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ACC520 | Legal Regulation of Business Structure Assessment Task 2 | Accounts

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PART A

AMAZE Ltd is a small public company that specialises in landscaping hedge mazes, public gardens, theme parks, and personal estates all over Australia. AMAZE Ltd is one of the few companies in Australia that does this type of work and therefore has a large monopoly on the sculpture and landscaping market. Even though AMAZE is a public company, it is a closely held company with only 6 shareholders as of August 2019. (Ada and Bob are directors of the company and each own 40% of the shares. Hannah, Kanak, Otto, and Elle each own 5% of the shares.) 

During incorporation, AMAZE Ltd created its own constitution. The provisions include:

• Rule 12: Director powers are restricted for any transaction or contract that amounts to 1 million AUD or more. Such transactions must be approved by an ordinary resolution of the shareholders.

• Rule 15: In the event that the votes of ordinary resolution of shareholders are tied, the motion does not pass and must be re-voted upon at a later meeting. 

• Rule 40: Members must offer to sell their shares to other members prior to offering their shares for public sale. 

As a director of AMAZE, Ada has begun negotiation with the Sunshine Botanical Gardens to provide landscaping and gardening services and to design and grow some unique lawn sculptures onsite. The contract with Sunshine Botanical Gardens will be easily worth over 1 million AUD, however, Bob believes that the time and expertise would be better spent in creating their own hedge maze theme park. AMAZE calls a general meeting with their shareholders to discuss and vote on the transaction. 

Hannah is a 5% shareholder of AMAZE Ltd but also the CEO of AMAZE Ltd’s main competitor, Hedge Fun Ltd. The strict provisions of AMAZE’s constitution give her inside knowledge into AMAZE’s next intended large business transactions and at times, Hannah has been able to use this knowledge to give Hedge Fun a competitive advantage. Ada and Bob are aware of this and tolerate Hannah’s presence since she has such a small shareholding of 5%. 

At the meeting of shareholders, Ada and Bob facilitate the voting on the transaction. Hannah, having heard that Bob is going to vote against the transaction, realizes that she can prevent the transaction from going ahead if she gets one other shareholder to vote against the transaction. Hannah offers Otto $1000 AUD to vote against the transaction. Otto declines the money but says that he was intending on voting against the transaction anyway. The vote ties between for (Ada, Elle, and Kanak) and against (Bob, Hannah, and Otto). Due to Rule 15 of the constitution, the motion does not pass and must go to a re-vote. In the meantime, Hannah immediately calls her company and instructs them to get in touch with Sunshine Botanical Gardens to negotiate a similar contract to AMAZE’s one. 

AMAZE decides to re-vote on the issue after lunch. During discussions over lunch, Otto changes his mind and decides to vote for the transaction. Hannah desperately offers Elle and Kanak $1000 AUD to vote against the transaction instead to make the vote tie once more. Elle agrees to Hannah’s deal. After lunch, the vote is tied once more between the votes for (Ada, Kanak, Otto) and against (Bob, Hannah, Elle) the transaction. Ada and Bob decide to close the meeting. 

Following the shareholder meeting, Ada and Bob receive notice from Sunshine Botanical Gardens that the contract can no longer go ahead as they have reached a deal with Hedge Fun Ltd. Furious, Ada and Bob decide to call a Special General Meeting (SGM) and give proper notice to their shareholders of two proposed constitutional amendments.

Amendment 1: The voting rights of shareholders who own under 10% of shares are revoked for all matters. 

Amendment 2: Majority shareholders may expropriate the shares of any minority shareholder who is involved in the management of a competitor company. 

Two months later, at the SGM, the votes take place: Ada and Bob vote for both amendments. Elle, Otto, Kana vote against the first amendment and for the second amendment. Hannah votes against both amendments. Ada and Bob tell Hannah that in compensation for losing AMAZE Ltd the contract with Sunshine Botanical Gardens, they will only give her half of the market price for her shares. The minority shareholders are dismayed by the outcome of the SGM and come to you for advice. 

1. Advise Otto, Kanak, Hannah and Elle whether the first constitutional alteration is legally valid. (12 MARKS) 

2. Advise Hannah whether the second alteration to the constitution for the expropriation of their shares is valid. (8 MARKS)

Use relevant statutory provisions and common law to explain your answers. 


PART B

Kitty White loves cats and coffee. She wants to combine the two to create ‘Cattuccino Ltd’, a cat-friendly cafe where people can come to eat, drink and pet the adorable cats that live at the cafe. Kitty approaches her solicitor and friend, Poppy Black, for advice on registering the company, sourcing directors, issuing disclosure documents and promoting the business to potential shareholders. Poppy, for a fee, provides this information to Kitty. Genuinely excited by the idea, Poppy also gets in touch with some of her clients and friends that she believes would be interested in financing or managing Cattuccino. 

Excited by Poppy’s interest, Kitty negotiates a contract with Commercial Cafe Ltd for some commercial cafe equipment for use in the Cattuccino cafe. Kitty agrees that Cattuccino will -purchase four top-of-the-line machines for $20,000 AUD each from Commercial Cafe Ltd and signs on behalf of ‘Cattuccino Ltd’ on the signature line. The contract requires that Cattuccino Ltd ratify the contract by 1 October 2019. 

Kitty tells Poppy about the purchase of the coffee machines. Poppy cannot contain her enthusiasm and says that she wants to be personally involved in the project. Kitty is delighted and appreciates Poppy’s expertise. 

Over the weekend, Poppy contacts her brother, Tom, who runs a business selling custom-made, handcrafted costumes for children, dolls and pets. Tom and Poppy have a longstanding agreement that Poppy will receive 20% of Tom’s income in exchange for taking care of the legal and business side of his small business. Poppy asks whether Tom would be interested in creating custom food and drink themed costumes for the cats at Cattuccino. Tom believes it would be a great business opportunity and agrees to do it. Without asking Kitty, Poppy enters into a contract with Tom, signing as Cattuccino Ltd, for 20 cat costumes at $300 AUD per costume. Poppy tells Kitty about the contract with Tom but does not mention that Tom is her brother nor the involvement she has in the business. Kitty is a little surprised that Poppy would enter a contract for Cattuccino without consulting her first but ultimately agrees that it is a good idea. 

On September 20, after a few weeks of organizing and finding interested investors and directors, Kitty requests that Poppy finalize the registration of the company and nomination of the directors. When Poppy goes to register the company, she is shocked to find that the name ‘Cattuccino Ltd’ is already taken. Instead, Poppy registers the company as ‘Cat Latte Ltd.’ Once registered, Cat Latte receives delivery of four commercial machines and an invoice to ‘Cattuccino Ltd’ for $80,000 AUD. On September 30, the new directors agree to ratify the contract however do not immediately have the full payment available as was required by the contract. They are only able to pay $50,000 AUD to Commercial Cafe. 

Similarly, Tom Black sends his invoice of $6,000 AUD to ‘Cattuccino Ltd’ for the ongoing creation of his cat costumes. The directors do not believe that the costumes should be that expensive and refuse to ratify the contract with Tom. 

Poppy and Kitty are concerned about the failure of Cat Latte to fully ratify and pay their contracts and want to know about their potential liability as it is their names on the contracts.

1. Advise Kitty about her liability under the contract with Commercial Cafe. Include any orders that may be made against her if Commercial Cafe were to pursue litigation. (12 MARKS)

2. Advise Poppy about her liability under the contract with Tom and discuss any causes of action that Cat Latte may have against Poppy. (8 MARKS)

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