CORPORATE LAW EXAM: strategies for revision It is important to prepare a good set of revision notes to assist you in your

preparation for the Corporate Law exam. Please note that section numbers and page numbers may not be accurate. PREPARATION OF NOTES Make your notes as user-friendly as possible.

Summarise the law; divide into relevant areas (eg. transactions with shares prohibited by the Corporations Law: share buy backs; financial assistance; capital reductions; indirect self-acquisition...) Similarly, summarise the relevant sections of Legislation in each area (eg what is a variation of class rights? See s 246C) in any summary, cross reference it to the relevant page in your notes Index your notes with table of contents or "Flags". Practice using your materials in exam-type conditions

When do the majority commit fraud on the minority in common law? ("An abuse of power whereby the majority secures an unfair gain at the expense of the minority") Expropriation of company's property Ratification of breach of Expropriation of directors' duty members' property

1. Wrong against minorty member [LH 557-558] 2. General rule 1. Wrong against the 1. Wrong against the expropriation must be company [LH 554-555] company [LH 555-557] justified REF: Gambotto v WCP Ltd altering 2. Cases 2. Gen meeting has a constitution to compulsority wide power to ratify acquire shares can only be directors who are in Menier v Hooper's exercised if: breach of duty REF: Telegraph Works: a) for a proper purpose, majority SH's resolved to Bamford v Bamford and wind up company and transfer assets to another 3. What are the limits on b) be fair in all the circ's 3. REF: Grey Eidsell company they controlled. this power? Timms Is the continued Cook v Deeks: directors REF: Winthrop controlled votes at the Investments v Winns Ltd: shareholding of the minority member general meeting and

ratified their own expropriation of company's property.

Majority can ratify a breach of directors' duties but "this action may nevertheless constitute a fraud on the minority if it Parke v Daily News: majority need not benefit can be shown that the from attempt to give away majority, acted for an improper purpose. the company's propertydirectors action in making gratuitous payments to easier to prove if employees could not be dir's who breached ratified. their duty also controlled the majority of the shareholders' votes

detrimental to the company and the interests of the existing shareholders generally? If yes, expropriation justified

Variation of Class Rights (procedure set out in legislation if changing rights of existing shareholders) What is it? How is it regulated? Can it be challenged?

1. At common law - very narrow view Must affect strict legal rights of members of that class REF: Greenhalgh v Arderne Cinemas value of shares not a variation right to

1. Section 246B applies: 2. s246B(1) - If coy's constitution sets out procedure, it must be followed 3. s 246B(2) If constitution silent or no constitution, variation of rights only by:

1. S246D - Right of members holding at least 10% of votes in the affected class 2. Can apply to court to a) set aside change of rights OR b) alter constitution to allow it 3. Court may set aside only if the variation would unfairly prejudice the applicants Other remedies?

2. Under statute - s 246C (a) special resolution of What actions taken by a coy PLUS coy = a variation of class rights? (b) special resolution of class affected a) s 246C(6) - new allotment of pref shares 4. PLUS notification ranking equally with

existing pref shares, not authorised in constitution b) s 246C(5) - coy with 1 class of shares issuing new class of shares c) s 246C91) - division of existing class of shares into diff groups d) s 246C(2) - rights of only some shares in a class are varied

requirements --> s246F ASIC (a) Notice within 7 days of variation, & (b) documentation to be lodged within 14 days s246B93) - notice to members of the class within 7 days of variation

S 1324 injunction to prevent breach of s246B S 246AA - if one in a series of acts which are oppressive S 140 compliance?

Corporate Law Exam TYPES OF QUESTIONS Short Answer Questions These questions are very straightforward and require explanatory/descriptive answers. With these questions, you are expected to explain legal principles and, in some cases, to apply these legal principles to problem situations. Study the following examples carefully. Examples of Short Answer Questions a) When would a proprietary company consider becoming a public company? can a proprietary company be forced to change its status? b) Directors need to consider a variety of interest groups who are affected by their decisions, including some outsiders to the company. Which outsiders may have rights against a company? c) Gerry, a director of a proprietary company, has authorised the issue of $300,000 worth of debentures to 5 different lenders. Is he permitted to do this? Explain. d) A company can normally either use the replaceable rules and/or construct a constitution. However, what is the situation with a single person company? e) How might disgruntled shareholders gather information about a company, and seek answers from the company, against the company's will? f) `Directors have a primary duty to manage the company and not to answer to individual shareholders.' Explain whether this comment is true. g) Why is it so important for a shareholder to actually be officially registered on the share register? h) `It is possible for the corporate veil to be pierced by statute.' Explain.

i) Bill is the managing director and a member of Biomed Ltd. The constitution of Biomed Ltd provides, as follows: "Bill shall be employed as Biomed Ltd's Chief Medical Officer for a period of five years after incorporation at a salary of $150,000 per annum." Bill informs you that following incorporation, the company has refused to employ him. Advise Bill. Semi-Structured Problem Questions These questions outline a problem fact situation. You are then given the areas of law which you need to discuss in your responses to these questions. However, you need to identify the issues in these problem fact situations and discuss the particular legal principles within the relevant areas of law which apply to the issues you have identified. You would need to use the following structure in your response: 1. Identify the issue/s 2. State the relevant statute/case law 3. Apply to the facts 4. Come to a conclusion Study the following examples: Question 4 Basil Brown and Brian Green are two new young entrepenures in the ever expanding telecommunications industry. They come from a media family and with the use of some family money they invest in Dotell Communications Ltd. They both have a 15% stake the Dotell and they both hold positions as nonexecutive directors on the Board of Dotell Communications Ltd. Due to excessive competition in the telecommunications sector Dotell Communications Ltd is facing liquidity problems. The managing director Sam Smart approaches basil and Brian and while assuring them that all is well he suggests that the company could do with a capital injection and convinces basil and Brian to increase their respective stakes in Dotell to 18%. Shortly after the capital injection Dotell Communications is still struggling. unbeknown to Basil and Brian, the directors fear that the company may be trading while insolvent so the board decides to place the company into voluntary administration. Basil, Brian and Sam now seek your advice as to their potential liability under the insolvent trading provisions under the Corporations Law. They also want to know if there are any defences available to them under the Corporations Law? (12 marks) Question 2 Harry is one of three directors in Engineering Products Pty Ltd. Harry is out for lunch one afternoon with a supplier of engineering parts, and after a long session

of talking and drinking with the supplier, he agrees to place a very large order with that supplier. The other directors discover the order that Harry has made and attempt to cancel the order. It appears the parts are inappropriate for their business, overpriced and the supplier has a poor record in the industry for delivering on time. According to the company constitution Harry is not permitted to sign off orders without the signatures of the other directors. 1. Can the Engineering Products Pty Ltd cancel the order? Explain the viewpoint of the supplier and Engineering Products Pty Ltd and its directors. 2. Would your answer be different if Harry was not a director of a company but instead a partner in a partnership called Engineering Products? (12 marks) Structured Problem Questions These questions include problem fact situations. However, the questions you are asked in relation to these fact situations are very directed and draw on your understanding of key legal principles in particular areas of the law. Usually you are expected to explain/outline/discuss these legal principles as they apply to the fact situations. Study the following examples: Question 3 Peter wants to establish a company to carry out biomedical research. The company is mot intending to declare profits or pass them on to members for a number of years, as all money from trading will be used for further researched. The company is proposed to be on a small scale with about 10 specialist researchers. The company once registered, is hoping to raise $6 million over a 4 year period raising $1.5million every year from a select group of investors. It is projected that the capital injection every year will meet the company's research needs. The company, once established, hopes to receive a government research grant of $5million provided it can show that the money will only be used for research and not for profit. Albright University has also indicated that it would be prepared to give an interest free loan for research purposes to the company once it is registered but provided the company can give the University some type of security. Peter engages a consultant to prepare a business plan at a cost of $3,000, which he intends to submit to the government and to Albright University in support of his proposal. Peter tells the consultant that the company will pay the bill after it is registered. Advise Peter of the following: a) What kind of company should Peter consider setting up (considering the above facts)?

b)What steps is Peter required to take when raising capital from the public? Would your answer be different if Peter were to raise $6 million from the outset as partly paid shares and simply made calls on the shares as the need for capital arose? c) Is Peter responsible for the cost of the business plan prepared by the consultant? d) Advise Albright University what it should do to secure the interest free loan to the company. (16 marks) Question 2 The Melbourne Ruffians Inc is a football club which wishes to change its club into a more business like format in order to facilitate some business deals. The club wants the members to become shareholders under a program whereby existing members will receive a number of shares. It is intended that the shares will be traded publicly. A prospectus has been prepared for the members which states all the advantages of forming a new company. However a number of members are unhappy with the change in format and believe that the committee has not been particularly open about the expenses involved and all the implications for the members. a) What rights might the members have regarding the prospectus? b) How many types of company might the club consider? Explain. c) Are there any disadvantages in changing the legal status of the football club? Explain. (3 x 4 marks = 12 marks) Essay Questions These questions require you to have a comprehensive understanding of particular areas of the law. You may be required to outline, explain/analyse in depth particular aspects of Corporations Law. Follow the essay structure of including an Introduction, Body and Conclusion. (Notes on Writing Essays can also be found in the back of your Subject Guide for Corporate Law). Study the following examples of essay questions: Question 5 There are a number changes proposed for Corporations Law in the new Company Law Review Bill 1997. Explain the most important changes and comment on why you think these reforms are being made. (10 marks) Question 5 The capital of a company must be preserved - this has been the traditional view of company law. In modern times this rule has been modified. Explain this historical rule and how it has been modified. (10 marks)

Further Study Hints Please refer to the notes on Answering Problem Questions and Writing Essay in the back of your Subject Guide. Good Luck with the Exam!!!

Corporate Law Exam Sample Questions Below is a sample question from a Corporate Law exam paper. Model answers have been provided to each part of the question. Good and not-so-good answers have been provided. Study these examples of responses carefully. Part A Aussies Mines Ltd has decided to expand, despite recent financial difficulties. The board of directors decides to issue $5million worth of shares in the company to fund the expansion. The following share issues are proposed: (a) $1 million dollars worth of shares will be offered to one large institutional investor (b) $1 million dollars worth of shares will be offered to company employees (c) the balance of $3 million dollars worth of shares will be available for purchase through the Australian Stock Exchange. The company seeks your advise as to whether they need to prepare any documentation for this proposed share offer. Advise the company. [This part of the question would be worth about 12 marks] Part B Five months after Mei-Ling purchased $20,000 shares in the company, she discovers that the information she based her decision to invest upon was incorrect. She based her decision to purchase shares on the company's previous year's profit figures. However the auditor made an error in the preparation of these figures for the company and the profit was overstated by 50%. She comes to you for advise. Advise Mei-Ling whether she can collect damages from the company and/or the auditor. [This part would be worth about 10 marks] Part C Tom is a minority shareholder of Aussie Mines Ltd. He comes to you and complains that the directors have sold company assets and have used the proceeds from the sale to purchase an island resort in their own names. He also tells you that the directors are the controlling shareholders of the company and they have ratified their own acts at a recent general meeting. Advise Tom, who wants to initiate an action against the directors. [This part would be worth about 10 marks]

Study carefully the following answers to Parts A, B and C of the exam problem question. In the answers which are considered to be successful and well written, the students have analysed the facts of the questions carefully and isolated the key issues for discussion. Next, the students have critically analysed the appropriate statute laws, evaluating and selecting the relevant sections of them to apply to the facts. In addition, the application of the relevant statute laws (legislation) to the facts necessitates critical and analytical thinking by the students, to determine which facets of the relevant legislation may or may not be specifically applicable to these particular sets of facts. The logic underpinning this thinking is then discussed by the students (see Chapter 10 for further information on answering problem questions). Part A Note that the plan of the answer to this part of the question includes information on the specific sections of the relevant law. Prospectuses Is a prospectus required? ss 1018, 1020 - general requirement ss 66(2) or s 66(3) - unless `excluded offer' / invitation [see LH pp130-133, Chapter 7]: if required, does it need to be registered, or only lodged? s 1017A - all prospectuses registerable s 1017A(3) & (4) - unless exempt from registration [See LH, pp133-135, Chapter 7] NB key terms defined - `prospectus' - s9, `securities' Below is a very good answer to the question in Part A. To assist in the structuring of the answer, we have included the necessary steps to write a successful answer. Identify the issue The main issue here is whether a prospectus is required or not and if so whether it needs to be registered or just lodged. The general prohibition is that the Corporations Law prohibits all issues, offers or invitations of securities for subscription which are not accompanied by a prospectus that complies with the requirements of part 7.12. However, if an issue, offer or invitation comes within a list of specified exceptions, it is regarded as an excluded offer or excluded issue of securities and a complying prospectus is not required. Apply legislation to the facts Looking at the facts of the case, the proposed offer of $1M worth of shares to one large institutional investor is an excluded offer. This is because under s 66(3) (a) an offer or invitation is an excluded offer or invitation. It is an offer for subscription f, or an invitation to subscribe for, at least $5000,000 by each person to whom the offer is made. Therefore no prospectus is required. The proposed offer of $1M worth of shares to company employees is not an excluded offer under s 66(2) and (3),therefore, a prospectus is required and it must be lodged with ASIC. All prospectuses are registerable as well, unless they are exempt from registration.

Under s 1017A(3), a prospectus in relation to shares is exempt from registration if (3)(b) the relevant offer o9r invitation is proposed to be made or issued : (3)(b) (iii) if the corporation is a listed corporation or is an approved unlisted corporation - to the employees of the corporation or a related body corporate. Aussie Mines Ltd is a listed corporation and they are making an offer to employees so they are required to lodge a prospectus but they do not have to register it as well. The remaining $3m worth of shares that is being made available through the ASX is not an excluded offer under s66(2) and (3), therefore, a prospectus is required and it must be lodged with ASIC. All prospectuses are registerable as well unless exempt from registration. Under s 1017A(3)(a), a prospectus in relation to shares is exempt from registration where the shares are listed for quotation on a stock exchange. Aussie Mines Ltd is making an offer on the stock exchange so they are required to lodge a prospectus but they do not need to register it as well. Part B Following is a plan for answering Part B. Once again, the relevant sections of the law to be applied to the facts in the problem question are identified and outlined. PLAN Prospectuses - misleading or incorrect contents Statute - key provisions - s 995 - misl/decep conduct in relation to securities - CRIM liability - 996 - authorise/cause issue of a prospectus where - CIVIL liability - a material statement in it is false or misleading, or - a material omission - entitlement to damages - s1005, s 1006(2) - defences - ss 1008, 1009, 1001, dirs, experts & prof. advisers common law action - fraudulent misrep and negligent mistatement - if no actual `damage' - rescission & damages [see LH, Chapter 7, pp148 - 154] In this instance, we have not stated the different steps required to answer the question. However, you will notice that these steps are interwoven into the answer itself. It is a well written answer. The issue here is whether or not there has been a misleading statement - and if so whether there has been a breach of duty and loss as a result. Looking at the facts of the case, by allowing the company's annual profits to be overstated by 50% this prospectus is false and misleading. Mei-Ling has a right of action under s 996(1)(b) because a person must not authorise or cause the issue of a prospectus if a material statement in the prospectus is false or misleading or there is a material omission. Contravention of s 996(1) is a criminal offence punishable by a fine of 200 penalty units ($20,000) or imprisonment for five years or both. In addition a person who breaches s 996 is also liable to pay damages to anyone who suffers loss or damage as a result of the contravention s 1005(1). However, Mei-Ling would have to actually prove that she suffered loss or damage in order to claim damages.

The defendant or whoever authorised the false and misleading statement has a defence under s 996(2) to the prosecution for contravention of s 996(1), if it is proved she had reasonable grounds to believe the statement was true and correct at the time. Section 1005 allows an action for damages to be brought against `anyone involved in the contravention'. Section 1006(2) lists those persons which includes directors, experts and other people in a professional capacity. Therefore Mei-Ling may have an action against the corporation as well as the directors. However, under s 1008 there is no liability for directors if it is proved that they have met the requirements in ss (2), (3) and (4) [This could be expanded upon - are any of those requirements relevant here? If so, why or why not?]. Experts are also relieved from liability if they can substantiate the elements in s 1009 [Does this include the auditor?]. Section 1011 sets out a due diligence defence for directors. Mei-Ling may also be able to seek a remedy under s 1325. For example, under a 1325(5)(a) the court can declare that the contract under which Mei-Ling acquired the securities be void and then under s 1325(5)(d) order that the person who contravened ss 995 and 996 to refund any money paid by the investor. This is probably Mei-Ling's best hope because the due diligence defence in ss 1008, 1008A, 1009 and 1011 do not apply to s 1325 orders. [The plan included reference to a possible common law action, but it was not included in the actual answer.] To enable you to understand more fully the components of a good answer, we have included below a poor response to a question. It states the legal principles, but fails to answer the question. Part B "Under s 1033 the ASC has the power to stop the issues of shares if they can find an error. This is called a stop order, but in this instance it is too late. S 996 deals specifically with false or misleading information statements or omissions. Under s999 it is an offence to issue false or misleading information that is likely to induce others to subscribe in the securities offered. S 1000 prohibits fraudulently inducing others to deal in securities. S 1309 states that it is an offence for an officer to furnish false and misleading information relating to the affairs of a corporation. Contravention of these sections constitutes a criminal liability. Under s 996(10(b) persons must not cause or authorise the issues of a prospectus if a material statement is false of misleading. contravention of this section constitutes a criminal offence and under s 1005(1) they are also liable to pay damages. S 996(3) excludes experts and excluded offers. The defence in this instance are s 996(2) if the people responsible can prove they had reasonable grounds and at the time to believe the information to be correct. Under s 1005(2) a person who contravenes s 995 & s996 is liable to pay damages to the person who has suffered the loss or damage under s 1006(2).

The persons liable are those who are `involved in the contravention'. Other remedies that are available are statutory injunctions under s1324 which is also a bit late in this instance. This is not a good answer because it fails to answer the question asked. The major problem with the answer is that critical and analytical thinking skills have not been utilised by the student, hence the student has been unable to come to grips with the question and its requirements. This is demonstrated by the fact that a whole host of sections of the Corporations Law are provided, without any real application to the facts. Also, irrelevant provisions have been presented. A stop order will only prevent further shares from being issues, and this is not relevant to Mei-Ling. Part C PLAN Minority shareholders' rights Statute - s 246AA(1)(a) - a member can apply - "affairs of coy" or an act / resolution is `oppressive' - range of remedies is available Common law - exceptions to the rule in Foss - fraud on minority? Other statutory provisions? eg - s 319 inspection of books Study closely this successful answer to the question. Once again, headings have been used to show the different steps involved in the writing of the response. Identify the issue The issue here is whether the minority shareholders have a right of action against the company. They may have a right to take action against the company, either at common law as an exception to the rule in Foss V Harbottle, or under s 246AA of the Corporations Law. At common law: identify the legal principles At common law the ability of individual members to enforce wrings done to their company is severely limited by the rule in Foss v Harbottle (1843). There are two aspects to the rule: - the internal management rule - the proper plaintiff rule. Tm only has a remedy at common law if he can bring his action within one of the exceptions to this rule in Foss. If he can bring himself within one of the exceptions to the rule, he will be permitted to bring an action against the company, the majority of the directors. At common law: applying the legal principles to the facts Looking at the facts of the case, Tom and the minority shareholders have a right of action under the common law because they can bring themselves within one of the exceptions to the rule in Foss v Harbottle which is fraud on the minority. By the majority shareholders selling off assets to the company without informing the general meeting of members they have committed a fraud on the minority by expropriating the company's property [Menier v Hooper's Telegraph Works (1874)].

Even though the directors' actions were ratified at a general meeting of members and the general meeting has a wide power to ratify the actions of directors who are in breach of their duty and to exonerate them from liability arising from such a breach, the directors control the cote so the same principle applies (fraud on the minority) where the directors control the majority of votes at the general meeting and use it to ratify their own expropriation of the company's property [Cook v Deeks (1916).] Under statute: identify & apply legal principles to the facts Tom and the minority shareholders could seek a remedy under the statutory provisions that address these problems. Section 246AA is probably the most appropriate, which allows a member to apply to the court [s 246AA(1)(a)] for a remedy where the `affairs of the company' [s 53] are conducted in a manner that is `oppressive, unfairly discriminatory or unfairly prejudicial or is contrary to the interests of the members as a whole'. Looking at the facts of the case, selling company property so that the directors can purchase island resorts is not in the best interests of the members as a whole because it is oppressive and unfairly discriminatory to minority shareholders." The legal action at common law will take the form of a personal or representative action or both, because the minority shareholders are seeking to enforce personal rights conferred on members generally, asserting that the wrong is done to the company. Under s246AA a wide range of remedies are available. The most appropriate seems to be s 246AA(2)(k) - an order requiring the directors to transfer the ownership of the resort into the name of the company.