Winter school~~

Yesterday, the agent came here to do the routine inspection, I really do not like it, but it can not be avoided. I am preparing the presentation for the BTX 5090, it is a group presentation, I do not think it is hard.
Here, I post another assignment, the corporate law, I learned it in 2008 Semester, I don't think it is a great example, but not too bad. Please do not use it for any commercial purpose.

CASE-Bell Re-Insurers Ltd (example of essay of Corporation law)
There are some economic problems in Bell-Insurers Ltd. Some directors try to solve these problems, and give financial assistance to acquire its own share. This essay is to judge the legality of the share capital transaction and whether these directors breach any common law and statute law. To answer these questions, the theory of the financial assistance and the duties of directors need to be applied, and the related stature law are Corporations Act 2001 S180- S183, S260A-S260E, also the case ASIC v Adler [2002] NSWSC 171 is exceeding similar with this one.

As S256A and Trevor v Whiteworth (1887) 12 App Cas 409 state, to protect the rights of creditors, a company is generally prohibited from reducing its issued share capital and the limited liability companies have to maintain issued share capital. The Corporations Act deals with the following transactions: share capital reductions, share buy-backs, self-acquisition and control of shares: and financial assistance. In the Bell Re-Insurers Ltd case, it uses financial assistance to reduce issued share capital.

Before 1998, a company indirectly reduce its capital if it financially assists a person to acquire shares in the company is illegal, because that is considered as offending the spirit of the rule in Trevor v Whiteworth. But according to 1998 amendments, as S260 expresses that a company must satisfy three conditions, and then it may financially assisting a person to acquire shares (or units of shares) in the company or its holding company. Firstly, giving the assistance does not materially prejudice the interests of the company, its share-holders or company's ability to pay its creditors. (S260 (1) (a))Secondly, the assistance is approved by shareholders. Thirdly, the assistance is exempted under S260C.

In this instance, Bell Re-Insurers Ltd is a company which specialising in the re-insurance industry. But recently, because of wild storms on the North Sea in Europe, a number of oil rigs were damaged and the potential for large claims being made on the reserves of Bell Re-Insurers Ltd meant the share price would probably fall. Under this situation, Charles who is the managing director of Bell Re-Insurers Ltd arranged for a $20M unsecured loan to be given to Blue Jen Pty Ltd, which then channelled $20M to Blue Enterprise Ltd. Both companies used a portion of the funds to buy shares in Bell Re-Insurers Ltd. After that the share price of Bell Re-Insurers Ltd was stabilised. This transaction can consider as a financial assistance. But this transaction hasn't satisfied any condition which can allow financial assistant happened.

Firstly, when financial assistance happened legally, the transaction must not materially prejudice to the interests of the company, its shareholders or the company's ability to pay its creditors. To make the judgement, we should measure whether the company or shareholders are suffered materially prejudice.
To answer this question, it is useful to analyse the case of ASIC v Adlder [2002] NSWSC 171. In this case, Alder is a director of Adler Corporation Ltd. HIH Casualty & General Insurance (HIHC) is a subsidiary of HIH Insurance Ltd (HIH). And Adler Corporation Ltd is a substantial shareholder of HIH. HIH provided an unsecured $10M loan to Pacific Eagle Equity Pty Ltd (PEE), which controlled by Alder. After loan PEE became trustee of AEUT. Also AEUT is controlled by Adler Corporation Ltd. HIHC's $10M loan to PEE was then applied to HIHC's subscription for $10M worth of AEUT. PEE used $4M to buy HIH shares on stock market. Later, PEE sold HIH share at $2M loss. PEE's purchase of HIH shares was designed to give stock market impression what Alder was supporting HIH's falling share price by personally buying its shares. The NSW Supreme Court held that substance of transaction is HIHC gave PEE financial assistance to acquire shares in HIH and HIHC has been suffered materially prejudiced by the fact that initially exchange $10M cash for either unsecured loan to PEE, and from the equitable rights it obtained against PEE which were of less value than the cash handed over. According to Santow J both HIHC and HIH suffered in HIH suffered material prejudice as the result of the financial assistance and therefore S260A was contravened.

Compare the two cases, the companies (HIH & Bell- Insurers) both financially assisting other company to acquire their shares. But there is a little difference. In the ASIC v Adler case, the share price of the HIH is decrease when PEE sold HIH's shares. But in the Bell-Insurers Ltd case, the share price of Bell Re-Insurers is stabilized. In another word, HIH gets $2M loss, but Bell not. But can we say that Bell Re-insurers Ltd doesn't suffer materially prejudice? No, because when the Bell loan $20M to Blue, and Blue uses this money to buy Bell's share, nobody know what will happen after that, it means that the company may lose capital from the action. And another problem is the unsecured loan. Unsecured loan is a loan where no collateral or security is given or charged to the lender. Unsecured loan is viewed as higher risk than secured loan and interest rates are generally higher to reflect this. That means Bell need to undertake more risk. If the Blue Enterprise Ltd doesn't want to pay back the loan or the Blue Ltd winds up, Bell Re-Insurers Ltd would suffer a huge loss because of unsecured loan. To sum up, the Bell is suffered potential materially prejudiced. So the share capital transaction is illegal and doesn't satisfy the S260A.

Secondly, financial assistance should be approved by shareholders, and according to SS260B (1), shareholder approval for financial assistance by a company must be given by: (a) a special resolution passed at a general meting of the company, with no votes being cast in favour of the resolution by the person acquiring the shares (or units of shares) or by their associates: or (b) a resolution agreed to, at a general meeting, by all ordinary shareholders. And S260B (4), company must to hold a meeting to decide whether to financially assisting. Go back to the case, first of all, Rod only approached Charles, and without consulting the Board or the shareholders of Bell Re-Insurers Ltd. Even though Rod informs this transaction to the Board, and they have the meeting to talk about the plan, we believe that the Board won't agree with this transaction. Because provide the unsecured loan is not a good choice for the company. And to stabilise the price of share, the company can choose a safe way to do that, but not financial assistance. Rod steers clear of Board to do this transaction, the purpose of this is dubitable. And the duty of Rod will be discuss at the duty of directors.

Thirdly, this assistance can't meet any clause of the S260C. To sum up, this transaction is illegal, because it breaches SS260A-C, and according to the S260D, if a company provides financial assistance in contravention of section 260S: (a) the contravention does not affect the validity of the financial assistance or of any contract or transaction connected with it: and (b) the company is not guilty of an offence. And the director will take charge of the action.

Another issue of this case is about the duty of directors and officers. Fiduciary duty is a very important concept in this part, which is an obligation to act in the best interest of another party. For instance, a corporation's board member has a fiduciary duty to the shareholders, a trustee has a fiduciary duty to the trust's beneficiaries, and an attorney has a fiduciary duty to a client. And in the company, the fiduciary duty is about act in good faith in the best interests of the company, exercise their powers for proper purpose, retain their discretionary powers, and avoid undisclosed conflicts of interest. And as Corporation Act states, the SS180-183 is related to these part. There are three people in this case, Rod, Charles and Linda.

Rod is a non-executive director of Bell and a majority shareholder of Blue Enterprises. As a non-executive, he should monitor the activities of the management team headed by the CEO and bring an independent view and judgment and after an outside or broad perspective to the board's deliberations. Charles is the managing director of Bell Re-Insurers who is put in charge of managing the company's daily business and deposable for the senior executives employed to manage the company. Rod and Charles are in the different positions, but when they manage the company, their fiduciary duties are the same. They need to consider the interests of the company firstly, but not his own interest. But in this case, when Rod decide to financially assist to Blue, he didn't priority consider the benefit of Bell-Insurers Ltd, but the bull Enterprise. And this transaction will increase Rod's wealth. Although this transaction can't increase Charles' wealth, but when he let this act happen, he didn't think over what will happen after that, and whether this will lose company's profit. So, both of them breach the S181-Duty to act in good faith. Also according to the analysis above, they breach the S182 and S183. S182 states that a director, secretary, other officer or employee of a corporation must not improperly use their position to gain an advantage for themselves or someone else, or cause detriment to the corporation. The S183 says a person who obtains information because they are, or have been, a director or other officer of employee of a corporation must not improperly use the information to gain an advantage for themselves or someone else, or cause detriment to the corporation. They both know the situation of the company, but they don't use information and their position to make a good decision for the company. Especially Rod, he uses his position to make the interest for himself.

Another person in this case is Linda, another director who is Charles ex-wife. She didn't participate in the transactions, but she is aware of these transactions. Linda knows what Rod and Charles will do before the transaction happens, she has the opportunity to stop it. But she didn't, and as a director of a company, she braches the S180-Care and diligence, it means a director of a corporation must exercise their powers and discharge their duties whit the degree of care and diligence that reasonable person would exercise if they were a director of a corporation's situation.

Rod and Charles maybe claim they were doing this for the benefit of the company, which means they want to make the price of the company stables. But in the ASIC v Adler case, which is similar to this case, the court held that Alder breached the S182 when he arranged a port of $10M loan to buy HIH shares. Rod and Charles do the same thing as Alder, and their behavior may increase their own wealth. When they do this kind of thing, they don't priority consider the profit of company, but their own benefit. They improperly use their position as directors of Bell Re-Insurers Ltd and misuse the company's fund. These directors would be personally liable for civil penalty under 1317E (a).

In final conclusion, Rod and Charles give financial assistance to Blue Enterprises Ltd. This transaction breaches the S260A-D. Rod and Charles as the directors of Bell Re-Insurers Ltd, both of them breach SS181-183, because of misuse their position and company's fund. Another direct of Bell Re-Insurers Ltd Linda, she breach the S180 (1), because she doesn't discharge her duty of care. The three directors will suffer civil penalties under s 1317E. They can be punished according to 1317G (1).

REFERENCE

Asic v Adler and 4 Ors [2002] NSWSC 171, (Santow J)

LexisNexis, Australian Corporations Legislation, 2008 edition, 2008

Lipton, P & Herzberg, A, Understanding Company Law, 14th edition, 2008

Trevor v Whiteworth (1887) 12 App Cas 409

Bibliography

moneynet, Glossssary, http://www.moneynet.co.uk/glossary/glossary-r-z.shtml%20at%2027%20April%202008

wikipedia, Secured loan, http://en.wikipedia.org/wiki/Secured_loan, at 25 April 2008