Corporations law help

[Mikii]

hi there, i just need some advice on an assignment topic im having trouble with.
any ideas very very much appreciated.
heres a brief summary of the scenario.

company 123 share price has been falling. a director of company 123 (bob) approaches company abc and lends 10M. bob is also a majority shareholder of abc. his plan is to use the 10M to channel through the company and buy shares in company 123 to stabilise the share price. without consulting the board or shareholders, an unsecured 10M loan was to be given to company abc which was used to buy shares in company 123.
the share price of company 123 was stabilised.

what are the consequences of this transaction under the corporations act ?

any opinions is helpfull. thanks alot !

 

[reece55]

Re: corp law help

hi there, i just need some advice on an assignment topic im having trouble with.
any ideas very very much appreciated.
heres a brief summary of the scenario.

company 123 share price has been falling. a director of company 123 (bob) approaches company abc and lends 10M. bob is also a majority shareholder of abc. his plan is to use the 10M to channel through the company and buy shares in company 123 to stabilise the share price. without consulting the board or shareholders, an unsecured 10M loan was to be given to company abc which was used to buy shares in company 123.
the share price of company 123 was stabilised.

what are the consequences of this transaction under the corporations act ?

any opinions is helpfull. thanks alot !

Right..... well, let me say it would be very difficult for this to actually ocurr in real life.

Let's start from the top:
1. What is the market cap of 123 relative to the 10 mil? Why: Does ABC become a substantial holder of the company? If so, a sub notice is required in 2 days when abc becomes aware that it has breached 5%, or an increase/(decrease) of more than 1% when a sub holder

2. Does the percentage interest exceed 19.9% - if so, then breach of Corporations Act unless there is an exemption in 606 (I think) because abc can't take more than a 19.9 stake without a takeover offer

Baring those two in mind, abc is a related party of the director. Therefore, for substantial shareholder reasons, the director and abc would be grouped as one relevant interest. Re-examine points one and two again.

Finally, re the director being able to do the transaction in the first place, what is the securities trading policy of the company? Was the director in breach of this? If so, ASIC may have the ability to query.

Then of course there are the insider trading rules.

Should get you started!

Cheers

 

[reece55]

Little bit more as I ponder the situation.....

Does abc have a constitution? If so, what does the constitution say about quorums with respect to directors meetings - why, because Bob has acted unilaterally without the approval of his (presumably) feelow abc directors in approving the loan and buying the shares and therefore, as long as a quorum requires more than one person (which it should unless it's a sole director company), then the director has breached his fiduciary duties by falsely accepting a loan and buying listed securities...

Cheers

 

[Mikii]

thanks for the info reece! Very much appreciated! Wen u say percentage interest, is that interest in the loan? So would this whole transaction breach the corporations act? Because he did not tell the board or shareholders. Also manipulating the shareprice and insider trading?

 

[doctorj]

Other issues to consider

- the terms of the loan (were they 'arms length')
- did the director sell some of his shares into the purchase?
- was the loan (and share purchase) material to ABC?
- What is ABCs business? Is it investing in other companies? Did ABC have a business case for investing in 123? Were the other shareholders of ABC disadvantaged because of the purchase?
- how was the loan disclosed (look up related party transactions)

 

[reece55]

Other issues to consider

- the terms of the loan (were they 'arms length')
- did the director sell some of his shares into the purchase?
- was the loan (and share purchase) material to ABC?
- What is ABCs business? Is it investing in other companies? Did ABC have a business case for investing in 123? Were the other shareholders of ABC disadvantaged because of the purchase?
- how was the loan disclosed (look up related party transactions)

Good point DocJ re the term of the loan, the grating of the loan amounts to a related party transaction and one of the stipulations for related party transactions is that they are at either arms length (i.e. in line with commercial rates of interest for example) or worse (i.e the loan's interest rate is below market rates) - as DocJ suggests, have a look at the related party section.

Mikii, when I refer to percentage interest, I am referring to in the first instance ABS's percentage stake in 123. So, ABC's (and if Bob has some in his name, ABC and Bob combined) percentage interest in the voting power in the company 123.

There could be multiple breaches of Corporations Act here, but I think between DocJ and I, we've given you ample info to determine that. Just answer the questions we've asked for yourself and you'll probably get the answer your looking for.

I actually think the Corps Law is a very user friendly piece of legislation - 100 times better than the Income Tax Assessment Act! Mikii, I suggest you dust the book off and get acquainted with the sections we have mentioned - you might just learn something!

Cheers

 

[gilbo]

Mikii - you may also wish to review the case ASIC v Adler (2002) 41 ACSR 72. The fictitious case you have mentioned bears a striking resemblance to the various breaches of director duties demonstrated at HIH. You may also want to review CA s 260A which regulates the conditions under which a company is allowed to offer financial assistance for the self-purchase of shares.

 

[Mikii]

thanks for you help reece, doc and gilbo ! you gave me a great kick start !

something i cant find in the books or net for my conclusion.... what should have been done under corp act to achieve the transaction lawfully and successfully.

 

[Mikii]

nvm i found the answer !
hey, whats an unsecured loan? does that contravene any of the corporations act?

 

[reece55]

nvm i found the answer !
hey, whats an unsecured loan? does that contravene any of the corporations act?

An unsecured loan simply means that the lender does not obtain security (such as a floating charge against the assets of the company for example).... In the event of default, unsecured loans simply rank equally with creditors. Securing a loan means that in the event of default, the secured lender gets everything back first.

Great to here you got what you were looking for.

Gilbo, great references here - wouldn't by any chance be either an accountant or lawyer would you? Either that or you got seriously ripped off by HIH, because your knowledge there was excellent!

Cheers