Fountain Ltd (Fountain)
The word limit for Question 1 is 900 (excluding footnotes and bibliography). The word limit for Questions 2 to 4 is 1700 (excluding footnotes and bibliography. There is NO 10% leeway on the maximum word limits.
You need to answer question 1, and you can answer any two questions from question 2 to 4. So total need to answer 3 questions.
Question 1
Fountain Ltd (Fountain) is a medium sized public company that bottles and sells mineral water to retail customers. Green is the Chairman of the board. White and Brown are two non-executive directors sitting on the Fountain board. Although the company’s constitution provides for the board of directors to appoint the managing director, no such appointment has actually been made by the board since the departure of the managing director three years ago. Joanna, a senior marketing executive of long experience with Fountain, has generally assumed the role of the managing director in practice. She enjoys the confidence of the board and now sits on the board as the company’s senior executive director.
One year ago, Joanna concluded an advertising agreement with Supermarkets Ltd, a large national chain, on behalf of Fountain. This advertising campaign proved most successful and the board was happy with Joanna’s part in arranging this. At about the same time she concluded the advertising agreement, Joanna also began negotiations with Supermarkets Ltd for an important contract committing Fountain to supply mineral water to Supermarkets Ltd for a period of three years.
Because of the importance to Fountain of the proposed three-year contract for the supply of mineral water to Supermarkets Ltd, the board subsequently resolved to delegate authority to a sub-committee of the board comprising Joanna, White and Brown to negotiate and complete the proposed contract on behalf of Fountain. After several meetings, Joanna, White and Brown reached an agreement with Supermarkets Ltd that the contact should be prepared for execution by both companies.
On the day appointed for execution of the contract, Joanna, White and Brown attend the office of Supermarkets Ltd. After some final discussion on the terms of the contract, Brown becomes sick and leaves the office. Joanna is then urgently called away on other company business. As she leaves, Joanna says to those remaining in the room that White is authorised to execute the contract on behalf of Fountain. White later signed the contract “on behalf of Fountain,” but without affixing the company seal. Sometime later, Fountain sought to avoid the contract with Supermarkets Ltd saying that White was not in fact authorised to bind the company.
Is Fountain legally bound by this contract? (Word Limit: 900)
Question 2
Apex is a large proprietary company that operates more than 20 Jewellery retail stores in Australia. George holds 25 per cent of shares in Apex. John and his wife hold 55 per cent and the balance of shares in the company are distributed among employees. George and John are both directors, John being the Chairman and managing director. The other director, Paul, is appointed from company employees.
Personal relations between George and John have seriously deteriorated since the end of 2011, and George now resents John’s dominance of board proceedings. Specifically George complains that board meetings have been conducted without regard to the views of directors other than John, that meetings of John and Paul are held before full directors’ meetings to formulate a position and strategy with respect to items arising at board meetings, and that John sometimes restricts the speaking time available to George at board meetings. George and John do not speak to each other save for absolutely necessary communications.
George is not happy with what is going on in Apex. In the meantime, George becomes aware of the following transaction between Apex and Myco Pty Ltd. Myco is one of several Australian companies importing diamonds from overseas. John is a 30 per cent shareholder of Myco. Myco has recently been awarded by John a three-year contract to supply Apex. Although the contract terms appear to be fair to Apex, John has never discussed this transaction at Apex board meeting.
Advise George of his possible remedies. (Word limit: 1700)
Question 3
Future Ltd is a mining company which owns several claims in Western Australia. It needs capital in order to exploit these claims. On 3 September 2012 Sam Kruger, the managing director of Future Limited, has lunch at his club in downtown Perth, the West Australian Club. He sees Mary Rothschild, his high school sweetheart, now a rich business woman, having lunch. Sam goes up to her and says “Can I interest you in our new share issue – how about $ 1 million’s worth?” Mary accepts the offer and agrees to buy $ 1million worth of shares.
On 10 September 2012 Future Ltd lodges a prospectus with ASIC, signed by all its directors. In the prospectus the following is stated:
FUTURE EARNINGS – GEOLOGICAL REPORT
According to the report of Mr. Peter Grunt, qualified geologist and partner of Grunt and Heave Professional Geology (see Appendix D), our mining claims are likely to yield 25 carats per metric ton of ore which, at present costs, gives a production price of $ 500 per ton.
OUR MARKET FORECAST
Assuming a production price of $ 500 per tone, and in view of our expectation that world diamond prices can only go up in coming months, we would expect earnings of $ 0.50 per share in the first year of operations – that is, a return of 10%.
Henry purchases 1, 000 shares in Future Ltd at $ 5.00 each. A few months later he is sitting in his GP’s waiting room in Canberra and reads an article in a magazine called The Diamond Miner, Issue No 6 of August 2012. The article contains the following statement “unfortunately, most experts predict a crash in world diamond prices in the short to medium term”. It also transpires that the mine had yielded only 15 carats per ton. Henry sells his shares immediately, but is able to get only $ 1.00 for them. Needless to say, he has never received any earnings.
Advise Future Ltd and its directors on their liabilities arising out of these facts, citing full authority for your answer (Word limit: 1700).
Question 4
Mandalay Chocolate Sprouts Pty Ltd (Mandalay) operates a business from a factory in Fyshwick it rented from Industrial Park Ltd. Due to some unsuccessful business expansion efforts in the last a couple of years, Mandalay has been experiencing extreme financial difficulties and its financial records are now in a hopeless mess. It is continually late in paying debts owed to its suppliers. With the holiday season approaching, the directors of Mandalay are uncertain whether the company would be able to pay its employees their holiday pay entitlements. The main creditors of the company are:
Commonwealth Bank, which is owned $2 million. This loan was secured over Manday’s plants and equipment and guaranteed by the directors of Mandalay with their family homes.
Indusrial Park Limited, which is owned $20,000 arrears of rent; and
Mandalay’s employees, who are owned $30,000 unpaid wages.
Furthermore, Mandalay’s debt of $3,900 to a local supplier is way overdue. Mandalay received a statutory demand from the supplier. The 21-day period for compliance with the demand expired yesterday.
Advise Mandalay’s directors about their options under the external administration procedures under the Corporations Act, including the advantages and disadvantages each of the different types of procedures poses for their and the company employees. In your advice, you also need to consider what Commonwealth Bank is likely to do (Word limit: 1700).
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