organization. This can be be considered as manipulation of internal information or data as well.

He can be accused of breach under the section 182 and section 191 of the Corporation act. He has made improper use of his position dishonestly. Though this not a criminal act but this is considered to be an offensive act against the organization.

It is of prior importance that he violated section 191 of the Corporation act. It is relevant that this issue of breach would not have arisen if he would have informed the other directors of the company about his personal interest because somehow or the other Wilstar also profited due this circumstances and his decision can not be blamed to be entirely for his own personal interest but evidently it was important for him to send an official notice to the other directors. This is considered to be offensive and violation of the Corporation Act. it was necessary for him to notify the board of directors with an official notice with all the details of the nature of the interest in the matter.

In this issue the important fact that requires attention is that any kind of Breach of the statutory duties that to be performed by the directors draws penalties under the implementation of the Corporation Act the penalty can range upto $200,000. It is also necessary to note that under both the Corporation Act and Common Law the directors and the subsequent officers who are found to be guilty are liable to pay the compensation or to account for the consequent profits. If the directors violated the terms and can be objected to be disqualified from their designated post. Therefore, I suggest you to analyse the issue and take possible legal actions applicable in this case.

Thanking you,                                                                                                              regards,

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