BLO 2205: Corporate Law -Harry, Minh and Jackson - Martin Lu - Assessment Answer

Corporate Law Assignment

Case Scenario

Harry, Minh and Jackson have been appointed by the general meeting as directors of Mobile Technology Ltd (MTL), an unlisted public company limited by shares. When MTL was formed it adopted an objects clause as part of its constitution; this clause restricts the company to the manufacture, purchase and sale of plasma televisions and DVD players. The company was incorporated in Melbourne where its head office is situated, and it has manufacturing facilities in Shanghai China. Shareholders in MTL are unhappy with the way in which the directors are running the business and are critical of the low level of dividends that they have declared and the unresponsive attitude of directors to the concerns of shareholders. The directors justify their approach, and point to the stable and slowly increasing share price of the company to the disgruntled shareholders.

Assignment Task

James and Jenny Lee are husband and wife (who together hold 60% of the shares in MTL) and they seek to take a bigger role in the management of the company. They advise the directors that they should change their business strategy and pay more attention to their wishes as majority shareholders. They threaten to sack the directors if they do not comply with their wishes. They also threaten to take over the management of the company.

Martin Lu is a minority shareholder in MTL (holding 5% of the shares) and he is concerned that the directors will run down the company and drain it of its assets. The directors have not shown themselves to be troubled by Martin’s concerns and say that the minority shareholders like Martin should mind their own business. Martin seeks an extraordinary general meeting of shareholders to discuss these concerns, but the board is reluctant to call a meeting.

In response to the shareholders’ concerns, and without consulting the shareholders, the directors of MTL seek to change the business of MTL to focus on manufacture and distribution of Smart phones and I Pods as they believe that the television and DVD market is saturated and demand will start declining if it has not done so already. The directors propose to enter into contracts for MTL to acquire a mobile phone manufacturing firm in Shanghai with a view of implementing their strategy.

The directors seek to avoid these pressures from the shareholders by setting up another company (Stan Mobile Pty Ltd) that they control and plan to sell the television business of MTL Ltd to their new company. At the same time, a Chinese company has come to the directors with a generous offer to buy the television assets of MTL at a significantly higher price than the amount that Stan Mobile Pty Ltd is prepared to pay MTL for these assets. The shareholders are not advised that this major asset is to be disposed of in this way or that the directors’ private company is involved.

The main aim of the paper is to analyze a case related to corporations act in Australia. Harry, Minh and Jackson have been appointed as the directors of Mobile Technology by the general meetings which is an unlisted public company limited by the shares. When the company was formed they adopted an objects clause as a part of its constitution and the clause restricts the company to manufacture, purchase and sale of the plasma televisions and DVD players. The company was incorporated in Melbourne and the headquartered of the office is also located in the same city. The manufacturing facilities of the company are located at Shanghai in China. The shareholders of MTL are quite unhappy presently with the ways in which the directors run the business and are critical to the lower levels of dividends that they have declared and unresponsive attitude of the directors to the concerns of the shareholders. There are multiple shareholders present of the company. The first shareholders are James and Jenny Lee who are husband and wife and they hold 60% of the shares of the company in MTL. They also seek to take a bigger role in the management of the company. Due to the improper business strategy of directors, James and Jenny Lee have advised the directors of the company to change their business strategy and pay more attention to the business as they are majority stakeholders of MTL. Martin Lu is a minority stakeholder of MTL and he holds 5% of the total shares of the company. He is worried about the fact that the directors of MTL will run down the business and drain it of its assets. The directors have not listened to Martin for long time and as he is a minority shareholder of the company, the directors have not focused on Martin. Martin wants a general meeting between the directors and all shareholders but it has not been arranged for a long time. Now, the shareholders want to change the business model of MTL without informing the shareholders to focus mainly on the manufacture and distribution of the smartphones and ipods because they believe that the television market has become highly saturated and the demands of the products will decline in the coming years. The directors also want to enter into contracts for MTL to acquire a mobile phone manufacturing company based in Shanghai. The directors also want to set up a new company named Stan Mobile Pty Ltd to which they will sell the MTL and at the same time a Chinese company has also come up with an offer to buy the television business at a higher price than Stan Mobile Pty Ltd. The shareholders are not advised about it. So, there are a number of legal issues can be found in the case which will be analyzed in the paper one by one.

First of all, as per the Corporations Act 2001, both directors of the companies and shareholders are corporate stakeholders. The shareholders bear the risk of investment in the company. The directors of the organizations receive salaries for their jobs and they are also penalized as per the Corporations Act 2001 fulfilling their jobs. The relationships between the directors and shareholders of particular organization need to be managed by statutory provisions. The interests of the shareholders in organizations in Australia are protected by the legal frameworks which require the companies to maintain a specific level of communication practice. The Corporations Act also allocates the power to the shareholders for scrutiny which means, the investors can protect their investments by examining the performance of the directors and they can also take strict action if the performance of the directors is poor. The shareholders also have power to forgive the directors who breach their duties as per the Corporations Act 2001.

The Corporations act 2001 also outlines that the shareholders of the organizations can minimize the risks of investment by monitoring the roles and responsibilities fulfilled by the managers and by voting for them. The act also states that if the directors of the companies conduct unfair treatment to the shareholders of the organizations then they have the right to take actions against them. Although, minority shareholders have not been given much freedom to take care of the organizational activities, but the act also protects them from the minority oppression as per section 232 of Corporations Act 2001. The section 232 of the act helps the shareholders to get relief from the unfair actions taken by the board of directors of a particular organization. The section 233 of the act also gives court the discretionary power for the interests of the minority stakeholders of the business.

So, in the case mentioned above, the first legal right goes to James and Jenny Lee who hold the majority of the shares of MTL Ltd. The husband and wife hold 60% of the total shares of MTL and as they are the majority shareholders, the board of directors i.e. Harry, Minh and Jackson should listen to them and they should take suggestions from them regarding the business operations. But, the decisions of the board of directors should not be taken entire based on the opinions of the Lee couple. Though, they hold majority of the shares in the business of MTL, there are other shareholders present as well. So, James and Jenny Lee can ask for a general meeting in which all shareholders of the company will be present as well as the board of directors as per the section 249D of the Corporations Act 2001. They can take permission from all shareholders regarding the change of business strategy and they can state in the general meeting that the business strategy is needed to be changed and then they can suggest the strategies they think will be better for business. As per the section 249D, the decisions will be taken based on votes of all shareholders of the company

The second shareholder of the company is Martin Lu who holds 5% of the total shares of MTL. In the case, it can be found that Martin is concerned about the directors of the company and he is worried about the fact that the directors will run down the company and drain it of its assets. The directors have not also shown interests to Martin’s concerns and they have not also consulted him regarding anything in the business process. Martin had asked the directors to arrange a general meeting but the board have not arranged it for a long time. This is a case of oppression of minority shareholders. The Corporations Act 2001 provides legal solutions for the oppressed minority shareholders. As per the Corporations Act 2001, it is the duty of the directors to exercise the powers and drive the organization in the interests of all shareholders. The majority of the shareholders might demand the affairs of the company be conducted in the way which is most beneficial for them and which might be detrimental for other shareholders as in this case. While the minority shareholders do not have any direct power to influence the company affairs but the directors also need to act fairly between all shareholders and also ensures that the decisions promote the company’s interests and the shareholder as well. Minority oppression is referred as the term which is generally used in the section 232 of the Corporations Act 2001. This particular section provides wide range of powers to grant the relief of the shareholders if the conduct of the affairs of the company is unfair to the minority shareholders. Martin can take legal actions against the board of directors of MTL Ltd as he has been oppressed from his rights. The shareholders of any organization can ask to arrange general meetings to find out solutions of an issue regarding the business. But, in this case, Martin has been oppressed from his rights by the board of directors. So, section 232 of Corporations Act is applicable in this context.

Without consulting the shareholders, MTL seek to diversify their business. Presently, MTL is engaged in manufacturing, purchasing and selling plasma television and DVD players but they are trying to diversify the business into manufacturing and distribution of smartphones and ipods due to the fear that the television and DVD market is saturated and the demand will decrease in the coming years. As per the section 125 of Corporations Act 2001, if a company has a particular constitution it restricts or prohibits any company to exercise power. So, in this case, the board of directors cannot exercise their power to diversify their business to a new segment of products without approval of the shareholders. The diversification of the business should be done through proper procedures. The board of directors should call for a general meeting and they should invite all shareholders to the general meeting. A voting process should be conducted by the board of directors including all shareholders. The result of voting process will determine whether the product diversification should take place or not. The shareholders should be given time for providing their opinions regarding their voting preferences. The shareholders can take legal actions against the board of directors under section 125 of Corporations Act 2001 for not informing them about the product diversification if it takes places.

The directors of MTL Ltd are also trying to avoid the pressures from the shareholders by setting up a new company named Stan Mobile Pty Ltd which are controlled by them and they are also planning to sell the television business of MTL ltd to the new company. At the same time, the Chinese company has also come up with an offer of buying MTL Ltd for a higher price than the amount quoted by Stan Mobile Pty Ltd. As per the section 182 of Corporations Act 2001, the directors of a company cannot improperly use their position in order to gain advantage for their personal benefits or they cannot detriment to the organization. As per section 182 of the Corporations Act 2001, the shareholders of the company can take legal actions against the board of directors if they sell the assets of the company to the new company without the consent of shareholders. In case of selling the assets, a general meeting should be organized by the board of directors where the shareholders and board of directors will discuss about the issues faced by the company and the reasons for selling the assets of the company to another one. The shareholders will also provide some alternative resolutions of the problems and a voting process will take place for acceptance or rejection of the resolutions provided by the shareholders of the company. If no resolution can be found out, the selling process should start upon approval of all shareholders. The board of directors do not have the power to sell the assets of the company to another one without the approval of the shareholders. If all shareholders agree, then they can sell the MTL ltd to the new company Stan Mobile Pty Ltd and if the shareholders do not agree, the board of directors do not have any right to sell the assets of the company without approval of the shareholders.