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Corporate Law Notes

Table of Contents

Topic 1: Contextual, Ethical and Theoretical Issues ....................................................................... 5 Theory and Corporate Law Podcast ................................................................................................................ 5

Why Theory? .......................................................................................................................................................................... 5 What is a Corporation? ...................................................................................................................................................... 5 Theories of the Corporation ............................................................................................................................................ 5

Companies in Context Podcast .......................................................................................................................... 8 Rationale for Forming Companies ................................................................................................................................ 8 Stakeholders of Companies ............................................................................................................................................. 8 Key Roles in Companies .................................................................................................................................................... 9 Internal Rules of Companies ........................................................................................................................................... 9 Types of Companies ............................................................................................................................................................ 9 Corporate “Life Cycle” ..................................................................................................................................................... 10 Corporate Fundraising ................................................................................................................................................... 10 Regulation of Australian Companies ........................................................................................................................ 10 Themes in Corporate Law ............................................................................................................................................. 10

Harris Textbook Notes ....................................................................................................................................... 10 Corporate Law: Theories, Principles and Applications – Chapter 1 ............................................................ 10

Topic 2: Partnerships and Other Business Structures ............................................................... 14 Partnership and Other Business Entities Podcast ................................................................................... 14

Types of Structure ............................................................................................................................................................ 14 Factors in Deciding Choice of Structure .................................................................................................................. 15 Partnership .......................................................................................................................................................................... 15 Partners as Fiduciaries ................................................................................................................................................... 17 Legal Liability of Partners ............................................................................................................................................. 19

Harris Textbook Notes ....................................................................................................................................... 20 The Nature of Companies, Partnerships and Other Business Structures – Chapter 3 ......................... 20

Topic 3: Types of Companies formed under the Corporations Act, Capital, Insolvency and Corporate Personality ................................................................................................................... 27

Setting Up a Company Podcast ........................................................................................................................ 27 Internal Capital Structure Podcast ................................................................................................................ 27

What is Capital Structure? ............................................................................................................................................. 27 Levels/Tiers in Capital Structure ............................................................................................................................... 27 Comparing Debt v Equity .............................................................................................................................................. 29

Overview of Corporate Insolvency Podcast ................................................................................................ 30 What is Insolvency? ......................................................................................................................................................... 30 Indicators of Insolvency ................................................................................................................................................. 30 Forms of Insolvency Appointments – External Administration .................................................................... 30

Corporate Personality Podcast ....................................................................................................................... 33 Limited Liability ................................................................................................................................................................ 33 A Corporate Personality: Salomon v A Salomon & Co Ltd [1897] AC 22 ..................................................... 33 Corporate Personality: Lee v Lee’s Air Farming [1961] AC 12 ....................................................................... 34 “Lifting the Veil” ................................................................................................................................................................ 34

Harris Textbook ................................................................................................................................................... 37 The Nature of Companies, Partnerships and Other Business Structures – Chapter 3 ......................... 37 Corporate Personality – Chapter 4 ............................................................................................................................ 38 Shares and Shareholders – Chapter 7 ...................................................................................................................... 43 Corporate Insolvency and Restructuring – Chapter 16 .................................................................................... 43

Corporate Criminal and Tort Liability Podcast ......................................................................................... 47

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Intro: Criminal (and Tort) Liability and Corporate Personality .................................................................... 47 Purpose or Intention of Company? ............................................................................................................................ 47 Vicarious Liability of Corporation ............................................................................................................................. 47 Primary Corporate Criminal/Tort Liability ........................................................................................................... 48 Special Rule of Attribution: A Third Way to Find Corporations Liable ...................................................... 48 Corporate Crime and the Criminal Code Act ......................................................................................................... 49 Accessorial Criminal Liability of Individuals ......................................................................................................... 49 Checklist for Corporate Criminal Liability.............................................................................................................. 49

Corporate Liability for Contracts Podcast .................................................................................................. 49 How may a Company enter into a Contract? ......................................................................................................... 49 Cases on Corporations Entering Contract using an Agent (see s 126) ....................................................... 50 What Authority is ‘Implied’ by Appointment as a Director? ........................................................................... 50 Further Protection for Outsiders in Statute: Sections 128-130 Corporations Act ................................. 51 What is Ostensible or Apparent Authority? – Relevant for s 129(3) .......................................................... 51 Note: Sections 128-130 Changed the Previous Common Law Test in Northside ................................... 52 How to Approach a Question ....................................................................................................................................... 52

Caratti Case and Podcast ................................................................................................................................... 52 Harris Textbook ................................................................................................................................................... 53

Corporate Capacity and Corporate Liability – Chapter 5 ................................................................................. 53

Topic 5: Introducing Directors............................................................................................................ 62 Directors and Officers: Definitions, Appointment and Removal Podcast ....................................... 62

Definitions – Officer – Section 9 .................................................................................................................................. 62 Definitions – Directors – Section 9 ............................................................................................................................ 62 Shadow and De Facto Directors .................................................................................................................................. 63 Roles of Directors in Companies ................................................................................................................................ 63 Appointment and Removal of Directors .................................................................................................................. 63 Remuneration – Listed Companies ........................................................................................................................... 63

Harris Textbook ................................................................................................................................................... 64 Managing Companies ...................................................................................................................................................... 64

Topic 6: Corporate Decision Making Organs .................................................................................. 72 Company Meeting Podcast ................................................................................................................................ 72

Checklist for Valid Meetings – 3 Phases of a Company Meeting ................................................................... 72 What are Company Meetings? ..................................................................................................................................... 73 Directors’ Meetings .......................................................................................................................................................... 73 Members’ Meetings .......................................................................................................................................................... 74 Voting at Members’ Meetings ...................................................................................................................................... 75 Convening a Members’ Meeting .................................................................................................................................. 75 Annual General Meetings (AGM) ................................................................................................................................ 76

Informal Corporate Actions and Unanimous Assent Podcast – Duomatic Principle ................... 76 Corporate Constitution and Division of Power Podcast ........................................................................ 77

What is Decision-Making Power? .............................................................................................................................. 77 Distribution of Decision-Making Power .................................................................................................................. 78 What are Decision-Making Organs? .......................................................................................................................... 78 Powers Given to Members ............................................................................................................................................ 78 Allocation of Power .......................................................................................................................................................... 78 Effect of Distribution of Power.................................................................................................................................... 79 A Residual Power for Members? ................................................................................................................................ 79 What is the Corporate Constitution? ........................................................................................................................ 80

Harris Textbook ................................................................................................................................................... 81 Internal Management and Meetings – Chapter 6 ................................................................................................ 81

Topic 7: Corporate Fundraising .......................................................................................................... 91 Corporate Fundraising Podcast ...................................................................................................................... 91

Rationale and Concepts .................................................................................................................................................. 92 Financial Products – Section 763A ............................................................................................................................ 92

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Offers Requiring Disclosure: ........................................................................................................................................ 93 Types of Disclosure Documents.................................................................................................................................. 94 What Information needs to be disclosed? .............................................................................................................. 95 Defective Disclosure – Liability ................................................................................................................................... 95 Defective Disclosure – Defences ................................................................................................................................. 95 Disclosure Documents – ASIC’s Role: ....................................................................................................................... 96

Harris Textbook ................................................................................................................................................... 97 Corporate Finance – Chapter 14 ................................................................................................................................. 97

Topic 8: Directors’/Officers’ Duties: Duty of Care, Skill & Diligence and Insolvent Trading ...................................................................................................................................................... 103

Duty of Care of Directors and Officers Podcast ...................................................................................... 103 Different Causes of Action for Breach of Duty of Care .................................................................................... 103 Elements of the Duty .................................................................................................................................................... 103 What is the Standard of Care? .................................................................................................................................. 103 Statutory Duty of Care: s 180(1) ............................................................................................................................. 104 Centro Litigation: Non-Executive Directors and Company Finances ....................................................... 104 Listed Companies: Importance of Checking Public Announcements ....................................................... 104 Duty of Care Defences .................................................................................................................................................. 105

Brief Overview of Directors’ and Officers’ Duties Podcast ................................................................. 105 Where do you find the Legal Duties of Directors/Officers? ......................................................................... 105 What are the duties? ..................................................................................................................................................... 105 Why retain both Statutory and General Law Duties? ..................................................................................... 106 Statutory Directors’ and Officers’ Duties: Consequences of Breach ......................................................... 106 General Law Duties: Consequences of Breach ................................................................................................... 106 Who can be sued for Breaching ‘Directors and Officers’ Duties? ............................................................... 106 How to distinguish the different duties? .............................................................................................................. 107 Examples – Which duties may have been breached? ...................................................................................... 107

Liability for Insolvent Trading Podcast .................................................................................................... 107 Concepts: Insolvency .................................................................................................................................................... 107 Section 588G – Liability for Insolvent Trading – Test for the Exam ......................................................... 108 Section 588H – Defences ............................................................................................................................................ 108 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 ................................................................ 108 Commonwealth Bank Ltd v Friedrich (1991) 5 ACSR 115 ............................................................................. 109 ASIC v Plymin, Elliot & Harrison [2003] VSC 123 .............................................................................................. 109 Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 ...................................................................... 109

Harris Textbook ................................................................................................................................................ 109 The Duty of Care and Diligence – Chapter 9 ....................................................................................................... 109

Topic 9: Directors’ and Officers’ Duties: Good Faith and Proper Purpose ........................ 117 The Duty to Act in Good Faith Podcast ...................................................................................................... 117

Equitable Duties and Fiduciaries ............................................................................................................................ 117 To whom are the Duties owed? ............................................................................................................................... 119 The Interests of the Company................................................................................................................................... 122

Acting for a Proper Purpose Podcast ......................................................................................................... 123 Acting for a Proper Purpose ...................................................................................................................................... 123 Examples ........................................................................................................................................................................... 123 Management v Control Powers ................................................................................................................................ 123 Other Examples .............................................................................................................................................................. 124 Establishing an Improper Purpose ......................................................................................................................... 124 Relief from Liability ...................................................................................................................................................... 124 Consequence and Remedies ...................................................................................................................................... 124 Approach to Good Faith and Proper Purpose Questions - IMPORTANT ................................................ 125

Harris Textbook ................................................................................................................................................ 125 Acting in Good Faith and for a Proper Purpose – Chapter 10 ..................................................................... 125

Topic 10: Conflicts of Interest ........................................................................................................... 131

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Conflicts of Interest, Disclosure and Related Party Transactions Podcast .................................. 131 General Law Conflict of Interest Rule .................................................................................................................... 131 General Law Rule on Secret Profits and Diversion of Corporate Opportunities ................................. 131 Modification of General Law Rules by Statute ................................................................................................... 132 Disclosure to the Board ............................................................................................................................................... 132 Related Party Transactions: Apply only to Public Companies .................................................................... 133 Who/What is a Related Party? ................................................................................................................................. 134

Secret Profits (Corporate Opportunities) – Statute ss 182 and 183 Podcast .............................. 134 What if the Company has rejected a Corporate Opportunity, or cannot take it? ................................ 134 How do these cases fit with sections 191-195 disclosure rules? ............................................................... 135 What if you resign your position to take up Opportunity? ........................................................................... 135 Statutory Conflict of Interest Duties ...................................................................................................................... 136

How to Approach Conflict of Interest Questions (Important for Exam) ....................................... 136 Director Conflict Checklist ......................................................................................................................................... 136 Officer Conflicts Checklist .......................................................................................................................................... 136

Harris Textbook ................................................................................................................................................ 137 Misappropriate of Corporate Opportunities and Secret Profits – Chapter 11 ..................................... 137 Managing Conflicts – Chapter 12 ............................................................................................................................. 142

Topic 11: Shareholder Remedies ..................................................................................................... 148 Remedies for Shareholders and Others Podcast ................................................................................... 148

Statutory Oppression Remedy (ss 232-235) ...................................................................................................... 148 Winding Up Remedies (ss 461-464) – Compulsory Liquidation Remedy .............................................. 149 Statutory Derivative Action (ss 236-242) ........................................................................................................... 149 Statutory Injunction (s 1324) ................................................................................................................................... 150 Other Options .................................................................................................................................................................. 151

Harris Textbook ................................................................................................................................................ 151 Members’ Remedies – Chapter 13 .......................................................................................................................... 151

Facts: Issues: Decision: Significance:

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Topic 1: Contextual, Ethical and Theoretical Issues

Theory and Corporate Law Podcast

Why Theory?

Theory of corporations pose fundamental questions – these below three points are to be considered.

Consider what a corporation is. Consider what the purpose of a corporation is. Consider how corporations should be regulated.

What is a Corporation?

Public v Private Relationships Is a corporation anything more than the exploitation of private property rights?

o See s 1070A. o The provision provides what a share is – viewed as private property.

Recognition that shareholders have private property which consists of the shares that they hold in the corporation.

Contrast classical ‘regulated corporations’ set up for public purposes by royal charter or private legislation with private business companies (eg, joint stock companies, and companies registered under general incorporation legislation).

A corporation is a set of private relationship between property owners and the managers of that property on the other.

It is totally or in part within the public domain. Some theories view it as a political/social institution. Something that is fundamentally private in nature; private property owners; who they

choose to manage that property (i.e. shareholders (money)/executive managers/board of directors (responsibility to manage property for the benefit of the shareholders); corporation as a public institution (i.e. UTS is a corporation).

Corporations are not just an exercise of property rights. They provide the greater majority of our essential goods and services in our lives. Corporations are everywhere. Hence, they are public in nature conveying the political/social distinction.

Not logical nowadays to have the public/private divide. Government provides services through companies. Governments engage in commercial activities and make a profit (i.e. Sydney Water).

Modern corporate law: general powers of incorporation; anyone can set one up nowadays; historically it was difficult done by virtue of a private statute.

The structure of corporate law in Australia is set up to protect the interests of those private shareholders.

The law: ‘Once a company has been legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself’: Salomon v A Salomon & Co Ltd.

Theories of the Corporation

Is it a real thing or not?

Yes

Managerialist (growth of conglomerates which used internal capital and product markets).

o The corporation as a hierarchy of management.

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o A large proportion of large public companies in US had no shareholder with a controlling stake. Poses challenges of how we view control of private property.

o A corporation can be viewed as a managerial hierarchy. Managers going up the chain. Focus of this approach is on the actual managers of the corp itself.

o A push for fiduciary obligations. There is a presumption that managers may do things that they are not engaged to do – legal system to increase profitability for the corporation flow on effects that positively benefit society, shareholders and creditors.

Concession theory (created by state authorisation). o Based on view that corps are a real thing, but are only a real thing because there

is a statute that says the corporation exists. o Based on the significance of the legal recognition of the corporation o . A benefit given out by govt and that benefit is a privilege (and thus comes with

responsibilities). Thus, justifies regulation of corps. o Not as relevant nowadays, anyone can really start of a corporation.

Aggregate /natural entity (more than the sum of its shareholders). o A corporation is a real thing, and the legal recognition is just a provision of

certain legal rights. o Corporation would exist even without general right of incorporation. o Corporations are the natural effect of the conglomerate of individuals. People

come together to do things (i.e. run businesses). Further, then those businesses begin to make a life of its own, even in the absence of legal recognition. I.e. this can be seen through unincorporated associations.

Communitarian (company as a social institution). o View that corporations are a social entity. o We need to look at the different stakeholders, stakeholders that interact with

corporation and the broader community. o What role do corporations have in the community? Often used as a contrast

from the economic perspectives. Political institution (company as an expression of social power).

o Just as we regulate political parties, we should regulate corporations. o A corporation has an important role in society (conglomerate of people coming

together), and there is a responsibility to regulate the contribution and how it interacts with society – thus it is a real thing.

Feminist (company as a social institution founded on gender bias, inequality, exploitation of property rights and conflict).

o See the corporations as a social institution; focus on how relationships develop and interact within and with the corporation.

o Assess how corporations affect workers and their families, affect on power dynamics in society, and focus on the role of woman in corps from the perspective of property ownership.

o A feminist critique: ignore non-property rights holders; reinforces pre-existing power inequalities in society (as woman historically have no owned property).

o Another critique: Corporate law focuses too much on addressing conflict, rather than connections and relationship within which corps and stakeholders interact with each other. Property managers will act selfishness.

o Critique: focus on a largely male paradigm of conflict and selfishness, rather than connection.

No

Contractarian (economic)-a corporation is a nexus of contracts.

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o Relationship between capital providers and the managers of that capital. Without capital, then the corporation cannot operate.

o Marketplace where providers of capital and users of capital interact with one another.

o Corporation law is about managing agency cost. Agency cost is when the owners of property appointing agents to manage that property.

o We don’t regulate the corporation; we regulate the people who work within the corporation and those that interact with it. Thus, the role of law is to try and make the contracting process more efficient.

o Under contractarian perspective, negative externalities are larger ignored. If people get hurt, it is not the point of corporate law/contract law to address it.

o Consider Coase theory of the firm (firms arise when the cost of producing goods and services is cheaper than obtaining these through markets).

Coase theory of the firm: trace back to economics research papers. Outsourcing v In-house decisions.

Team production model (TPM)-corporation as a mediating hierarchy that is designed to lock capital into the enterprise.

o Managers of corporations may have a tendency to get perks for themselves rather than benefit the shareholders.

o Attempts to constrain agency costs by making it harder and more expensive to do so. Not a real thing; but it is not simply a marketplace. Rather it is a mediating hierarchy that is development to manage the providers of capital.

o Directors are the mediating hierarchy that has to make decisions about how the output of the corporation is shared between the team members.

o Role of directors is to how to allocate what the corporation produces (e.g. creditors must have to have a good return, so they withdraw their loans, etc).

What is the Purpose of Corporate Law?

Should corporate law be used to address bargaining and wealth inequalities? Shareholder primacy revisited (eg TPM).

o Are shareholders really the residual risk bearers? o Communitarian v economic perspectives

Mixed goals: o Investor protection o Managing agency costs o Reducing transaction costs (including the competition for capital) o Efficiency v equity

Feminist critique-corporate law entrenches conflict, separation and existing hierarchy, individuals valued over groups, economic gains valued over other benefits.

Alternative foundations: trust, legitimate expectations and mutual responsibilities, the corporation as custodian.

Corporate law is about protecting capital providers. Other theories beg to differ. Other theories hold that it is not ok for corporations to rip off employees; make

products that hurt people. Corporations law should look after this responsibilities. Shareholder primacy: economics: if nothing more than a nexus of contracts, how

should corporate law look after that? Greater efficiency. Main aim of corporate law is to maximise shareholder wealth – primacy norm. This

should be the guiding norm of corporate law. Shareholders have to pay its obligations. Only after creditors are paid, then it has a surplus to return to shareholders (i.e. by dividends, buying back shares and putting it back in the business). Everyone else must

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get paid before the shareholders do. Communitarians say that harm is being dealt on community and employees so company can make a profit.

If a company goes bust, shareholders lose their money. But employees also lose their jobs. Customers lose their products. Suppliers lose a customer. Community loses tax revenue source. There are many stakeholders affected by corporate failure.

We must look at the rules from a variety of perspectives in order to get the optimal view. This is what the corporations act attempts to do.

Not one single theory will provide what corporate law actually is.

Companies in Context Podcast

Rationale for Forming Companies

Why do people form companies? o A means of limiting the liability (i.e. managing risk) of members (shareholders). o Enables investment and business growth economic growth. o Enables perpetual succession.

Companies (corporations) have separate legal personality. o Meaning they may enter into contracts; o may employ people; o may raise capital; o may borrow, lend and invest capital; o and may sue and be sued.

Stakeholders of Companies: someone who has an interest in a company

Shareholders (members): invest capital into companies receive shares (securities) in company meaning they have equity in company (right to share in net worth of company or to receive dividends which is a distribution of the company’s profits)

o Retail – individual investors o Institutional investors – banks, insurance companies, superannuation funds,

governments, fund managers Companies would like a good mix of debt and equity (in order to get tax advantages.

o May sell their shares; may receive dividends (distribution of company profits). o They’ve got equity in the company. o Shareholders may be categorised as:

Retail – individual investors; and Institutional – banks, insurance companies, superannuation funds,

governments and fund managers. Directors: govern companies (involved in management)

o In small (closely held) companies, directors often involved in management. o In larger companies, directors delegate management to managers & employees.

Creditors: lend capital to companies. Can include financial institutions, companies and individuals (contractual promise for the latter two) contractual promise to receive their lend with interest on top

Can also include: o Contractors and business partners;

See also mergers and acquisitions. Business is a big web of contracts.

o Employees; Director duties generally don’t attach to employees.

o Interest groups; o Community groups;

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There is an increasing prevalence of Corporate Social Responsibility (CSR). o Companies behave and conduct business is a socially responsible way.

Corporate law theories seek to explain how corporate law should balance all these interests (see above).

Key Roles in Companies

Directors may be: o Executive: employment contract with company; or o Non-executive: no employment contract with company – only association

through role as director. Board of Directors – Chair of board (person in charge) – generally head of company. CEO/Managing director – in charge of management – can sit on the board and report to

the board overall. Chief Financial Officer (CFO) – report directly to CEO and have a relationship w/ board. Company secretary (Chief Administrative Officer)– person who keeps all

administrative aspects all organised. Also known as Chief Administrative Officer of the company.

o Filings, meetings of directors, administrative aspects of the company in check For larger companies: in-house/corporate counsel – usually headed by a “General

Counsel”. o Bring legal skills and aspects to the business

CS and GC are often combined. o CS often has a number of assistances that are either internal or outsourced

Internal Rules of Companies

Company constitution – sets out the rules for the governance of the company – which may include:

o Issue and transfer shares; o Powers of directors; o Meetings of directors and members; and o Changes to company structure and activities.

Has the effect of an enforceable contract between company and its members. o Under the Corporations Act, it acts as a contract. Any breach of contract can be

brought to court. Pre-1998: memorandum of association and articles of association (constitution).

Types of Companies

Companies (around 2 million in Australia). o Public (Ltd)

Listed (around 2,000 listed on ASX). Unlisted. Can raise funds; advertise securities to gain money from. Only public companies can legally list on the ASX.

o Private (Pty Ltd). Small or large: s 45A of the Corporations Act. Can’t raise capital for the members of the public

Corporate groups: parent (holding) company and subsidiary companies. Other business structures: sole trader, partnership, joint ventures, associations and

trusts.

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Corporate “Life Cycle”

Incorporation – comes into existence. Must be registered with ASIC; form a constitution.

Operation Possibly – change of structure – e.g. if company grows/need to raise more funds. Possibly – if company encounters financial difficulties – external administration

winding up (may be prompted by members, by creditors, or by ASIC). o Obligations shift to satisfying needs of the creditors. o Can go into external administration – insolvency firm – look at concepts or

voluntary receivership and liquidation. o Whatever is left after winding up may be returned to members.

De-registration by ASIC. Individuals can become personally bankrupt but the company can become insolvent

Corporate Fundraising

Securities/stock/capital markets – financial market jargon. Australian Securities Exchange – see www.asx.com.au - electronic market. Enable larger companies to be listed (floated) – raise funds from public. The company’s securities may then be bought/sold (traded) on market. Enhanced requirements: disclosure of information to investors.

Regulation of Australian Companies

Until 1980s – States/territories regulated companies. Transfer of regulatory powers to Commonwealth. Australia Securities and Investment Commission (ASIC) deal with the following:

o Regulator of consumer credit and companies. o Maintains a public register of companies information for investors, creditors,

contractors, etc.; o Companies over specified sizes must lodge financial reports; o Investigation – fraud; breaches of Corporations Act; and o Enforcement – criminal, civil or administrative remedies.

Themes in Corporate Law

Involves both legislation (Corporations Act 2001 (Cth)) and common law. Some themes examined in this course:

o Protecting rights of members – disclosure of information; participation in meetings; and approval of decisions.

o Ensuring directors act in company’s best interests conflicts of interest, good faith, proper purpose, duty of care and diligence.

o Safeguarding rights of creditors. Insolvency: inability to meet long-term financial obligations.

o Remedies for breaches.

Harris Textbook Notes

Corporate Law: Theories, Principles and Applications – Chapter 1

Corporations and Companies

Identifying the Nature of our Subject

A ‘company’ is defined in the Dictionary in s 9 of the Corporations Act as being ‘a company registered under this Act’, which narrows the scope of the term to very

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specific entities and does not include other business entities with corporate-like features, such as incorporated associations, co-operatives or foreign companies: see also Re Featherston Resources Ltd.

A ‘corporation’ is defined under s 57A to include a company in addition to any body corporate (in Australia or overseas) and an unincorporated body that has the features of separate legal status under the law of its place of origin.

Types of Companies

Section 112 provides for public companies and proprietary companies, each of which may have either a limited or unlimited capital structure.

Companies limited by guarantee do not issue shares and therefore have no share capital. Rather guarantee is drawn from each member’s guarantee: s 517.

Different Corporations

Refer to p 4 for the difference between corporations sole and aggregate.

The Key Elements of a Corporation

Board of directors is most important decision-making organ of corporation: s 198A. Members who make decisions by passing resolutions in general meetings are an

important element of the corporation. The balance of power between the board and the members in a general meeting as

decision-making organs is set out in the company’s constitution and the Act. Members provide funds to the corporation by either buying shares issue by the

corporation or by agreeing to become a member of a company limited by guarantee. Capital structure (shareholders’ liability) is another key element. Note: Act refers to shareholders as members due to companies limited by guarantee

not having share capital. There is equity capital (money from shares or guarantees) and debt capital (loans, etc).

Historical Development

Refer to pp 6-16 for the historical development of modern corporations.

Theoretical Perspectives

This section can go hand in hand with the theory and corporate law podcast above.

Fiction (or Concession) Theory

View that corporations are artificial entities whose existence is derived solely from law – i.e. they exists because the law says so.

Thus, this theory views a corporation as not a real entity. View that law is justified in regulating corporations because they owe their complete

existence to the state. In effect, the view is that corporations should at least partly be run for public purposes.

This theory was borne out of the distrust of corporations that built up during the 18th Century. Issue as to the ability to remove corporations that grew almost as large as governments (if not larger) – a requirement of control and accountability.

During this theory’s dominance, companies existed in the form of joint stock companies using deeds of settlement.

Introduction of a general power of incorporation by registration undermines the argument that incorporation is somehow a privilege that should carry onerous obligations as justification for incorporation (prevalent today).

Relevance of this theory is questionable – only view is really provides is that corporations should act in ‘the public interest’.

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Realist (or Natural Entity) Theory

View that the corporation is not merely an artificial concept created only by law, but rather a separate and distinct entity that is a product of social interaction.

Views corporations as a product of private relationships: the corporation exists because of private interactions rather than legal rulemaking.

Lesser focus on regulation, at least in the absence of negative externalities to justify public regulation.

Has common sense appeal, more so for larger corporations, such as those on ASX. Modern public corporations involved a separation of ownership from control – Berle

and Means.

Economic (or Contractarian) Perspectives

Argue that corporations are not real entities – artificial device useful for issues of limited liability, perpetual succession and dealing with collective rights over property.

Financial economists see the corporation as an internal marketplace in which bilateral contractual transactions are carried on between the corporation’s stakeholders.

The corporation is no more than a ‘nexus of contracts’, where contract refers to a concept of mutual exchange.

Focus on the transactions entered into by capital providers (shareholders and creditors) and the managers of capital.

Corporation should be managed solely or the ultimate benefit of the shareholders – ‘shareholder primacy norm’, meaning that the shareholder interests should be paramount.

o This does not mean that other stakeholders are irrelevant. o Rather shareholders should be the primary, but not only, focus of management,

as shareholders bear the residual claim on the corporation. Shareholders seen as residual claimants, despite not generally being entitled to

dividends because they will only receive an economic benefit from owning shares if all fixed claimants (i.e. creditors, employees) are already paid their entitlements in full.

The Development of Economic Theory and its relevance to Corporate Law

The theory in explaining what the corporation is and how it should be regulated goes back to Coase’s paper ‘The Nature of the Firm’.

Argument: firms should be examined according to how managerial power is exercised. Perhaps it may be cheaper to outsource a production process rather than the business

fulfilling the function itself. Agency theory rests on the traditional economic assumption that all people are

rational profit (or utility) maximisers who will always act in their own self-interest. o Agency problem arises when shareholders delegate to professional managers. o These professional managers may act for their own self-interest (i.e. salary

perks, etc), rather than the benefit of the shareholders. o Theory of Jensen and Meckling – outside equity agency problem.

Transaction cost economics (other theory) focuses on how the management and performance of different types of transactions can generate costs due to the central problem of uncertainty caused by the potential for each party to the transaction to act in their own self-interest rather than simply complying with their obligations under the contract – Oliver Williamson.

Team production theory attempts to bridge agency theory and transaction cost economics – assumes that the corporation is an artificial legal device.

o Includes debt and equity, as well as human-specific capital. Economic perspectives see the rule of law used to facilitate more efficient transactions.

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Does not consider stakeholder claims not based on voluntary contracting. o Thus, negative externalities are not considered. o Leads to greater debate for their inclusion but CSR by corporations.

A detailed explanation of the theories is provided on pp 24-9.

Progressive (Communitarian) Perspectives

Views the corporation as a real social entity that is more than a mere sum of bilateral contracts (distinguish with contractarian perspective).

Reject notion that shareholders are in fact bearers of the corporations’ residual risk. o Minimised because shareholders hold a diverse portfolio of shares.

Point more towards displaced workers and involuntary tort claimants where the risk of corporate failure is felt.

The view that corporations are social institutions, sees the corporation as part of a web of social relationships involving not only shareholders and contractual creditors but also customers, employees, involuntary creditors and the broader community.

o Utility and legitimate expectations of these participants, is just as valuable as the economic investments made by shareholders and contractual creditors.

Argument against contractarian: focus on economic values is too narrow – more complex than merely a collection of bilateral contracts.

Support developing trend for social benefit corporations that are given specific statutory regulation.

Argument weakness lies in its inability to provide concrete recommendations for law reform; and that these theories are a collection of individual critiques of the law and economic analysis of corporate law.

Corporate Social Responsibility (CSR) forms part of this theory.

Feminist Perspectives

Liberal feminism: focused on improving gender equality through the eradication of discrimination by adopting an equal rights perspective.

o Seeks to refocus its social footprint, rather than legal nature of corporation. Socialist feminism: particularly examine unequal treatment of female workers and

discuss how the corporate profit motive results in the individualisation, and thereby separation, of the family unit.

Radical feminism: capitalist system is fundamentally a male construct designed to serve male wants and fit within a distinctively male value set.

o This represses women and prevents them from finding and pursuing their own, distinct feminine goals.

o Corporate law promotes hegemonic masculinity by being focused on individuals who are self-interested, aggressive and competitive.

o Historically been male. Corporate law draws attention to the circumstances of divided individuals competing

against each other, rather than recognising and rewarding characteristics that connect and bind members of society together.

View the corporation as fundamentally public in nature. See the corporation as a power structure that divides people as individuals rather than

bringing them together as part of a community – seeks to justify the current market-based capitalist system – Professor Sarra.

Concept of a corporation as consisting of a set of private relationships maintain structural inequalities such as racism, sexism and wealth inequality – Professor Testy.

The corporation is a social institution that has an impact on a broad constituency, particularly on working and personal lives of women and their families – P Spender.

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Topic 2: Partnerships and Other Business Structures

Partnership and Other Business Entities Podcast

Types of Structure

Company: a separate legal entity. o Has limited liability: if two people join together to run a small business. To start

that business they borrow money. If there is not enough money to pay off creditors, the entrepreneurs may perhaps very little personal liability.

Note exceptions: personal guarantees and directors of a company. Sole Trader: a single person running a business with no overarching structure.

o Not a separate legal entity. i.e can have unlimited liability for business debts o As soon as you get more than one person running the business, it is not a sole

trader o Unlimited liability for business debts. o Can have higher tax implications o Advantages: very easy to set up

Association (incorporated and unincorporated) o Typically in non-for-profit o Unincorporated association: generally used for non-for-profit

organisations/vehicle. i.e religious, sports and recreations associations Peckham v Moor 1 NSWLR 353: unincorporated associations create

difficult question regard contractual capacity and liability. Who is responsible for the conduct of the association? Executive

committee? Members? See also: Associations Incorporations Act 2009 (NSW).

o Associations must not be used for pecuniary gain o Incorporated associations: a non-for-profit vehicle: s 40 Associations

Incorporations Act 2009 (NSW). Helps solve who is responsible. NSW Legislation – provides statutory means in which associations can

be separate entities thereby resolve issues experienced i.e. who is responsible.

Partnership: not a separate legal entity; rather the sum of the partners. o Incur the share of the debts of the partnership personally – no limited liability. o If not enough money to pay off creditors creditors may come after partner

personally and use their assets (i.e. family home). o Two or more people running a profit-making business. o Can be individuals or companies. o Relatively low compliance obligations compared to a company. o The status of being a partner in the partnership is not matched by the positions

in a company o Benefit: easy to establish and relatively low compliance obligations

Joint Venture: two or more parties cooperating with each other to undertake a particular project (as opposed to an ongoing business).

o Usually for a particular venture rather an ongoing consistent business o Example: mining projects, cooperation to mine the awe o They split the product that is created; rather than the profits/proceeds

generated. splitting the outcome of the venture Co-operative: profits are distributed by virtue of the members’ dealings with society.

o Used where there is trade with members (e.g. Dairy Farmers co-operative).

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o NSW has pushed to make a co-operate law’s more uniform throughout Australia o The main purpose is for the community to co-operate into a common joint goal o Such as Co-op bookshop. The proceeds of the co-operative go back to the

members in the form of discounts on books. Trust: not a separate legal entity. Can be and frequently used for business purposes.

o Superannuation is the most common everyday trust. o Involves trust property that the trustee manages for the benefit of beneficiaries o Shields assets from business risk – trustee is legally responsible for the trust

and beneficiaries can have benefit of the assets while shielded from liabilities.

Factors in Deciding Choice of Structure

Liability most important factor Duration: sole traders and partnerships only last as long as the individuals do; while

companies have perpetual succession and can last forever. Financing (debt and equity)

o Only companies have full range of debt and equity financing, because companies can issue shares and other securities.

Partnerships cannot. You may need to bring in other partners, which means the share of the profits becomes smaller/dilutes control.

Size: take note of s 115 Corporations Act and reg 2A.1.01 Corporations Regulations. o Cap of 20 partners, with exceptions for particular professions: s 115

(accounting 1000 partners, law 400 partners) Level of external regulation and compliance costs.

o Little to no costs for sole traders and associations. o Companies need to comply with Corporations Act; big public companies will

need to adhere to further onerous requirements. o Partnerships have lower compliance costs than companies.

Taxation: o Tax is different for different business structures.

Partnership – when is it created?

S 2, 5 and 8 There is no requirement for a written agreement for a partnership, it can be simply

oral Partnership Act 1892 (NSW) Law of partnership based on common law, but codified in Partnership Act 1982 (NSW). Statutory definition (s 1(1) Partnership Act)

“Partnership is the relation which exists between persons carrying on a business in common with a view of profit…”

“[P]artners may be either natural or corporate persons” – Redmond para 1.20. o May be an individual as well as a company

Examples of decisions where there was no partnership (only preparation of entering a business, but no carrying of a business) – don’t count.

o Goudberg [2007] VSCA 12 (intention to open restaurants but no concrete plans were developed).

o Walters v Scarborough [2011] NSWSC 1380 (intention to share profits but not details of partnership agreed to, agreement to split imports at a fee only).

No requirement of a written partnership agreement (can be purely oral). Persons can include any recognised legal person, including a company.

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Single v Continuing Business

UDC v Brian (1985) 157 CLR 1. o Why is it important to know if you have a joint venture or a partnership?

Partnership: every case you have a partnership; partners always have a fiduciary obligation.

Joint venture: it depends on the facts of the cases as to whether the parties owe each other fiduciary duties. It may or may not have a duty. (see Fast Financial Services below)

Canny Gabriel Castle Jackson Advertising v Volume Sale (Finance) (1974) 131 CLR 321. o Deed between two parties holding pop concert (deed said not partners, JV

participants – didn’t want fiduciary obligations). JV is often used to prevent fiduciary obligations

o Court said it doesn’t matter what the arrangement is called in the document – what matters is the actual relationship between the parties.

o There was mutual trust in confidence and mutual reliance, therefore the court found that there was a partnership. It wasn’t two independent entities working together.

o Financial solvent position – indicated they will pay their way o Despite there only being one project, it was still deemed a partnership due to

the wording within the agreement. o A single venture, may or may not amount to carrying out business, it depends

Fast Financial Services v Crawford (2012) 88 ACSR 650. o JV was found to find a fiduciary duty to another JV. o Stronger JV said to owe a fiduciary duty was owed to a vulnerable JV. o I.e. just because you are involved in a JV, doesn’t mean you are to escape

fiduciary duties Single project: a joint venture; while a continuing business: a partnership (old view). One-off event was not a partnership. There needs to be a repetition of activity in order to be a partnership: UDC v Brian. In every case of a partnership, partners definitely owe fiduciary obligations to all the

partners; while a joint venture it depends on the facts of the case on whether fiduciary obligation is owed. This is why the distinction is important: Canny Gabriel.

Rules for Identification

Ownership of property Sharing of gross returns Sharing of profits: prima facie evidence of partnership

See s 2 of the Partnership Act 1982 (NSW):

“2(3) The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but the receipt of such a share, or of a payment contingent on, or varying with the profits of a business does not of itself make the person a partner in the business; and in particular: . . . (d) The advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person, that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such: Provided that the contract is in writing and signed by or on behalf of all the parties thereto:

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o Section 2(3)(d) states that it does not make you a partner, unless you have a written signed contract stating that it does.

Ownership of property: joint ownership of itself does not indicate a partnership. Sharing of gross returns: does not of itself indicate there is a partnership. Sharing of profits: prima facie evidence of a partnership.

Loans v Partnerships

‘The use of the word “lend” . . .[is] mere sham – a mere contrivance to evade the law of partnership’ Re Megavand; Ex parte Delhasse (1878) 7 Ch D 511, 526.

o Example of someone being a partner, even though they tried to characterise themselves as a mere lender.

o A party attempting to say it was a loan, but in fact it was a partnership “there was not in this case a . . . participation in the loss on the part of the lender . . .the

capital was not risked in the business . . .the money . . . advanced by badeley to smith was not made contingent as to its repayment upon the success of the undertaking” Badeley v Consolidated Bank (1888) 38 Ch D 238, 260.

o Court found that the lender never put the loan at risk by sharing the losses. o Control rights were exercised regardless of whether or not there was a loss. o Capital was not risked in the business. o A standard loan where debtor has an absolute obligation to pay back the loan.

Significance of a Partnership

Partners share in profits as well as losses. Partners are liable for partnership debts. Partners owe each other fiduciary obligations – each partner acts as an agent for

each other partner – each partner is an agent for, and principal of each other partner

Directors also own fiduciary obligations Fiduciary Obligations of partners arises from the mutual trust, confidence and

vulnerability of the parties-each partner is in a fiduciary relationship with other partners, although may be shaped by agreement

Duties of Partners See ss 28-30 Partnership Act NSW including s29(1) “every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership”

s19, s46 of Partnership Act Each partner is both a principal and an agent of the firm (s 5 Partnership Act)-see also

Cox v Hickman (1860) 8 HL Cas 268 A distinctive feature of partnership is mutual trust and confidence between partners

(see Birtchnell); but may be displaced by partnership agreement (see Chan v Zacharia) the ‘real ground for liability’ [of partners] is ‘that trade has been carried on by persons

acting on by persons acting on his (sic) behalf’ (Cox v Hickman)

Partners as Fiduciaries

Partners must forsake their own interest, and do what they do for the benefit of the partnership.

Fiduciary obligations scope can be limited and shaped by the terms of the partnership of the agreement.

Fiduciary obligations of partners arises from the mutual trust, confidence and vulnerability of the parties – each partner is in a fiduciary relationship with other partners, although may be shaped by agreement.

Duties of partners: see ss 28-30 of the Partnership Act, including s 29(1):

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“every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership”.

Sections 19 and 46 of the Partnership Act. o Duties may be varied by the partnership agreement: s 19. o Common law can still trump s 19: s 46.

Uphold duty to account for profits; and duty to not compete with partnership.

Each partner is both a principal and an agent of the firm (s 5 Partnership Act). o See also Cox v Hickman (1860) 8 HL Cas 268.

A distinctive feature of partnership is mutual trust and confidence (heart of partnerships) between partners (see Birtchnell); but may be displaced by partnership agreement (see Chan v Zacharia).

The ‘real (substance) ground for liability’ [of partners] is ‘that trade has been carried on by the persons acting on by person acting on his (sic) behalf’: Cox v Hickman.

Main issue: was the conduct within the scope of the firm’s business?

If outside scope, then not necessarily a fiduciary duty owed, and vice versa. Birtchnell v Equity Trustees, Executors and Agency Regarding conflict of interest: “the subject matter over which fiduciary obligations

extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the agreement of the parties, . . .but also from the course of dealing actually pursued by the firm…”:

o Also need to look at the course of dealings. o Can’t take opportunities or advantages for themselves if within the scope of the

undertaking. o Breached his fiduciary obligations to the partners. I.e the profit he made out had

to be repaid to the partnership “The duties imposed by these doctrines … forbids a partner from withholding from the

firm any opportunity of advantage which falls within the scope of its undertakings”: Birtchnell per Dixon at 407.

Contrasting case to Birtchnell is Dean v MacDowell Different business (salt merchant and salt producer): Dean v MacDowell (1878) 8 Ch D

345. o No breach of fiduciary obligations, as they were different businesses and no

obligation to account to the partnership May extend beyond termination of business: Chan v Zacharia Two doctors in a partnership

o Continuing during winding up of the firm termination, after the dissolution of the business.

Identifies the test for breach of fiduciary obligations: Deane J

Fiduciary Obligations of Partners

“[T]he principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee”: Chan v Zacharia per Deane J at 199.

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(1) You cannot profit when you have a conflict of interest; and (2) when you use your position as partner unless you get the consent of the partners.

Legal Liability of Partners

Section 5(1) of the Partnership Act is given as: “Every partner in a partnership other than a firm that is a limited partnership or incorporated limited partnership is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.”

o Debts of the partnerships will bind ALL partners: see all Cox v Hicksman prior to the Act, but was encapsulated in the Act.

o Can incur liabilities without knowledge and consent – be vigilant with whom you go into partnership with.

Each party has unlimited liability to third party creditors. Joint liability for partnership debts: s 9 Partnership Act Joint and several liability for civil wrongs: ss 10, 12.

o If within the ordinary scope of business, even if it is illegal, the partnership may be liable.

The key questions are: are they acting within the ordinary course of business of the firm? Or are they acting in a personal capacity?

See the extract from Polkinghorne v Holland (1934) 51 CLR 143, 156-7: ‘[T]o make his co-partners answerable, it is not enough that a partner utilizes information obtained in the course of his duties, or relies on the personal confidence won or influence obtained in doing the firm’s business. Something actually done in the course of his duties must be the occasion of the wrongful act.’

o Main question: whether Investment advice was within the scope of a law firm’s business.

o YES Firm not liable if partner engaging in ‘a frolic of their own’, but conduct in the ordinary

course of business may be fraudulent: Dubai Aluminium [2002] UKHL 48 (partner in a law firm drew up fraudulent consulting agreements – this bound the firm as this type of conduct was closely connected to his ordinary practice).

o Firm of lawyers were caught up in international fraud. One of the lawyers was drawing up dodgy contracts. House of Lords looked at equivalent of s 10 and the use of the word wrong (can incl. fraudulent wrong, so long as within the general scope of partnership business).

o Law firm liable for actions of partner. See also Hraiki v Hraiki [2011] NSWSC 656 at paras 83, 84 approves Dubai Aluminium.

o Partners are not liable for partners who are in ‘a frolic of their own’. Dubai gives the flip side that even if the partner is fraudulent, the partners can be found liable