ACC220 Law of Business Associations

Question 1

Alana and David are the directors of Chocolate Cleaning Products Pty Ltd (“CCP”), a small company that manufactures biodegradable and environmentally friendly cleaning products that smell like chocolate. The shareholdings of CCP are as follows:

• 40%: Alana;
• 40%: David;
• 15%: Sol (an investor and mentor who has significant experience in the cleaning products industry);
• 5%: Max.

Max was engaged by Alana and David when they set up the company in order to draft the constitution and advise on the initial business structure. In exchange, he received a 5% shareholding in CCP. When drafting the constitution, Max included a clause in the constitution appointing himself as the company’s solicitor and that he cannot be replaced except for negligence.

Relations between Max and Alana and David have been strained of late because Alana and David are taking Sol’s advice in regards to proposed expansion activities. Max thinks that Sol’s recommendations are generally shady, but Alana and David are unswayed. Eventually Sol recommends that they fire Max as company solicitor and engage someone with more experience.

In addition, David and Alana call a general meeting and pass a special resolution to alter CCP’s constitution, inserting a new clause giving the board the right to expropriate the shareholdings of members owning less than 10% of the total shares issued.

Q1: Advise Max as to whether he is able to:

a) enforce the clause in the constitution making him the company solicitor, and what type of remedy he would need to seek if he could; and

b) prevent the inclusion of the clause allowing the directors to expropriate his shares, even though the other shareholders have passed a special resolution.

Question 2

Aussie Boats Ltd (“AB”) is a listed public company that has been supplying custombuilt boats to the Australian market for the past 25 years. Its customer base has been gradually decreasing due to increasing competition for larger luxury yachts with hi-tech fit-outs made by other companies such as Millionaires on Water Ltd (“MWB”). AB had been planning expansion activities into international markets for a number of years but has held off due to lack of funds. They have had some initial discussions with boat consultancy firm La La Loopsy Pty Ltd, but again, have not had the funds to engage them for a full report and recommendations.

The board of AB is made up of Clancy (who is the managing director/CEO), Jack

(the Chief Financial Officer) and three non-executive directors, Henry, Banjo and Matilda (the chairperson). At a board meeting held in July 2017 the directors expressed their concerns about the difficult financial future facing AB, as well as their deteriorating market share. In addition, Clancy and Jack had received notice that MWB had been buying up stock in AB and now owned 35% with a planned takeover bid imminent.  

On the 15^th of July, the board resolved to issue $1.5million of shares as follows:

• $500,000 of shares to La La Loopsy Pty Ltd, in return for the provision of a report on opportunities for AB to supply boats internationally;
• $1 million of shares to the public to be issued for the purpose of raising additional capital for expansion purposes.

The minutes of the meeting reflected as the reasons for this decision that:

1. It is in the best interests of AB that it immediately engages in previously planned expansionary activities so as to improve market share;
2. That such expansion should be informed by high-quality consultancy and market research.

The new issue of shares was completed in September. After the new issue, MWB’s stake in AB was reduced to 18%.

Banjo, one of the non-executive directors of AB, disagreed with the resolution and issue of shares, believing that it would be better to enter into discussions with MWB around the terms of the take-over. He believes that Clancy and Jack are acting purely out of concern for their own positions as MWB is known to terminate the positions of executive directors after completing a take-over (whilst generally retaining non-executive directors).

Q2: Advise Banjo as to whether the directors have breached their equitable and/or statutory duties to AB (including any remedies or penalties that might be applicable).