Lecture 1- Introducing companies

Question 1

How many companies are there in Australia?

Answer 1

2 million

Question 2

How are companies created?

Answer 2

Through a process of registration under statue

-incorporation

Question 3

How are companies legal persons?

Answer 3

=artificial legal persons created by incorporation

-they have rights like humans, they are and antity

Question 4

What is a legal person?

Answer 4

-can be a human or a company

Question 5

What is the legal attribute of separate personality?

Answer 5

-companies have separate legal rights from the people who created them

Question 6

What is the purpose of companies?

Answer 6

• making money, people pool money into one fund and make lots of money, you couldn’t do it on your own
  eg: building a railway

Question 7

What are the two sides of companies that the government has to balance?

Answer 7

-protecting people who deal with companies vs making money

Question 8

Why does making money side win sometimes?

Answer 8

-governments are scared the economy will be hurt if companies aren’t protected

Question 9

Why are small companies sort of an aberration?

Answer 9

• not the purpose of incorporation
• but you can’t set a limit on how small or big a company has to be to be able to come into existence; thus you can even have a company that has one shareholder, one director and one dollar in shared capital

Question 10

How many companies control most of the company money in Australia?

Answer 10

2000

-the ones listed on the Australian Securities Exchange (there are other stock exchanges eg. ASX, Chi-X etc.)

Question 11

What are the majority of companies like? (size-wise)

Answer 11

-small businesses often run by one person

Question 12

What is the major reason for forming a company?

Answer 12

• it creates a legal barrier between the people creating the company and creditors
• you don’t have to be liable for company’s debts

Question 13

What is a member of a company?

Answer 13

• A member of a company must be a person (e.g. John Citizen), a body corporate (e.g. XYZ Company Pty Ltd), or a body politic (e.g. State of Queensland). A member is an entity that can own property, sue or be sued.
• commonly called shareholders

Question 14

What is investing money in a company called?

Answer 14

• subscribing for shares

- can do it by filling out a prospectus, or buying someone else’s shares via a stockbroker etc.

Question 15

What do companies have to have (members)?

Answer 15

-have one or more members who have invested money by subscribing for shares or acquiring shares from an existing shareholder= called equity capital

Question 16

What is equity capital?

Answer 16

-the capital generated by selling shares

Question 17

What is debt capital?

Answer 17

• all the rest of money a company has (except for the equity capital)
• if company is winding up this is the money that has to be paid as opposed to equity that doesn’t

Question 18

Who are the companies’ creditors?

Answer 18

-employees, suppliers, lenders = debt capital

Question 19

Do you have a contract with the company if you are a shareholder?

Answer 19

• yes, you don’t have to have direct contact with the company to be a shareholder.
• the Corp Act 2001 says there is a contract between the shareholders and the company

Question 20

Who runs the company, day to day?

Answer 20

-depends on the size of the company, if very small than the person who owns it= director, if larger you have more people so they elect a board of directors who make decisions, if even larger then the board of directors makes the bog picture decisions and delegates responsibilities to senior management

Question 21

What are the two decision making organs in a company?

Answer 21

1. board of directors and senior management

2. the company in general meeting (all shareholders gathering and voting together)

Question 22

Do directors have to be members of the company?

Answer 22

-no

Question 23

What issues have the members the right to vote on?

Answer 23

-on some issues but usually not in general management decisions

Question 24

What is the doctrine of separate legal entity?

Answer 24

• companies in a business sense can do everything that a human can do.
• that is why you want a company; when in debt they are the liquidated and what is left is distributed to the creditors but the people behind it are safe= so the company puts a barrier between the human and the creditors

Question 25

Who are natural legal persons?

Answer 25

-humans

Question 26

Who are artificial legal persons?

Answer 26

-companies (have extra rights= issuing shares but cannot marry and have a passport etc.)

Question 27

What are the consequences of companies being a separate legal personality?

Answer 27

- companies can live forever= perpetual succession - can contract with controllers and others - separate taxpayer - members have limited liability - can incur obligations and hold rights and sue and be sued in its own name

Question 28

What are the facts of the Salomon v Salomon (1897)?

Answer 28

-Salomon is a successful shoe manufacturer, decides to incorporate, he transferres his shoe business and in return gets cash and 20 001 shares, 6 shares go to Salomon's family. (you had to have 7 shareholders back then), he also gets debenture(security for a loan). -then business gets into financial difficulty and Salomon is a secured creditor so the ISSUE:- was Mr Salomon entitled to priority under the debenture over unsecured creditors of the company -depends on whether the company and its controller are separate legal entities = court says YES so he is entitled

Question 29

What is the hierarchy of creditors?

Answer 29

- secured - unsecured (employees) - then the shareholders

Question 30

What are the facts and issue of the Lee v Lee's Air Farming Ltd case?

Answer 30

- Mr Lee has a farming company and is it controller but also an employee. He has injury insurance policy for employees. He incurs and injury and wants the insurance to pay for health costs but they decline. - Issue: could Mr Lee be both the controller of a company and its employee?= YES so insurer has to pay! - same human being can have several roles in a company

Question 31

What are the facts and issue of the Macaura v Northern Assurance case?

Answer 31

- Mr Macaura has a forest and transfers it to a company in which he is the sole shareholder, he doesn't transfer the insurance policy to the company. Forest burns down and he wants the insurance to pay. They decline on the grounds that Mr Macaura isn't the owner of the forest, the company is. - Issue: was Mr Macaura the owner of property that belonged to a company controlled by him?= NO so insurers don't have to pay! - even if you own 100% of the shares of a company you do not own the assets of the company and can still be liable for theft.

Question 32

What are shares?

Answer 32

- claims against a company to which particular right attach (enforceable by law) - valuable assets that can be sold by the shareholder - but shareholder's don't own the company's assets

Question 33

In what do different classes of shares differ?

Answer 33

-shares can be created with different rights attaching eg. =dividends "rights" (not really a right) =voting rights =rights and priorities in repayment of capital or surplus on winding up

Question 34

What are dividends "rights"?

Answer 34

-payment that you get as a result of owning share capital, you get money only if certain conditions are met and dependent on the financial situation of the company

Question 35

What do voting rights depend on?

Answer 35

-what type of shares you have, preference shares usually don't carry voting rights

Question 36

Why must there be a balance between the debt capital and the equity capital?

Answer 36

-debt capital doesn't involve control of the business but the share's capital doesn't have to be repaid (equity capital)

Question 37

Is there a fixed number of votes per share?

Answer 37

-no, determined by the company and each class of shares can have a different number of attached votes

Question 38

According to which section can the company decide the class rights of shares?

Answer 38

- section 254B

Question 39

Who has the power to issue shares?

Answer 39

-directors (s198A) -but the issue of shares may require shareholder approval if =amendment to the constitution is required =the issue varies existing class rights

Question 40

What does section 198A regulate?

Answer 40

- who decides what shares to issue (directors) - crucial for the division of management in a company - the directors can do everything except for the few decisions given to the shareholders in general meeting (those that are spelled out in the constitution of the company)

Question 41

What are ordinary shares?

Answer 41

-if company has one class of shares= ordinary shares, can be further divided into classes A?C etc.

Question 42

What are preference shares?

Answer 42

-companies can issue these, they are different to ordinary shares and have special rules that avry and are decided by the company (s254A(2)) -usually they carry: =fixed dividend(it is payable only if there is money to be paid out) =priority for repayment of capital =limited voting rights (or none at all) =no right to share in surplus on winding up

Question 43

What does section 254A (2) stipulate?

Answer 43

-company decides the rights attached to preference shares

Question 44

What are partly paid shares?

Answer 44

- if you pay 6 dollars for 10 dollar share then you are liable to the company for up to 10 dollars and if the company goes bust they can make a "call" and you have to pay it or forfeit the shares and the already invested money - company can issue these partly paid shares and the shareholders are obliged to contribute further if a call is made - CA s 254M - when you buy 10 dollar shares that cost 10 dollars= then you don't have any more liabilty to the company= principle of limited liability - if the company goes bust you lose your 10 dollars but the creditors cannot come and request more money from you.

Question 45

What are you liable to with limited liability company and no liability company?

Answer 45

- l imited liability company= you have to pay it, they can sue you and you have to pay - no liability company= you don't have to pay anything more for partly paid shares and just leave.

Question 46

What does limited liability mean?

Answer 46

- the company's debts have to be paid by the company, not its shareholders - in a company limited by shares, a member's liability to pay the debts of the company is limited to the amount (if any) unpaid on their shares (s 516) - if fully paid, no further contribution required

Question 47

What does s516 do?

Answer 47

--in a company limited by shares, a member's liability to pay the debts of the company is limited to the amount (if any) unpaid on their shares

Question 48

What is company law?

Answer 48

-general term used to describe the legal rules governing: =forming and termination of companies =characteristics of companies =relationships between participants in companies (such as members and officers) =aspects of companies 'dealings with outsiders

Question 49

What is the purpose of company law?

Answer 49

- investor protection - commercial stability and consumer confidence - balancing competing interests - certainty= standard from rules

Question 50

Can breach of the Corporations Act be a criminal offence or subject to other State sanction?

Answer 50

-yes

Question 51

What are the sources of rules for company law?

Answer 51

- Corporations Act 2001 - Case law= precedents - other sources= corporations regulations, ASIC Act, ASIC exemptions, accounting standards, ASX Listing Rules (for listed companies)