Corporate Law Assignment: Case Analysis Of The Infinites Pty Ltd
Question
Task:
Andrew Jupin, Eric Szyszka and Steven Sajdak start a comic book called The Infinites. The Infinites becomes very successful and in order to better protect their assets, the comic book creators decide to incorporate a company to own all of The Infinites’s intellectual property. Andrew, Eric and Steven allot themselves 1000 shares each, and each becomes a director of their new company, The Infinites Pty Ltd. The comic book creators remunerate themselves mainly through dividends. They do not bother paying themselves separate directors’ fees. The comic continues to sell extremely well and is even optioned by Netflix. Due to their continuing success, the three comic book creators decide to hire a new writer to help expand the comic universe. The new writer’s name is Chris Cabin.
Chris insists that as a fellow writer of The Infinites he should have an equal say in management, so the original three writers give him a seat on the board. Chris is also granted 500 shares.
After about 6 months it becomes clear that the three founding members have made a huge mistake in hiring Chris. He is rude and difficult to work with. Andrew, Eric and Steven ask Chris to resign, but he refuses to do so. The three founders vote to remove Chris as a director, but he still refuses to leave the comic. They then cut The Infinites Pty Ltd’s dividend and start taking most of their pay in directors’ fees. They refuse to replace Chris’s income with a regular salary. Chris still will not quit. Finally, Andrew, Eric and Steven incorporate a second company, WE HATE COMICS Pty Ltd, without including Chris. They then inform Chris that The Infinites Pty Ltd will be selling its main asset — its intellectual property rights to all of the characters — to WE HATE COMICS Pty Ltd for $10.
WE HATE COMICS Pty Ltd will not be offering shares to Chris; nor will it employ him on salary. As The Infinites Pty Ltd will no longer have any valuable assets, it will not be in a position to pay dividends. Accordingly, Chris will have no income.
Chris says that he will vote against the sale, but he is outnumbered three to one. At this point, Chris no longer wants to work with the other three comic book writers, but he feels like he should receive some compensation for effectively being fired.
Herein corporate law assignment, consider whether:
(a) Andrew Jupin, Eric Szyszka and Steven Sajdak have breached any of their duties as directors of the company (The Infinites Pty Ltd).
(b) The company (The Infinites Pty Ltd) is able bring an action against Andrew Jupin, Eric Szyszka and Steven Sajdak.
(c) Any remedies available to Chris Cabin for the restriction of his dividend or the enforced loss of value of his shares in The Infinites Pty Ltd. Does Chris have any remedies in Oppression of the Minority?
Answer
Answer a: Duties of the directors
According to the Corporations Act, 2001 considered within the corporate law assignment, there are certain duties of directors that are included and analysed in the given act from Section 182 to Section 191, followed by Section 286 and Section 588G. The duties of the directors are as follows:
According to Section 188, a director should exercise his powers and at the same time discharge the applications based on reasonable care (Datt, 2019).
Section 181 of the act says that a director along with the other officers should be exercising their respective power and obligations and duties in good faith with regard to the best interest of the organisation.
The act, in Section 182 also states that a director and an officer must not be allowed to improperly use their respective powers and positions in the course of gaining their personal advantage, or in any case to cause detriment to the company (Barnett, 2018).
Section 183 of the act states that a director or an officer should not be making improper use of valuable information of the company for their personal advantage and to the detriment of the company.
Section 184 of the act clarifies the duty of the directors to act with honesty and in good faith.
Following these duties Section, 190 says that an officer and a director who delegates their powers to some other person will be responsible for the actions taken by the delegate (Harris, Hargovan and Adams, 2018, p.76).
Section 191 of the same act conveys the duty to the directors to disclose the material personal interests in relation to the corporation. Also, according to Section 203C of the given act, there are two methods for removing a member from the board of directors that follows creating a resolution to remove a director from the board and appointing another person instead. In the present case with the voting procedure, all three numbers in favour of removing Chris follow the resolution with the involvement of the voting procedure. Hence, the process of removal was also appropriated.
Now, analysing all the duties mentioned in the given act under different sections, it is to be determined the validity of the duties of Andrew, Eric, and Steven. All the three members, while deciding to cut Chris off their board of directors, did it because it was not convenient to work with Chris due to his behaviour. It was done with the majority vote of the directors in the favour of cutting Chris off. Also, aligning with Section 181 of the act, they have taken this step in the best interest of the corporation and good faith for the benefit of the company. In this regard, it cannot be said that these people might have breached any of their duties as directors in the given company. The justification for this can be drawn back to the alignment of the step taken for cutting Chris off the board of directors, and the best interest of the company as it will allow the other members to communicate and work more effectively in the absence of the said member. However, they have reached Section 182 and 184 as they refused to pay any financial benefit to Chris in the form of compensation as he had 500 shares in the company.
Answer b: Ability of the company to bring an action against Andrew Jupin, Eric Szyszka, and Steven Sajdak
Depending upon the breach of certain duties by Andrew, Eric, and Steven against the company, it is to be analysed whether the company could bring appropriate actions against these directors with regard to their actions. In the present case, it was analysed that Andrew, Eric, and Steven wanted to transfer the main asset of the company to a new company. However, Chris refused to transfer the same as he held 500 shares in The Infinites Pty Ltd. Applicability of the replaceable rule in the given act will be taken into consideration (Cassim, 2019). This rule comes into effect when a company does not decide to draft its company constitution then this will provide the basic standards required for the functioning of a company (Harris, Hargovan and Adams, 2018, p. 198). There are different sections laid down in this rule, among which, section 1072G talks about the transfer of shares (Www5.austlii.edu.au, 2021). According to this section, a director of a given company has the right to refuse to register the transfer of the company shares in any other company for any particular reason.
In the present case, when the three directors of the company decided to transfer their share into a new company for $10, Chris refused to do so as he held 500 shares in the company. However, he was outnumbered in the boat as the majority wanted to transfer the same. Now, it is understandable that this action went against this particular section under the replaceable rule in the absence of any particular constitution of The Infinites Pty Ltd. Chris, being an active member of the company, had all the rights to refuse the sale of the shares irrespective of his position in the company and the number of shares he held. However, his proposal was refused on the basis of a minority vote. It is also to be noted that, under the given section of the replaceable rule there is no mention regarding the voting procedure in relation to majority and minority voting. It specifically mentions that in the absence of the intention of a particular director to transfer the shares into a new company, it cannot be shared thereof. Since Chris was still a member of the board of directors of the previous company had the right to refuse and his refusal was required to be accepted by the other three members which would have resulted in no transfer of shares into the new company for $10. However, they did not consider the replaceable rules even in the absence of their company constitution. Hence, the previous company can bring action against Andrew Jupin, Eric Szyszka and Steven Sajdak for breaching the replaceable rule.
Answer c: Remedies in Oppression of the minority
The refusal by the three directors against Chris Cabin with regard to its claim of compensation based on the shares in The Infinites Pty Ltd raises an issue of minority oppression as the majority shareholders in the present case went against him for their benefit. Section 2323 under the Corporations Act 2001 defines “minority oppression” as “conduct involving a mere failure to agree between majority and minority shareholders". This issue was specifically analysed in the case of Foss vs Harbottle. In this case, two rules or principles were brought into action namely the internal management rule followed by the proper plaintiff rule.
In the case of the internal management rule, it is understood that any regulatory, as well as breach of duties in the company by the majority shareholders with regard to their conduct of internal actions, will be required to be settled within the functions of the company itself with the help of GMS. The court will refuse to intervene in any such matter and the minority shareholder cannot forward such cases to the court. On the other hand, in the case of the proper plaintiff rule, any damage caused to the company will consider the company itself as a victim for any legal proceeding. It is clear in this case that the rules laid down in this particular case bring advantage in favour of the majority shareholders. As a remedy to the same, and considering the status of minority shareholders in these rules the court developed certain common law exceptions to the given rule. The exceptions include the following:
- Illegal or ultra vires
- Special majority
- Members' personal rights
- Fraud on the minority
- Justice requirement
- Statutory derivative action (Nwafor, 2016)
Considering the elements of the given case, the exceptions of illegal or ultra vires, members' personal rights, fraud on the minority, and justice requirements will be taken into consideration. In this case, the three directors went against Chris by refusing his part of compensation while trying to transfer all the main assets of the previous company to the new company. It was in favour of the three directors as they will get all the assets in their favour when the same is transferred into the new company where Chris will no longer be a member. Hence, in the present case, these exceptions will be applicable to secure remedy against the BOD.
Reference List
Barnett, K., (2018). A Reconsideration of s 1324 (10) of the Corporations Act 2001 (Cth): Damages in Lieu of an Injunction.https://www.researchgate.net/profile/Katy-Barnett-2/publication/325619461_%27A_reconsideration_of_s_132410_of_the_Corporations_Act_2001_Cth_Damages
_in_lieu_of_an_injunction%27_2018_364_Companies_and_Securities_Law_Journal_forthcoming/links/
5b1903720f7e9b68b4255055/A-reconsideration-of-s-132410-of-the-Corporations-Act-2001-Cth-Damages-in-lieu-of-an-injunction-2018-364-Companies-and-Securities-Law-Journal-forthcoming.pdf
Cassim, R., (2019). The Removal of Directors by a Company’s Board of Directors under the Companies Act 71 of 2008: Should it be a Mandatory or an Alterable Provision?. Corporate law assignment Comparative and International Law Journal of Southern Africa, 52(3), pp.389-409.https://uir.unisa.ac.za/bitstream/handle/10500/26774/CILSA_Vol_52_no_3_2019_04.pdf?sequence=1&isAllowed=y
Datt, K., (2019), June. Tax system integrity and directors' obligations under the'Corporations Act': A tale of two systems. In Australian Tax Forum (Vol. 34, No. 2, pp. 277-307).https://www.business.unsw.edu.au/About-Site/Schools-Site/Taxation-Business-Law-Site/Documents/ime-Datt-Tax-system-integrity-paper.pdf
Harris, J., Hargovan, A. and Adams, M., (2018). Australian corporate law. LexisNexis Buttwerworths.
Nwafor, A.O., (2016). ENFORCEMENT OF CORPORATE RIGHTS-THE RULE IN FOSS v HARBOTTLE: DEAD OR ALIVE. Corporate Board: role, duties and composition, 12 (1), pp.6-14.https://virtusinterpress.org/IMG/pdf/10-22495_cbv12i1art1.pdf
Www5.austlii.edu.au. (2021). CORPORATIONS ACT 2001 - SECT 1072GAdditional general discretion for directors of proprietary companies to refuse to register transfers (replaceable rule--see section 135). [online] Available at: http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1072g.html
