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2. Incorporation

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Queensland University of Technology

Incorporation Incorporation Any association or body of more than 20 persons with the object of making a gain for itself or any of its members must incorporate: s115(1)  Regulations might specify higher number: s115(2) Advantages  Separate legal entity created  Company can own property, sue & be sued in its own right  Limited liability for shareholders & investors (in most cases)  Taxation advantages, superannuation benefits  Continued existence beyond life of members Disadvantages  Fees & paperwork associated with incorporation  Ongoing filing of returns with ASIC  Audits with large or public companies Promoters (advice to shareholders) Definition Not defined in Corporations Act Old Definition—  Definition—―one who undertakes to form a company with reference to a given project & to set it going, & who takes the necessary steps to accomplish that purpose‖: Twycross v Grant per Cockburn CJ  Example—sole trader who incorporates their business: Saloman v Saloman Expanded definition— (Tracey v Mandalay Pty Ltd (RSC purchased land to build flats—sold to M=new company—M advertised & attracted shareholders—flats never built due to regulations—M sued promoters to recover money paid by shareholders into new company & set aside contract of sale  promoters = shareholders of RSC—including those who took no active part but stood to profit (passive promoters)))  includes— o Active promoters  coordinates formation—  preparation & lodgement of necessary documents (eg constitution)  organising the company directors and officers  negotiating pre-incorporation contracts  plays a central role in organising the share capital or investors—  eg—issuing a prospectus or negotiating an underwriting contract o passive promoter—  lets others do promotional work and  knows the plan of promotion and  has an understanding with the promoter that will share the profit  Does not include— o Professionals (eg solicitors, accountants and bankers) who merely perform paid services in the ordinary course of their profession upon behalf of those seeking to incorporate the company: Emma Silver Mining Co Ltd v Lewis Andrew Trotter LWB334 Corporate Law Duties of promoters CL—Fiduciary duties  Fiduciary duties to make full & fair disclosure of— (Gluckstein v Barnes (UK); Tracy v Mandalay Pty Ltd) o Conflicts of duty and interest (eg in contract entered into by company) (incl constructive knowledge) o all material facts including—  nature of the enterprise being established  any secret profits made in formation of the company: Gluckstein v Barnes (paid £160K for land | received £20K discount when paying out mortgagee— effectively paid £140K—sold for £200K  must disclose actual £60K profit not just £40K);  Disclosure must be made to: o independent board of directors, if one exists: Tracy v Mandalay Pty Ltd  Not sufficient to disclose to a BoD involved in the scheme: Gluckstein v Barnes (EXC acquiring land | transfer to NC—EXC paid £160K for land to liquidator for vendor | received £20K discount when paying out mortgagee—effectively paid £140K for land—sold for £200K  insufficient to disclose £40K profit— must disclose actual £60K profit); Tracy v Mandalay Pty Ltd o Shareholders (existing or potential) induced to join the company o All members, if the plan involves no offer of shares to outside investors and ends with the setting up of a private company: Salomon v Salomon  Disclosure can be made through— (Gluckstein v Barnes) o Constitution o prospectus o any other way as long as all persons are fully informed  Duration of promoters duty—until the time of incorporation: Twycross v Grant; Lagunas Nitrate v Lagunas Syndicate o Where role includes raising capital—may extend past incorporation until all capital fully taken up (← until BoD acting independently) o Until performance of contracts: Twycross  Disclosure required whether or not profit actually made: Erlanger v New Sombrero Phosphate CA—Disclosure by Prospectus: Ch 6D CA  Approaches by companies to potential investors to raise funds by offer of securities=shares must be made by means of a disclosure document: s706  The disclosure document is normally a prospectus: s709  A prospectus must disclose: o Terms and conditions of the offer: s711(1) o the interest of a promoter in the promotion of the company, property acquired by the company in connection with its promotion or the offer of securities: s711(2) o The amount paid or payable for the promoter‘s services: s711(3)  Exemptions— o Small scale offerings  = Total < 20 persons & < $2 million in any twelve month period: s708(1)-(7) o Large offers to sophisticated investors  = amount payable for the securities > $500,000: s708(8)(a)&(b) o Offers to  ―professional investors‖—person who controls at least $10 million: s708(11) & s9 (financial services licensee, body regulated by APRA, trustee of a superannuation fund, listed entity etc) Andrew Trotter LWB334 Corporate Law  senior manager of the company or a related company or their spouse, parent, child, brother or sister: s708(12) Remedies for Breach Common Law  Fiduciary duty owed to the company (rule in Foss v Harbottle & Proper Plaintiff Rule) → Statutory derivative action: s236 w leave of court Rescission (Tracey v Mandalay Pty Ltd)  Available irrespective of honesty or profits made  Not avail where— o 3rd parties involved o company has affirmed or ratified contract after being informed of misrepresentation o not possible to return parties to their original positions Account of Profits  Available where—promoter acquires property as a fiduciary: Gluckstein v Barnes  Not available where—promoter acquires property on own account rather than as part of the scheme for incorporation: Tracy v Mandalay (fiduciary duties do not extend back to the time of purchase of the property) o Court will not rewrite the contract & force to sell for lesser price o Promotion starts with the incorporation process Damages  Available if breach is fraudulent: Re Leeds and Hanley Theatres of Varieties Ltd (Co purchased music halls for $25K—transferred to nominee—new company L&H purchased from nominee for $75K—BoD not independent—nominee used as smokescreen  fraudulent breach of fiduciary duty → damages awarded to extent of profit made) Corporations Act—Compensation (for anyone suffering loss)  Remedy in respect of failure of promoter for non-disclosure of matters under s711  Must not in a disclosure document (prospectus)— o make misleading or deceptive statement (s728(1)(a)) o omit material required (s728(1)(b)) o fail to update (s728(1)(c))  Loss can be recovered from— (s729(1)) o the person who makes the offer o a director of the body making the offer o proposed director if coy not formed yet  Defence—if did not know & made all reasonable enquiries: s731(2)  Criminal proceedings: s728(3) Pre-Incorporation Contracts (advice to vendor) Common Law  No pre-incorporation contracts—agent cannot contract on behalf of a non-existent principal → promoters personally liable | not binding on company | cannot be ratified: Kelner v Baxter (Promoter buying wine of behalf of unformed company—both parties aware that co not formed—company formed, failed, payment not made  promoters personally liable for sale price) Unless— Andrew Trotter LWB334 Corporate Law o both parties thought corporation had been incorporated: Black v Smallwood (company line and ‗director‘ line where two proposed directors signed—all thought company existed  promoters not personally liable)  BUT if promoter signs to authenticate company‘s signature, promoter liable in damages for breach of warranty of authority o novation of contract (=new contract is formed with third party after coy comes into existence): Howard v Patent Ivory Co (1888)  Common law displaced by CA: s133 Corporations Act: Pt 2B.3 (s131) (1) If  a person enters into, or purports to enter into, a contract  on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if  the company, or a company that is reasonably identifiable with it,  is registered and ratifies the contract: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time—within a reasonable time after the contract is entered into. Pre-incorporation contract binding where— (s131(1)) 1. Person enters into a contract for company not yet formed  on behalf of (agency): Kelner v Baxter  Need authority under agency o Directors have none: Nthside developments o CEO → ordinary contracts: Entwells v NGI  for the benefit of (erroneous belief that company in existence) 2. Ratification—  within the time stipulated in contract: s131(1)(a)  if no time stipulated—within a reasonable time: s131(1)(b)  depends on type of contract: Hughes v NM Superannuation (supply of stationary → short || land → long)  Replaces common law: s133 Means of Ratification Means of ratification include (but not limited to)—  Usually—resolution by the BOD to that effect  Otherwise— o execution of a document to that effect o an agent with actual authority: s126 o by conduct—by performing the contract with knowledge of its terms: Re Duomatic  based on estoppel: Herrman v Simon (Aztech Science Pty Ltd v Atlanta Aerospace (contract stated to be ratified within 60 days—ratified on rd 63 day—question as to whether certain conduct amounted to agreement to extend that period  agreement to extend established—ratified pre-incorporation contract binding on company)) Effect of Ratification  Ratification effective— o Company has primary liability if ratification effective: s131(1) o Secondary liability of promoter if company does not perform— (s131(4))  Court can order promoter to pay all or part of the damages s131(4) Andrew Trotter LWB334 Corporate Law  Prevents person from deliberately forming an asset-less company to ratify a pre- incorporation contract & avoid liability for damages under s131(2)  Company not incorporated or fails to ratify or enter into a substitute contract— (s131(2)) o Promoter is liable s131(2)  If more than 1 promoter—only those involved in the contract are liable  Measure of damages—amt for which company would have been liable if it had ratified & total failure to perform o Powers of court—may do what it considers appropriate including order company to pay all or part of the damages, specific performance etc: s131(3)  Applies even where proposed company name changed or not adopted: s131(1) (…the company, or a company that is reasonably identifiable with it…); CBA v Australian Solar Information Pty Ltd  Contractor may release promoter from all or part of their liability under s131 by signing a release: s132(1) o Advisable for parties to obtain a release—especially if not promoter signing contract  If both sign & promoters liable → jointly & severally liable—sue one or both, they can seek contributions from each other. Andrew Trotter LWB334 Corporate Law Procedure Availability and Registration of Company Name  Name must be available: s148 (1)(a) (or use ACN w/o name) not available where— (s147) o reserved or registered by another entity: s147(1)(a) o included on national business names register: s147(1)(b)  Rules for determining identical names in reg 2B.6.01(1) o declared to be unacceptable: s147(1)(c) –  likely to be offensive to any section of the public or generally: reg 2B.6.01 Sch 6  eg—offence to religious communities: Little v ASC (Virgin Marys Pty Ltd  refused by ASC (=modern day ASIC))  minister may consent to availability of otherwise unacceptable name (s147(2)) o can be subject to conditions (s147(3))  references to government, Don Bradman, royal family or use of words ―stock exchange‖, etc  Abbreviations after name reflecting nature of name— o Required abbreviations  limited public company → ―Ltd‖ | limited proprietary company → ―Pty Ltd‖: s148(2)  No liability company → ―N/L‖: s148(4) o Acceptable abbreviations: s149(1) (Co, Coy | Pty | Ltd | NL | Aust | No | & | ACN | ABN)  Can reserve name for 2 months before incorporation: s152(1) o Can be extended for a further two months: s152(2)  ACN registered with name: s118 Agreement as to constitution Adoption of constitution by agreement in writing to terms by all members: s136(1)(a) o If does not need constitution → step may be skipped (rely on the replaceable rules in the CA)  N/L companies → constitution must state its sole objects are mining purposes: s112(2)(b)  Company limited by guarantee → constitution must require to pursue charitable purposes only: s150(1) (ASIC may register a company limited by guarantee without "Limited" in its name, or alter the registration of a company of that type by omitting "Limited" from its name, if its constitution requires the company to pursue charitable purposes only and to apply its income in promoting those purposes; and…) Consent Members  Application for registration must contain— o name & address of each person who consents to become a member (s117(2)(c)) o the number and class of shares each member takes up & the amount to be paid for them & whether they are beneficially owned (s117(2)(k))  Consents must be attached to application for registration: s117(5)  Procedure— o Members sign consent to become members of company & take up shares o Pay for them on registration o After registration, consents given back to company to keep First directors and secretary Andrew Trotter LWB334 Corporate Law  Application must contain— o names (former and current) & date and place of birth of each person who consents to becoming  director (s117(2)(d))  secretary (s117(2)(e)) o address of those people: s117(2)(f) Lodgement of Application  To register, must lodge an application with ASIC: s117(1)  In prescribed form: s117(4) [Form 201]  Must include— (s117(2)) o Details of the company  Type of company (s117(2)(a))  Company name (s117(2)(b))  address of proposed principal place of business (s117(2)(i))  Address of registered
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