exam answer Essay

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Semester 2, 2007 Exam
Question 1:
(a) Financial report disclosure and AGM (5 marks)
Pierce Pty Ltd was formed recently. During Pierce Pty Ltd’s first year of operations it hired 75 employees and was expected to be extremely profitable this year. Its three shareholders and respective shareholdings are
Burns owns 4% of Pierce Pty Ltd’s shares;
Donovan Ltd owns 76% of Pierce Pty Ltd’s shares; and
McIntyre Pty Ltd owns 20% of Pierce Pty Ltd’s shares. Burns was concerned when Pierce Pty Ltd’s directors told him that it would not send him a financial report. In addition, Burns was also worried that Pierce Pty Ltd would not have an annual general meeting (AGM) even though Burns asked for one to be called. Burns particularly wanted to use the AGM to force Pierce Pty Ltd to use less polluting practices in its production processes.

Explain whether Pierce Pty Ltd must give Burns its current annual financial report and hold the AGM to vote on the pollution reduction issue Burns was concerned with.

Burns desires to view the Pierce’s financial report and hold an AGM, thus the issue in this case deals with the requirements in the Corporations Act on annual financial report and general meetings for private companies.

Annual Financial Report:
Large proprietary companies are required to disclose financial reports under s.292(1). However, small proprietary companies are not required to prepare audited financial reports unless directed to do so by shareholders holding 5% or more of the voting shares (s.293). Pierce have 75 employees which satisfies one of the criteria under s.45A(2) to establish a small proprietary company. Assuming that ‘extremely profitable’ does not mean that the company earn more than $25 million revenue and that their assets are less than $12.5 million in value then the company can be assumed to be a small proprietary company, otherwise, if it satisfy one more criteria, it is a large company.

Thus, as a small proprietary company, he is unable to direct the company to prepare audited financial reports as he only has 4% of the voting shares, unless he can convince another shareholder. However, as a large company, they are required to prepare financial reports.

Annual general meeting:
Under s.250N, only public companies are required to hold annual general meetings, whereas proprietary companies are not required unless their constitution requires it. Subsequently, as Burns does not have more than 5% of the voting shares, he is unable to call and arrange a general meeting under s.249F. Among other things, without having more than 5% of the voting shares, Burns can’t give a company notice of a resolution that they propose to move at a general meeting. Under s.249Q, a general meeting must be held for a proper purpose which the proposed meeting by Burns was not as it seeks to interfere with the directors’ exclusive power to manage the company’s business (NRMA v Parker).

Burns will not be able to force Pierce to provide annual financial reports and to hold a general meeting due to his lack of voting shares and also that the meeting was for an improper purpose.
(b) Altering constitution and Share expropriation (5 marks)
Donovan Ltd operated a successful toy importing business. Its directors recently discovered that 10% of its shares were owned by Sleazy who was a convicted child molester. Fearing that Donovan Ltd’s wholesome reputation would suffer if Sleazy’s shareholding became common knowledge, the directors considered the following proposals

(i) call a shareholders’ meeting to insert a new clause in Donovan Ltd’s constitution forcing any shareholder with a criminal conviction to sell their shares to the other shareholders.

(ii) call a shareholders’ meeting to pass a resolution reducing the company’s capital by cancelling Sleazy’s shares and paying him the issue price.

Explain how case law or the Corporations Act operates in relation to both of the proposals

The issue