22 Introduction to Company Law © Oxford University Press, 2007. All rights reserved.

22Introduction to Company Law

© Oxford University Press, 2007. All rights reserved.

Intro to Company Law cont…

Learning Objectives:• Explain the different types of company structures;• Understand the essential elements of incorporation;• Understand the role of company regulation both internal and

external, especially the obligations imposed upon company directors for corporate governance, insolvent trading and financial reporting;

• Explain the relationship that external stakeholders, company auditors and creditors have with the company;

• Understand the role, functions and powers of ASIC.

Intro to Company Law cont…• Companies have evolved to become one of the

primary types of business structures in the Western world.

• The popularity of the corporate entity as a primary choice for businesses to employ is testament to the many advantages offered by the companies.


Types of Companies

Dependent upon size and capital structure and include:-

• Limited liability (shares);

• Limited liability (guarantee);

• No-liability company.

• Small v Large Proprietary Companies


PUBLIC COMPANY

NO LIABILITYUNLIMITEDLIABILITY

LIMITED BYSHARES

LIMITED BYGUARANTEE

PROPRIETARY COMPANY

LIMITED BYSHARES

UNLIMITED

CAPITALSTRUCTURE

SIZE

LARGE(ANY 2 OUT OF 3

BELOW)

SMALL(ANY 2 OUT OF 3

BELOW)

(1)REVENUE>$10 MILLION

(2)ASSETS>

$5 MILLION

(3)EMPLOYEES>

50

(1)REVENUE<$10 MILLION

(2)ASSETS<

$5 MILLION

(3)EMPLOYEES<

50

Intro to Company Law cont ...

Essential Features of a Company• Corporate entity structure v other forms of business

structure. • Separate legal entity;• Separation of management from control.• Students should be made aware of these essential

features particularly how the two concepts interact with each other.

See: Salomon v Salomon [1897] AC 22.


Appointment and Removal of Company Directors

Part 2D.3 of the Corporations Act • Rules relating to:-• appointment, • remuneration and • removal of company directors.


Appointment and Removal of Company Directors

Distinguish between:-

• proprietary and public companies,

• different rules apply for the removal of company directors regarding public v proprietary companies.


Financial Records and Reports• Chapter 2M of the Corporations Act governs the

requirements of companies to keep and prepare financial records and financial reports.

• contain a correct record and explanation of transactions, financial position and performance;

• enable true and fair financial statements to be prepared and audited

• Half-yearly reporting by listed companies• Annual Directors’ Report• Audit Report


Annual Reports

• The annual financial reports must contain the following information:-

• the financial statements for the year;

• the notes to the financial statements; and

• the directors’ declaration about the statement and notes.


Directors’ Declaration: s.295A• Must be in writing;• state that the financial records of the company have been properly

maintained in accordance with s.286;• state that the financial records and notes comply with relevant

accounting standards in accordance with s.296;• state that the financial records and notes provide a true and fair view

of the financial position and performance of the company in accordance with s.297;

• specify the date on which the declaration is made;• specify the capacity in which the person is making the declaration;• be signed by the person making the declaration.


Half Yearly Reports

• Publicly listed entity must prepare half-year financial reports and a directors’ report

• Half-yearly reports in addition to annual reporting requirements

• Does not apply to proprietary companies


Annual Directors’ Report

• a review of operations and the results of those operations during the year;

• details of any significant changes in the entity’s state of affairs;• state the entity’s principal activities for the year;• provide details of any matter or circumstance that may have a

significant effect on the company’s operations or results in future financial years;

• provide details of likely developments in the company’s operations in future years;

• provide details of any environmental legislation that may affect the company’s performance.


Audit Report• Compliance with Corporations Act &

relevant accounting standards.

• Provide a true and fair view of company’s performance.

• Company has sufficient financial records.

• Auditor has required information.


Contracting with a CompanyFormal Authority

• Agency: s.126;

• Direct: s.127

• Execution with a seal: s.127(2)

• Execution without a seal: s.127(1)


Statutory v Common Law

At Common Law three specific categories of authority:

• express actual,

• implied actual and

• apparent authority.


Statutory Assumptions

• Sections 126, 127 and 129 provide for additional safeguards to outsiders contracting with companies

• Section 129(2) ASIC Records

• Section 129(3) Holding Out


Advantages of Statutory Assumptions

• Broader Application c/f common law.• Burden of proof on company for reasonable suspicion.• Outsider entitled to rely on statutory assumptions.• Assumptions are cumulative.• Assumptions apply even if there is fraud by an agent.• Outsider cannot rely if the agent “knew or suspected”

breach.


Company Regulation• Internal Regulation v External

Regulation

• Constitution v Replaceable Rules or Both

• External Regulation by ASIC & Corporations Act 2001 (Cth)


Company’s Constitution v Replaceable Rules

ABC Pty Ltd

ABC elects to have aconstitution

ABC elects to begoverned by the

replaceablerules:S.135

ABC can elect both:Constitution &

Replaceable Rules:S.134

ABC Constitution Replaceable RulesTable: S.141


Amending a Company’s Constitution

• Can be modified by special resolution

• Special Resolution must be lodged with ASIC within 14 days


Replaceable Rules: s.135

• Pre 1 July 1998 Coy can have Constitution or Replaceable Rules or both.

• After 1 July 1998 can adopt Replaceable Rules.

Pre-1July 1998 Companies

Memorandum and Articles of Association=Company's Constitution

OR (in default):

Tables A & B (Corporations Act)(Model rules for coy's limited by shares & no

liability coy's)

OR :

A combination of both (S.134)(referred to as modified Table A Articles)

...........................................................

Pre-1 July 1998 Coy's may continue to operate asbefore, or repeal their memorandum and articles

of association entirely and move into the newregime (Post-1July 1998).

Post- 1 July 1998 Companies

Coy's constitution may comprise:

* Special Resolutions OR* Contained in a document upon registration

OR (in default):

REPLACEABLE RULES (see:S.141 Table)

OR:

A combination of both (S.134)....................................................................

Advantage of replacement rules :Any updates in the Corporations Act automatically

amend the internal rules of these coy's and thecoy's constitution is always up to date with the

Corporations Act. (Compare with Tables A and Bthat remain static).

Pre/Post 1 July 1998 Regime:Internal Management Rules


External Regulation

• Corporations Act• ASIC• Corporate Crime & Corporate

Governance• See: R v Rivkin (2003) 198 ALR 400.


Corporate Criminals 2001-2004 CRIMINALS JAILED BY ASIC 2001-2004

0

5

10

15

20

25

30

35

1

2001-2004

No

of

Cri

min

als

2001-02

2002-03

2003-04


Civil Penalty OrdersApplied for contraventions of the Corporations Act

including:-• Insider Trading:-s.1043A(1) & (2);• False Trading & Market Rigging:- ss.1041B(1) and C(1);• Market Manipulation:-s.1041A;• Insolvent Trading:-s.588G(2);• Failure to comply with Financial Reporting

Requirements:-s.344(1);• Duties of Officers of the Company:-s.601FD(3).


Civil Penalty Orders ASIC 2001-2004CIVIL PENALTY ORDERS BY ASIC 2001-2004

140

151

118

2001-02

2002-03

2003-04


Investigation & Enforcement ASIC

% SUCESSFUL LITIGATION: ASIC

92 94 93

70 70 70

0

20

40

60

80

100

2001-02 2002-03 2003-04

2001-2004

PE

RC

EN

T


MEETINGS

Generally, there are three broad classes of meetings that may be convened:-

• Board Meetings; • Shareholder meetings which may include:- Annual

General Meetings (AGM); Class Meetings and Extraordinary General Meetings (EGM);

• Court Ordered Meetings.


Quorum & Proxy • At least 2 members in a quorum • Must be present at vote• Proxy can be appointed by a member• Proxy can be an entity or individual• Proxy has same rights as the member including:-

– to speak at the meeting;– to vote; and– to join in a demand for a poll.


Notice Procedures

Member’s must be notified at least 21 days before the meeting is held in the following ways:-

• personally; or• by sending in post to the members address as it appears on the register

of members;• by sending by fax or email;• by notifying the member by other electronic means nominated by the

member;• by any other means provided by the company’s constitution.


Contents of notice • A notice of a meeting of shareholders must provide the

following information:-• set out the place, date and time for the meeting;• state the general nature of the shareholders’ meeting;• if a special resolution is to be proposed at the meeting- set

out the intention to propose the special resolution and provide details of the resolution;

• if a member is entitled to appoint a proxy- provide a statement setting out proxy’s rights and entitlement to vote at the meeting.


Types of Meetings

• Annual General Meeting (AGM)

• Extraordinary General Meeting (EGM) • Boardroom Meetings • Class Meetings • Court Intervention


Share Transactions Affecting Share Capital

• Issuing New Shares

• Payment of dividends

• Share buy-backs


Issue Shares

• bonus shares

• preference shares

• partly-paid shares


Payment of Dividends

• Only out of profits

• Capital Maintenance Requirement

• Declaring a Dividend v Payment of Dividend


Maintenance of Share Capital

• dividends can only be paid out of ‘profits’, not capital;

• redeemable preference shares must be redeemed out of profits, or the proceeds of a new issue of shares; and

• general prohibition against a co dealing in its own shares (Part 2J.2).

• Doctrine modified by Corporations Act.


Share Buy-Backs

Company may undertake a buy-back of its shares in the following ways:-

• employee share scheme;• on-market;• equal access scheme and• selective buy-back.


CORPORATE GOVERNANCE

• CLERP 9 Recommendations• CLERP (Audit Reform & Corporate Disclosure) Act 2004

(Cth). • Independence of the company auditor • Corporate disclosures requirements • International Accounting Standards & Australian

Equivalents• United States has enacted similar legislation in the form of

Sarbanes-Oxley Act.

22 Introduction to Company Law © Oxford University Press, 2007. All rights reserved.

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