Reference no: EM13647027

Question 1

Cotton Limited holds 89.5% of the shares in Satin Co Limited. The remaining shares are held by Silk and several other small investors. The Board of Satin wants the company to become a wholly owned subsidiary of Cotton Limited as they expect this will result in both taxation benefits and a saving on accounting fees and administration charges of about $230,000. Cotton Limited offers to buy the shares held by Silk and other minority members but they refuse. Arrangements are made to hold a members meeting to pass a resolution changing the constitution of Satin by inserting a new clause 53 "any member entitled to 80% or more of the issued shares may compulsorily acquire all the remaining shares". Silk and other minority members receive written notice of the company meeting together with a proxy form and a valuation certificate stating the shares were worth $2.50 each. Although the offer is fair Silk does not want to sell her shares and wants to start legal action to prevent the proposed alteration to the constitution.

Discuss whether she may succeed in her action.

Would your answer be different if the real reason for compulsorily acquiring the shares from Silk was that she discovered operating a business in competition with Satin Co and was using information gained as a member to take away some of Satin's business?

Question 2

Polyester is a director of Style Pty. Limited involved in making women's clothing. Has she breached any duties under the Corporation Act in the following situations?

Situation 1. She arranges with the company's bank to transfer an amount of $65,000 from the company account into a personal bank account held by her in her own name. She uses the funds to finalise some outstanding personal debts.

Situation 2. As a director she receives information that the company is in a serious financial position. She arranges to transfer a larger amount of the assets of the company over a new proprietary company that she formed with the intention of caring on the same business.

Situation 3. Contrary to a resolution of the Board and notwithstanding established business practice that limits credit to $20,000 she allows a trade debtor (who has a history of bad debts) to exceed its credit limits by $25,000. The debtor fails to pay the outstanding amount of $45,000. Can she rely on the business judgment rule in this situation?