COMPANIES AND SECURITIES LAW 77947 Week 1 1 WEEK 1 TOPIC Company Law in Context History and evolution of company law Regulatory framework The uses of different business structures to achieve different business objectives Types of companies 2 REQUIRED READING ￠ Textbook, chapters 1 and 3 ￠ Harris, Hargovan and Adams Ch 3 (UTS Lib e- reading (DRR)) For a discussion of the non-corporate business structures 3 SOME PRELIMINARY QUESTIONS ￠ What is company law and why are you all studying it ￠ What is a business, and why is this concept relevant for company law ￠ What do we mean by a “business structure” ￠ What is a company See next slide 4 COMPANY ￠ An artificial entity recognised by the law as a legal person with rights and liabilities. ￠ It has Shareholders (aka members) – regarded as the owners of the company and usually enjoys limited liability. ￠ It has Directors – usually given the power to control the management of the company’s business. Note: Companies and Corporations are referred to and are used interchangeably BUT strictly speaking a company is a type of corporation 5 ENGLISH LEGAL HISTORY ￠ The 1800s saw a number of Acts which gradually added the main features we see today including the ideas of: Incorporation by registration Limited liability for shareholders 6 AUSTRALIAN LEGAL HISTORY ￠ At first the States had their own Acts modelled on the UK Companies Act 1862 ￠ 1960s brought recognition of the need for uniformity ￠ Similar Acts were introduced in all States and Territories ￠ A number of schemes have been used to have a uniform and later a single Act applying to all Companies in Australia 7 CONSTITUTIONAL PROBLEMS ￠ A continuing problem is the limited power given to the Commonwealth Government to make laws with respect to Corporations ￠ This means that the Commonwealth needs the help of the States to pass legislation which comprehensively covers all companies ￠ There are also problems with who will “Police” and administer these laws 8 WEEK 1 TOPIC Company Law in Context History and evolution of company law Regulatory framework The uses of different business structures to achieve different business objectives Types of companies 9 REGULATORY FRAMEWORK – ASIC ￠ Australian Securities and Investments Commission (ASIC) – main regulating body for companies law ￠ Registers companies ￠ Grants AFSL’s ￠ Registers auditors and liquidators ￠ Grants relief from compliance of Corporations Act ￠ Maintains publicly available documents ￠ Investigates suspected breaches of the law ￠ Advises the minister ￠ Ban’s persons from providing financial services ￠ Seeks civil penalties from courts ￠ Accepts documents in relation to takeovers 10 REGULATORY FRAMEWORK – OTHER BODIES ￠ Australian Securities Exchange (ASX): Operates financial markets, with a role in supervising listed entities ￠ Takeovers Panel: replaces the court as the main forum for resolving disputes regarding takeovers ￠ Financial Reporting Council: oversight body in relation to financial reporting ￠ Australian Accounting Standards Board (AASB): creates accounting standards ￠ Auditing and Assurance Standards Board: mirrors AASB, but in relation to auditing standards ￠ Companies Auditors Disciplinary Board: can cancel or suspend an auditor’s registration ￠ Corporations and Markets Advisory Committee: defunct. Was an advisory body on corporate law reform. ￠ Parliamentary Joint Committee on Corporations and Financial Services Reform: Parliamentary supervision of corporations law. 11 WEEK 1 TOPIC Company Law in Context History and evolution of company law Regulatory framework The uses of different business structures to achieve different business objectives Types of companies 12 BUSINESS STRUCTURES ￠ Businesses are the engine of the capitalist economy such as the Australian economy. ￠ In addition to companies, there are a variety of ways that a business may be structured/ organised: Sole Trader Partnership Joint Venture Trust Association 13 WHICH BUSINESS STRUCTURE ￠ Decision on one or more of business structures is influenced by factors such as: Size of business and possible future expansion (raising capital), and duration; Setting-up and costs, and ongoing operating costs; Exposure to liability if business fails; Ability to participate in management; How to deal with profits and losses How to deal with taxation liabilities Degree of importance attached to privacy of financial information. ￠ Most important factor: risk and consequences of business failure and who bears the liability. 14 SOLE TRADER ￠ Simplest business structure; very little cost ￠ Sole Trader is the business, owns all assets, takes all profits ￠ Sole Trader is responsible for all liabilities/losses: personal liability ￠ Very few regulatory requirements: Business Name Registration; ABN for Taxation purposes 15 PARTNERSHIPS ￠ There are 3 legal requirements for a partnership to exist: ￠ Two or more persons must work together (relation which exists between persons) in the same business enterprise (carrying on a business) ￠ by persons working together (in common) ￠ attempting to make a profit (with a view of profit) ￠ See Partnership Act 1892 (NSW) section 1. 16 PARTNERSHIP PRINCIPLES ￠ Three important partnership principles: A Partnership is not a separate entity. Each Partner is both a principal and agent of the business (partnership) (see ss. 8, 12) A Partnership is based on mutual trust and confidence, an equitable relationship (based in equity) resulting in each partner being a fiduciary of the other, meaning they must act with honesty, loyalty and put the interests of partnership ahead of own interests – Chan v. Zacharia (1984) 154 CLR 178 17 LIABILITY OF PARTNERS Con
sequences: ￠ every partner may incur liabilities on behalf of the partnership. ￠ each partner is liable for the debts and obligations properly incurred on behalf of the partnership (joint and several liability). 18 PARTNERSHIPS ￠ Generally the Partnership Agreement will set out the rights and obligations of Partners. ￠ Otherwise Partnership Act 1892 (NSW) applies. ￠ e.g. section 27 states: The partners share equally in the profits The firm must indemnify each partner for payments incurred by them Every partner may take part in the management of the business A partner can retire by giving written notice – thereby ending the partnership A partner should not compete with the firm ￠ Additionally No more than 20 general partners. Limited Partnerships 19 NOT A PARTNERSHIP! IT IS A JOINT VENTURE ￠ An association of persons, natural or corporate, who agree by contract to engage in some common, usually ad hoc or single undertaking, for joint profit, or to generate a product to be shared among the participants, by combining their respective resources, without forming a legal partnership or a corporation. ￠ Liability is individual not joint and several. ￠ Other differences between a JV and a Partnership are discussed in HHA Ch 3. 20 TRUSTS ￠ A Trust is created when the owner of property (“Settlor”) legally transfer that property to a second person who is trusted (“Trustee”) to be held on trust for the benefit of a third person (“Beneficiary”). Note the following: The Trustee has legal title to the trust property. The Beneficiary has the beneficial or equitable interest in the trust property. The trust is governed by the law of equity and the Trustee is a fiduciary, in fact is the prototype of the Fiduciary. Trusts are mainly used for tax planning. 21 USE OF TRUSTS ￠ A trust is normally used to safeguard assets or to defer the timing and application of tax ￠ A trust usually has a life of less than 80 years. ￠ A common application of a trust is that involved in a testamentary trust (will) for safeguarding assets on the death of the testator ￠ Another common application is in a business structure where an asset has been acquired and the intention is to use the asset for commercial purposes amongst the mix of other assets but at all times bearing mind it requires protection 22 ASSOCIATIONS ￠ A group of people who got together to form an association for purposes – unconnected with profit-making. ￠ Examples are sporting and recreational clubs ￠ Can choose between: unincorporated association (not a separate legal entity; members or management committee are liable) or incorporated association (a separate legal entity and association itself is liable). 23 WEEK 1 TOPIC Company Law in Context History and evolution of company law Regulatory framework The uses of different business structures to achieve different business objectives Types of companies 24 TYPES OF COMPANIES ￠ The Corporations Act 2001 recognises a number of different types of companies. ￠ Types of Companies according to liability: Limited by shares; Limited by guarantee; No Liability; Unlimited Liability with share capital. ￠ Types of Companies according to size: Proprietary (aka Private); Public. 25 COMPANIES LIMITED BY SHARES ￠ Maybe a proprietary (private) or public co; ￠ Has share capital, often with different classes of shares [ordinary v preference shares]; ￠ May allot and issue shares as the directors think fit; ￠ Liability of members is limited to the amount (if any) unpaid on their shares [s 9 of CA]; ￠ Shares are personal property of the members and (subject to restrictions in the constitution/rules) are freely transferable. ￠ Must have the words ‘limited’ or abbrev. ‘Ltd’ at end of its name: s 148(2) – purpose ￠ Exception: charities – s 150 26 PROPRIETARY (I.E., PRIVATE) COMPANIES ￠ A company limited by shares that is registered as, or converts its registration to, proprietary, : Limited to 50 non-employee members Cannot offer shares/securities to the public Usually name finished with “Proprietary Limited” or “Pty Ltd” ￠ Small proprietary company – s 45A Must be a proprietary company Satisfy 2 out of 3 of the following tests: ￠ Consolidated revenue of less than $50m ￠ Consolidated gross assets of less than $12.5m ￠ Less than 50 employees Has advantages from a reporting perspective 27 PUBLIC COMPANY LIMITED BY SHARES ￠ A company that is not a proprietary company ￠ NOT the same as a “listed” company. A company is listed if its shares are listed on an official stock exchange. All listed companies are public Not all public companies are listed ￠ Tax legislation has a different definition for the terms “public” and “private”. Need to read this legislation 28 OTHER TYPES OF COMPANIES ￠ Unlimited liability companies Liability of members is unlimited Has all the other advantages of companies, such as legal personhood ￠ No Liability companies Must be mining companies Members cannot be asked to contribute uncalled amounts Why is this useful for the mining industry ￠ Companies limited by guarantee No shares, just “members” Members guarantee a certain amount to be paid on shares Generally, not-for-profit entities 29 OTHER CONCEPTS IN RELATION TO COMPANIES ￠ See discussion in textbook at parts 3.130—3.200 for the following concepts: Holding and subsidiary companies Ultimate holding company Wholly-owned subsidiary Related bodies corporate Foreign companies Registrable Australian bodies Trustee companies 30 WEEK 1 TOPIC Company Law in Context History and evolution of company law Regulatory framework The uses of different business structures to achieve different business objectives Types of companies 31