Business Law Report: Rosta Pty Ltd and Corporate Governance Issues

This report analyzes a business law case involving Rosta Pty Ltd, focusing on shareholder disputes, share sales, and corporate governance. The report examines the issues arising from the issuance of Class B shares, the validity of share sales and lease agreements, and the actions that could have been taken to prevent share transfers. The analysis utilizes the ILAC method and references the Corporations Act 2001, particularly sections concerning share issuance, preference shares, and restrictions on share transfers. The case involves a dispute between shareholders, including James, Vicky, and Kevin, over the dilution of shareholder rights and the transfer of assets to a subsidiary, Payperwork Pty Ltd. The report concludes that the share transfer to PPW was invalid and explores the rights of minority shareholders. The report highlights the importance of adhering to corporate law regulations and the potential remedies available to affected parties. The report also discusses the actions of ASIC to address such situations, providing insights into the legal implications of the case.

Business Law

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
Permission to issue Class B shares and Advice to Kelvin to prevent the issue......................1
PART B............................................................................................................................................3
Advisory to Rosta on validity of share sale and lease agreements and actions to be taken
against,....................................................................................................................................3
PPW, James and Vicky...........................................................................................................3
PART C............................................................................................................................................5
Steps that could have been taken by Kevin to prevent share transfer of Rosta......................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business Laws has always played a very important role in the overall growth and success
of the organisation. If an organisation or the employees working under it would be having
adequate knowledge regarding the Law, then it would become possible for the company to
effectively manage the whole business and face any situations that may occur in front of it. It is
indispensable for a successful organisation to hire individuals with efficient skills and
capabilities to understand the implications of law (Truyens and Van Eecke, 2014). The current
report will try to analyse certain situations based on ILAC Method and will try to reach on a
conclusion based on the facts that are there in the law and necessary decisions taken in different
cases both in and outside Australia (Combe, 2012).
PART A
Permission to issue Class B shares and Advice to Kelvin to prevent the issue.
ISSUE
The issue here revolves around three partners Vicky, James and Kevin. James being a
director in Rosta Pty Ltd. Rosta Pty Ltd has issued Kevin $50,000 in company by way of
convertible note, with the investment able to convert to a 10% shareholding in Rosta and the
same can be converted at any time on the discretion of Kevin. James and Vicky have decided to
give its key IT employees a share in the company by giving them a right of 10 “B” Class
ordinary shares at the start of employment and an option was also given to purchase an additional
20 “B” Class Shares after Six months of employment provided they meet the performance
targets. The proposal was also given by the chairperson of the company that those Class “B”
Shares shall be given with priority dividend but no voting rights. Kevin being the holder of
Convertible note in the company, argued that this decision will dilute his shareholder’s rights.
LAW
The corporation act 2001 is an act of commonwealth of Australia which set out specific
rules or law that deals with business entities in Australia at federal and interstate level.
According to section 9 of CA, 2001, a redeemable preference share is hybrid securities because
they have specific characteristics akin in both debt and equity. Clarifies that if directors of the
company want to issue shares or for that matter want give rights to employees for exercising
these rights, then it shall have to first issue these shares to existing shareholders. Though, the
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company also have the right to authorise directors to issue any class of shares to individuals
without offering the same to existing shareholders, provided a special resolution has been passed
in this regard (Aggrawal, 2016).
ARGUMENTS
Section 254A of CA, 2001 provides for all issues of preference and redeemable
preference shares offered by the company. Kevin, in this case is arguing that because he is also
holding a convertible note in the company, he should receive the offer first as he is the existing
shareholder of the company. The argument of James and Vicky was that they both were having
majority stake in the company and thus may issue options to employee, just by passing a special
resolution in the meeting and there is no need to consult the same with Kevin as the special
resolution has authorised the organisation to perform the act (Lopez-Tarruella, 2012). Kevin hold
no any specific right against James and Vicky that they cannot issue special shares to their
employees.
CONCLUSION
Thus, after having a proper look of all the facts above. It can be observed that issue of
options to employees by James and Vicky has ignited dispute among James, Vicky and Kevin.
This has resulted into a problematic situation within the company. As per Section 254A of CA,
2001, the preference share allotment can only be issues by the owner of the company so they
have all the right to give options to employees first. However, Kevin argument is invalid because
director’s decision must be employee’s priorities. Thus, it can be concluded, that because James
and Vicky were having majority stake in the organisation, they have the right to issue option to
employees as directors of the firm without taking the opinions of Kevin, who is just holding
around 10% of shares within the firm, At the time, when business was attempting to incentivise
employees with “B” class shares Kevin was just a convertible note holder But It is of paramount
importance to make sure that ultimate consensus is built within the firm, before taking any
decision effectively.
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PART B
Advisory to Rosta on validity of share sale and lease agreements and actions to be taken against,
PPW, James and Vicky
ISSUE
Rosta’s liability increase their assets, the app will not be ready for release until the
allotted time because of less revenue. Rosta accountant make advice to Vicky to sell Rosta as
soon as possible. The company's application has not come to an existence as of now and thus
they have decided to sell their company to Keywest Ltd, which is a company of Vicky's father,
Bruce, as he holds 60% in it. But his father disagrees to purchase the same contending that the
claims of creditors like LT Suppliers and Employees will also follow the purchase.
Vicky decided to transfer the assets of company to a new wholly-owned subsidiary
Payperwork Pty Ltd. Vicky has decided to make Steve, and Bruce father of James and Vicky
respectively, directors in PPW and then in a meet sold PPW to Keywest. Rosta Went bankrupt
and Liquidators of the company said that only 10 cents out of a dollar will be paid back to
creditors. They also said that PPW was formed just to transfer assets of Rosta Pty. Ltd. And it
will not be carrying out any business in real.
LAW
The Corporation act. lays down the provisions regarding different aspects of sale or
transfer of shares or assets to another company. The act positively sets down in Section 444GA
of CA, 2001 that for a successful transfer of shares, even where there is a sophisticated counter-
attack by the shareholder. Section 259C of the Act, said that there is a restriction on a company
to sell its shares to an organisation in instance where the value of the pre-existing equity is nil on
a liquidation situation. Majority of creditors with loan to own ambition cannot forward a
restructure proposal by a deed of company agreement which is controlled by the organisation
itself. Thus there cannot be any transfer of shares to a wholly owned subsidiary as it is stated
void under the law (Tank, 2012).
ARGUMENTS
The arguments that were made by James and Vicky in this regard is that the company is
suffering from losses and it will lead to bankruptcy, thus it is much better to sell off the company
to a different entity. On the other hand, creditors were saying that, the owner of Rosta Pty. Ltd is
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trying to dispose of the company by transferring the assets and not the liabilities of the
organisation to one of their relatives. Under this case, the creditors will not be able to get even 10
cents on a dollar. Thus, the sale shall be said as “void ab initio” and company should be disposed
of through proper liquidation process. The argument of both the parties shall be considered
effectively in order to reach to a specific conclusion. It is void to transfer shares to PPW which is
completely owned by Vicky. This involves transaction within the home itself and can have a
negative impact on the business. There are certain remedies presented to Rosta victim. In
common, settling of civil penalty that proceedings are expect a defendant to agree to full and
frank statement of facts. Before making any remedial action, the ASIC can deduct the nature and
seriousness of companies’ evidence. It would also have complied with legal obligation or have
extra voluntary cooperation.
CONCLUSION
After the above discussion, it can be concluded that The attempt of Vicky and James to
transfer the shares of Rosta Pty Ltd. To PPW was not correct because PPW is a wholly owned
subsidiary of Rosta itself and it is not possible to make a transfer of shares in a company which is
owned by the entity itself, as laid down in section 259C of Corporations Act. 2001. If an
organisation tries to do so, the transaction is regarded as null and void. The whole transaction
was made to avoid the liabilities that were being faced by the company portrayed through
balance sheet of the company and a fictitious company was opened merely to transfer the assets
of the organisation in the longer run. Thus, the intention of both James as well as Vicky was not
correct behind the transaction and thus the transactions is not valid. All those action taken by
ASIC does provide certain provision for compromise private right of action to seeks remedies for
Rosta. The basic policy aim of derivative proceeding is to provide an effective remedy for
investment and to reduce all the difficulties faced by the PPW. The company can success in only
those situation, in case they used to follow each and every regulation before making decision of
share sales and leasing.
Case example:
As laid down in Holdings Ltd Vs Goldfields Kalgories Ltd., ASIC and PPW may pursue
various types of actions against the company Some of the actions may include a decree which
can be taken from court regarding the transfer of shares, the court will give this decree, if it will
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find that the transaction was made to violate the law and to prevent payment to Creditors then it
may stop the transaction to take place.
Judgement: After taking consent of both the companies issues, the court has decided to
make decision in the favour of Goldfields Kalgories ltd. According to the company act, a person
can claim for the right at time because of the holding shared percentage.
PART C
Steps that could have been taken by Kevin to prevent share transfer of Rosta
ISSUE
Kevin being a 10% Shareholder in Rosta Pty. Ltd. Must have certain rights which he
could have exercised in order to stop the registration of PPW Ltd. Along with halting transfer of
assets of Rosta to PPW. Through the entire sale the benefits were derived by Vicky and James
and not Kevin as they both were having more than 90% shares of the company. The issue raises
serious concern on the rights of minority shareholders as to what are the specific rights they
possess in case majority of Shareholders has decided to conduct a transaction without the consent
of minority shareholders.
LAW
As in above given case Kevin can use the Provision Act of 256 and 258 of Corporation
Act 2001 which describes that a person can deny the decision for transferring share to another
subsidiary company. Kevin can also file a case in ASIC in order to present their case and to bind
Rosta to transfer share to PPW. The act lays down various types of rules as well as regulations
that will ensure that the overall rights of minority shareholders is protected, they shall also be
having effective criteria to protect the rights of shareholders in the longer run.
As per the current scenario, the only option left with Kevin is to claim his rights within
the court because he only holds minority interest in the company. As a result, it will not be going
to have any effect on the overall functioning as well as transactions that will be made by the
company over longer period of time. The resolutions can be passed by the both Vicky and James
and there is no remedy available to Kevin for preventing that resolution to be passed in any way.
Thus there is a need to make sure that right kind of step is taken by Kevin, so that transaction
with fraudulent nature can be prevented at the earliest in the longer run.
ARGUMENTS
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According to the mentioned case, it has been found that Rosta Pty ltd is not been working
effectively from few years. The two of the partner who hold maximum share of 45% each has
decided to shut down the operations. In every legal system there are various specific kind of
rights and debts of minority shareholder. The issues have been examining from past few periods
and remedy was given at common law to the Kevin. Among these derivatives claims that it is
important for them to analyses other doctrines and judicial that provide the basis of certain rules.
A minority shareholder can bring a claim when the company has been or is being managed in
various manner that is unfairly prejudicial to Kevin and other shareholders. According to the law,
minority shareholder would not have no right to challenge the decision of the directors of the
majority. Kevin can only bring certain right to bring claim in the company has been going to
close their business operations. Because the other partner is doing wrong activity in the new
company that can lead to affect the equability of Kevin so it just claims in the court for this type
of unethical activity (Schöpfel and Lipinski, 2012).
The decision can be made as per the collected evidences that can prove that Kevin point
of view is correct. As the two partners are cannot take decision of opening new subsidiary alone.
They must have to consult with Kevin because 10% of share is being kept by Kevin. The
argument that was made by Kevin is that the transfer of all the assets to the PPW was basically to
sell the business to their relatives which owned Keywest Ltd. If the company would be sold to
PPW then it will be ultimately sold-out to Keywest through a sale transaction between Bruce,
Jimmy and Vicky and Minority shareholders like Kelvin won’t get anything, and they will be
cheated. However, both James and Vicky were convinced that this is the only best possible way
for the company as it is going towards bankruptcy. Kevin can conduct legal proceedings against
PPW or they used to conduct legal in respect to the company. Kevin must be allowing enough
time for check, whether Rosta payment to be processed. It is so because, PPW is subsidiary
company which is establish for the purpose of avoiding the losses in near future. Thus Kevin
have full right to make compliant in the court for the stopping the operations of PPW.
CONCLUSION
From the above discussion on the case it can be concluded that there are various types of
remedies that are available to minority shareholders like Kevin to stop the transaction of transfer
of shares. There is a specific need to make sure by Kevin that when the decision regarding the
sale was taking place a resolution was needed to be passed, without which the sale cannot take
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place. Due to the fact that Kelvin was holding only 10% in Rosta Pty. Ltd. Even if he would have
voted against the resolution, it would not have any effect on the result of the resolution, because
if his vote will also be taken into account even then it wouldn't make any difference as he possess
ed only 10% of the shares and rest are owned by James and Vicky. However, if Kevin can go
against this transaction in ASIC, which can cancel this transaction, if judicial founds it to be
illegitimate. As laid down in section 258 G of the Corporation Act, 2001. It is necessary to build
a general consensus that will ensure that a good working environment within the organisation
prevails and there are less disputes among individuals. There are various deregister ways Kevin
can have used to stop PPW if he thinks it has ceased trading or it has overdue fees or penalties.
The one think Kevin would do to lodge any legal document or write to us and advising PPW for
trading. It is mainly depending upon the order of court of board that is having authority to cancel
the registration of the company.
CONCLUSION
Thus, from the above discussion it can be said that the ultimate aim of any business
organisation is to effectively manage its legal issues. There is a need to effectively take care of
the rights as well as duties of all the members along with managing the issues that are being
faced by them in their day to day working. Business laws are framed to ease the way we conduct
our business, and thus it is the responsibility of the manager as business people to effectively
consider all the legislations as well as acts and their implications on the business shall also be
analysed in a more appropriate way.
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REFERENCES
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pp.137-153.
Combe, C., 2012. Introduction to E-business. Routledge.
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Online
WINPAR HOLDINGS LIMITED v GOLDFIELDS KALGOORLIE, 2012. [Online]. Available
through: < https://iknow.cch.com.au/document/atagUio378771sl10443911/winpar-
holdings-limited-v-goldfields-kalgoorlie-ltd >.
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