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Explain the separate legal entity doctrine and discuss two circumstance where the law allows for piercing of the corporate veil.
The two key forms of documentation required in a Chapter 6 takeover are bidder’s statements and target’s statements. Explain why this documentation is required and discuss the key information that needs to be included in these statements.
In May 2015, Mary K founded the proprietary company Koala Bean Coffee Pty Ltd. Using her global connections, Mary K has been able to develop Koala Bean into a successful business that produces coffee from beans grown on sustainable farms in Papua New Guinea. The beans are imported into Australia, where they are roasted and packaged in NSW and sold wholesale to cafes around the country. As of January 2021, and despite the challenges of COVID-19, Koala Bean employs 20 staff and is generating after cost revenues of $2 million annually. Due to the success of the business, Mary K is seeking to expand. She wants to start her own line of cafes and break into the retail market, selling her sustainable coffee beans to major upmarket retailers like David Jones.
Mary K does some back of the envelope calculations and decides that she will need to raise $200 million to establish three landmark cafes around Australia: one in Sydney, one in Melbourne and one in Cairns. She also wants to use some of these funds to hire new staff; pay a marketing firm to develop retail packaging for Koala Bean; and bankroll an advertising campaign to support the launch of both the retail coffee and the flagship stores.
Mary K is nervous about trying to secure such a large sum of money through creditors and is concerned about the interest payments that would result from such a big loan. Instead, Mary K decides to seek out funding from the public, she is also excited to become the CEO of a public company, a dream she has held since childhood. In March 2021, Mary K converts Koala Bean into a public company (Koala Bean Ltd). Following this, she approaches you for advice on raising the $200 million in capital to expand the operations of Koala Bean Ltd.
Mary K is considering two options for fundraising: raising the full $200 million by offering all shares to the well-known investment firm, Profit Plus Ltd (a registered Financial Services Licensee), or offering 200 million worth of shares in an IPO on the ASX.
Advise Mary K on the following questions:
a) Are the disclosure obligations the same for both avenues of fundraising? (5 points)
b) If Mary K decides to conduct an IPO, what type of disclosure document will be required and what must the document contain? (15 points)
Mary K is a very proactive businesswoman. She has pre-prepared a prospectus document that she shares with you. Mary K states that this is the document she is planning to use if she decides to pursue an IPO for Koala Bean Ltd. In the document, Mary K provides forecasts about future profits of Koala Bean Ltd, including a statement that “Koala Bean Ltd is likely to quadruple its revenue in the next 12 months as a result of the expansion into retail.” While Mary K assures you this forecast is based on sound calculations, no additional details are provided in the document. When pressed, Mary K informs you that the calculations are the result of a conversation she had with her friend Dave over dinner, he is a professional business analyst at a leading advisory firm. Additionally, Mary K admits to you that she has not included several historical loans in the financials provided, because they are “only small” and “will be paid off soon”.
c) Based on the above facts, advise Mary K on whether the draft prospectus is likely to fulfil the obligations for disclosure under Chapter 6D. What, if anything, should Mary K change to ensure the draft prospectus is compliant and what are the risks if the prospectus is not compliant? (15 points)
Letters Pty Ltd is a private company that provides business consulting and advertising services to other large companies across Australia. Letters has five directors: Jenny J, Mel B, Jeff T, Biggy W and Zee Z. Jenny is the Managing Director and Zee is the CFO. The others are all non-executive directors. Each of the directors hold 20% of the shares in Letters Ltd. Generally, meetings and decision-making run smoothly. This is supported by the fact that the constitution of Letters Ltd provides a lot of detail on how decisions should be made and the responsibilities of different positions. For example, the constitution includes a clause 6A, “that at least 2 weeks’ notice must be provided for all meetings”; clause 6B “that a quorum for a members meeting is three members”; clause 6C “that all decisions for loans over $10 million must be decided by a general resolution at a members’ meeting”.
Recently, Jenny J and Zee Z have been in disagreement about whether or not to expand the business and take out a large loan of $50 million to do so. Jenny promotes the idea of expanding the business and supports the loan, while Zee thinks it is a risky move that compromises the business. Jenny knows that Mel B supports her position. Mel and Jenny are best friends and Mel always agrees with Jenny regardless. Zee knows that Jeff T supports his position that the loan would be a poor choice and reckless for the business. The decision then turns on convincing Biggy W one way or the other.
Jenny J is very keen to take out the loan and “get cracking”. To increase her odds, she sends out notice of the members meeting to be held in three days’ time, at a location she knows it will be difficult for Zee to get to, as he lives almost 8 hours away. She also provides a video link for board members who cannot attend in person.
Zee is not taking any chances, despite the challenge, he makes it to the meeting in person to present his case against the loan. However, both Biggy W and Jeff T choose to attend via video link. During the meeting, the video connection is poor and there is a lot of static in the line, Jenny disconnects both Biggy and Jeff and does not reconnect them. With only the 3 members in attendance, she and Zee put forward their arguments for and against the loan. Ultimately, the vote goes in favour of Jenny. Although Mel has some misgivings about the financial issues raised by Zee, she votes predictably in favour of Jenny, as she always does. Without back up from Jeff and without clarity on how Biggy would have voted, the decision is passed in favour of the loan.
After being kicked off the video link and discovering the outcome of the meeting, Jeff approaches you for advice.
a) Advise Jeff on the validity of the decision in favour of the loan, any liability Jenny and Mel may have as Directors, and what actions and remedies may be possible. (20 marks)
Subsequently, Jeff wants to ensure that this type of conduct cannot occur again. He comes to you to request advice on the process for changing the constitution of Letters Pty Ltd so that decisions like the one above require a special resolution of members.
b) Advise Jeff on whether such an amendment is possible and how it could be done. (15 marks)
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