Companies

Question 1

company

Answer 1

a legal entity set up as a separate entity from its owners

• can enter into legal agreements in its own name, sue and be sued in its own name, own property
• all aspects of company formation and certain aspects of company operations are controlled by corporations act

Question 2

share capital

Answer 2

total equity purchased by shareholders represented by shares issued to them

• equity of a company is divided into parts known as shares
• each share is given a small money value
• people purchase these shares and become owners of the company
• owners of a company are known as shareholders or members

Question 3

liability of owner

Answer 3

liability of a shareholder is limited to the amount the shareholder owes on the shares

Question 4

proprietary company

Answer 4

• cannot raise money from the public
• must have at least 1 shareholder and maximum 50 non employee shareholders
• must have at least 1 director and secretary is optional
• must have proprietary or pty in its name
• do not have to hold AGM if shareholders agree
• company’s constitution may contain a clause that restricts right of shareholders to transfer their shares to a new owner

Question 5

public company

Answer 5

• can raise money from the public in the form of shares or securities
• must have at least 1 shareholder with no upper limit on number of shareholders
• must have at least 3 directors and 1 secretary
• must have limited or ltd in its name
• shareholders can transfer their shares to a new owner without restriction

Question 6

similarities between public and large proprietary companies

Answer 6

• owners have limited liability
• company has continuous existence where the death of a shareholder does not end the company as it is a separate legal entity
• • however, the ownership of a company may change from time to time but continues to exist until it is deregistered
• company is a separate legal entity and is taxed as a separate legal entity
• • directors can act on behalf of company and have obligations to do what is in the best interest of the company

Question 7

AGM

Answer 7

meeting of the shareholders and directors

• shareholders are given opportunity to question the directors about the company’s performance over previous 12 months
• shareholders elect directors, appoint or reappoint external auditors and approve final dividend recommended by directors

Question 8

large proprietary company satisfies 2/3 of these

Answer 8

• 12.5 million or more total gross assets
• 25 million or more total revenue
• 50 or more employees

Question 9

large proprietary company

Answer 9

must lodge financial statements with ASIC each year and audit each year unless ASIC grants exemption
- reports include SOCI, SOFP and balance sheet

Question 10

corporations act

Answer 10

regulates company operations in Australia

Question 11

impact of the act on company formation, operations and governance

Answer 11

• powers and duties of directors
• written constitution
• replaceable rules
• prospectus
• rights of shareholders

Question 12

duties of directors

Answer 12

• care and diligence
• good faith
• duty to disclose
• proper use of information and power
• no trading during insolvency
• ensuring relevant information is lodged with ASIC

Question 13

care and diligence

Answer 13

directors should exercise degree of care and diligence that a reasonable person in a similar position would exercise

• business judgement rule
• directors who make business judgements with care and diligence are ones who make judgements in good faith, has no material personal interest in the outcome and believes rationally that decisions are in the best interest of the company

Question 14

good faith

Answer 14

directors should act in good faith in the best interest of the company, avoid conflicts and manage and disclose any conflicts that may arise

Question 15

duty to disclose

Answer 15

directors must disclose strong interests or potential conflicts that might affect his impartiality in decisions and the extent of his interest and how it affects the company
- where an interest exists, the director should not be involved in decisions or vote on it

Question 16

proper use of information and power

Answer 16

directors should not make improper use of information and their position as director

Question 17

no trading during insolvency

Answer 17

directors should ensure that company does not trade while insolvent and should report to liquidator if company is being wound up

Question 18

ensuring relevant information is lodged with ASIC

Answer 18

directors are required to ensure that company complies with obligations on keeping financial records and preparation and audit of financial reports showing performance and financial position are true and fair

Question 19

powers of directors

Answer 19

• having access to all information
• exercising all powers set out in constitution except where constitution requires power to be exerted through AGM
• manage the business
• execute negotiable instruments
• delegate their powers

Question 20

formation of company limited by shares

Answer 20

• complete and submit form 201 and pay required fee to ASIC
• once ASIC is satisfied that all requisite requirements are fulfilled, a certificate of incorporation will be issued and company will become a separate legal entity

Question 21

information to be submitted to form a company

Answer 21

• name of company
• registered office
• place of business
• name and consent of initial shareholders, directors and secretary
• rules selected to govern business

Question 22

a company will be manages internally under a set of rules

Answer 22

• replaceable rules
• constitution
• combination of both

Question 23

replaceable rules

Answer 23

• set of rules from corporations act
• automatically applies to proprietary companies unless replaced with replaceable rules and newly formed companies unless director and shareholder are the same person
• saves company from making constitution updates every time laws relating to company operations changes
• do not need to be registered with ASIC

Question 24

constitution

Answer 24

• set of rules developed by company and is a contract between the company, shareholders and directors
• can be used to manage the company by developing their own set of rules or amending any replaceable rules
• might have to make updates every time laws relating to company operations changes
• public companies must register with ASIC
• proprietary companies need not register with ASIC but must be made available if requested

Question 25

rules covers matters such as

Answer 25

• appointment, powers and remuneration of directors
• types of shares; different classes, transfer and dividend rights
• procedures for calling and running meeting of shareholders or directors

Question 26

preliminary expenses

Answer 26

costs of forming a company such as fee charged by ASIC and legal consultation fees

Question 27

prospectus

Answer 27

disclosure document issued by public company to invite public to subscribe to their shares or other securities

• must be registered and lodged with ASIC
• contains all information in regards to financial position and nature of security so that potential investors can make informed decisions about their potential investments

Question 28

information in prospectus

Answer 28

• past financial information including financial statements and auditors reports
• amount being raised and minimum subscription amount for share issue to proceed
• future financial information including budgets and statement of capital investments
• application form including share issue details
• personal details of directors and senior management

Question 29

ordinary shares

Answer 29

• no special rights attached

- ordinary shareholders do not have right to dividend at fixed rate

Question 30

how one can become a shareholder

Answer 30

• being listed as shareholder in company registration
• by company issuing shares to person
• by purchasing shares from existing shareholder and company registering the transfer

Question 31

how one can cease to be a shareholder

Answer 31

• selling all their shares and company registering the transfer
• company buying back all the persons shares
• ASIC cancelling the company’s registration

Question 32

rights of shareholders

Answer 32

• access to company information
• returns to shareholders
• voting rights

Question 33

access to company information

Answer 33

• shareholders may inspect company share register

- all public company shareholders have right to receive financial reports 21 days before AGM

Question 34

returns to shareholders

Answer 34

• dividends: distribution of after-tax profit
• buying back shares: company buys shares back from shareholders
• winding up: shareholders can claim remaining assets after repayment of creditors when company is wound up

Question 35

voting rights

Answer 35

shareholders vote on resolutions which are formal decisions
- usually one vote is available for each share
ordinary resolutions
- requires majority of 50% of members present
- example of decisions: election of directors, appointment of auditors, acceptance of AGM reports
special resolutions
- passes when at least 75% of members present vote on it
- members must be sent notification of special resolution at least 3 to 4 weeks before meeting to vote on resolution
- examples of decisions: modifications of constitution, changes to share rights, winding up

Question 36

bonus share issue

Answer 36

shares issued to existing shareholders with no payment required

advantages:
- might attract new shareholders to invest in company
- existing shareholders might have higher dividend payout in future
- existing or potential shareholders might be able to buy more shares since share price reduces