ACC220 Business Law of Associations Assignment - Semester 2, 2018

This assignment solution addresses a business law case study focused on the legal framework of business structures in Australia, specifically concerning the Corporations Act 2001 and the law of associations. The solution analyzes the implications of the Corporations Act 2006, model articles of association, and object clauses, examining the ultra vires doctrine and its impact on company actions. It dissects a hypothetical case involving Avocado Smash Pty Ltd, exploring issues related to the company constitution, directors' duties, and the validity of contracts. The analysis also delves into the responsibilities of company directors, including their duty of care, diligence, and the exercise of power in good faith, referencing relevant legal principles and case law such as Stone v. Ritter. The solution provides insights into the legal obligations of managers and directors, and the importance of acting in the best interest of the company and its shareholders.

BUSINESS LAW
(LAW OFASSOCIATIONS)
Introduction
The Corporations Act 2001 (Cth) provides for the legal frame work of business structures
in Australia. Notably, the business structure is set under different regulations and therefore, it is
crucial to consider the legal regulations that guide the operations of the projected business form.
Certainly, business associations are membership groups with the objective of enhancing and
facilitating the interests of the members.1 The projects facilitated by business associations require
resources that individual corporations cannot manage, for instance, the project may need more
time before yields or require heavy investment of funds. Moreover, business associations need
lobbying of information, research and ensuring the standard of the business association before
embarking on the project. There are legal regulations that guide the members of a business
association and all the members are bound by the regulations. The assimilation of corporation act
2006 revised article of association and memorandum of association guide the members in the
management of the business association and the achievement of the projected objective(s). The
report seeks to offer analysis and suggestions to cases related to business associations.
Question 1
According to corporation act 2006, the assimilation of model article of association is
prime since it provides limelight regarding the operations of a corporation. The model describes
the activities of the corporation and therefore specifies the scope of its undertakings.2 The
1 Twomey, D. P., & Jennings, M. Business law: principles for today's commercial environment. Mason, OH, South-Western Cengage
Learning, 2010.
2Reda, J. F., Reifler, S., & Thatcher, L. G. Compensation committee handbook. Hoboken, N.J,.Wiley, 2015.
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shareholders have the liberty to take the activities as the members wish to be assimilated into the
corporations’ day to day activities.3However, it may not go in contradiction of the law of land
and the provisions of the Corporations Act. Companies that were formed before the amendment
of the corporation act 2006 were guided by the objective clause and could not act beyond or
outside its objects clause and any action done beyond the object clause will be ultra vires and
invalid. Such actions could not be approved even by the approval of the whole body of members.
The Corporations were, however, obligated to do anything which is related to and significant
upon the objects indicated, and such act is not to be reflected as ultra vires.
According to the guidelines of the object clause (1985), the shareholders were expected
to cautiously draft before the implementation since violation of the clause would be void unless
otherwise indicated. The drafting should include the key matters of the corporation.4The matters
which are related or subsidiary to the accomplishment of the key objects are further assimilated
in the first section of the object clause. The objects assimilated in the first section of the clause
include the directors of the corporation, the operations of the company and the accountabilities of
the directors according to the nature of duties.5The objects of the corporation must not be
unlawful, dishonest or contrasting to public policy or in violating of the Corporations Act,
2001.The objects clause must be sensibly drafted but the clause should be in a clear and definite.6
3Reda, J. F., Reifler, S., & Thatcher, L. G. Compensation committee handbook. Hoboken, N.J,.Wiley, 2015.
4 Austin, R. P., & Ramsay, I. M. Ford's principles of corporations law. Australia, LexisNexis, 2013.
5 Twomey, D. P., & Jennings, M. Business law: principles for today's commercial environment. Mason, OH, South-Western Cengage
Learning, 2010.
6 Tomasic, R., Bottomley, S., &Mcqueen, R. Corporations law in Australia. Sydney, Federation Press, 2012.
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The clause empowers the members and the creditors to know the determination for which the
reserves of the corporation are allocated.
The adjustment of the clause has extensive implications and thus Corporations Act has
retained some limitations on the right of a corporation to adjust the objects clause. A corporation
may, by passing a special resolve and getting it confirmed by the Company Law Board to adjust
its objects clause if the adjustment is essential to facilitate the company.Some of the exemptions
that may need the corporation to adjust the objects clause include conducting its transactions in
an improved way and more effectively, accomplishing its key drive by new or improved means,
enlarging or changing the local area of its action, conducting on business which under the
existing condition may be suitably or favorably combined with the business of the company,
selling or disposing of the whole, or any part of the activity of the corporation, constraining or
abandoning any of the objects specified in the memorandum and joining with other corporation
or members.
The powers of a corporation are limited by ultra vires, therefore, if the undertakings
provided for exceed the objects clause is ultra vires the corporation and thus negated. The
corporation shall not be certain by such acts which are ultra vires the corporation. The resolution
of the doctrine of ultra vires is to guard the interests of members of the corporation.
Consequently, by feature of the objects clause, the members of the company recognize the
purposes for which the resources are allocated by the company.7To protect the interests of the
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shareholders and the third parties who enter into deals with the company, the corporation's
activities are limited to the objects given in the Memorandum of Association. The corporation
cannot do anything beyond the objects clause and if so, the corporation is ultra vires and would
be void.
However the world of business has changed over the years and object clause have often
been regarded as unwieldy as many companies in the 21st century attempt to include as much as
possible in their operations. According to In re “Walt Disney Co. Derivative Litigation, 906 A.2d
27 (Del. 2006),” the court ruled that a company of obligated to perform any activity provided it’s
in the best interest of shareholders.8 Therefore, in frequent occasions, companies included a wide
“Catch all” clause that provided for the ability for any company to include all its objects. Anew
dawn came with the implementation of the companies’ act 2006 which abolished the requirement
of new companies to have object clause. The activities of companies formed during this period
were effectively limitless, unless restricted by the self-imposed articles and rule of law. The
operations of the companies that were formed before the corporation act 2006 became more
complicated in their operations. Instead of doing away with the clause they include it in the
article of association and the objective clause became potentially blighted. It has become clear
that the corporation act 2006, many companies that felt restricted by the old act have soon
amended the new act to replace their article e of association.9 The object clause therefore no
longer reflects the current activities of the company, therefore termed as unnecessary hindrance.
Conaglen, M. Fiduciary loyalty: protecting the due performance of non-fiduciary duties. Oxford, UK, Hart Pub, 2010.
8 In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006).
9 Eisenberg, Melvin A. The structure of the corporation: A legal analysis. Beard Books, 2006.
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Certainly, in review to the corporation act 2006, the case study between AS and Build
Em Architects assimilates non-violation of the objects clause and thus AS is bound by the
contract.10 The assimilation of the corporation act 2006 is clear and definite that a corporation
can act beyond or outside its objects clause provided the actions are legal and are accepted by the
company. A company will act provided such actions are approved by the approval of the whole
body of members.11 However, in older days, the objects clause integrates some exemptions,
adjustments that need the approval of the shareholders. The adjustments include conducting its
transactions in an improved way and more effectively, accomplishing its key drive by new or
improved means, enlarging or changing the local area of its action, conducting on business which
under the existing condition may be suitably or favorably combined with the business of the
company, selling or disposing of the whole, or any part of the activity of the corporation,
constraining or abandoning any of the objects specified in the memorandum and joining with
other corporation or members.12 However, the modern corporations are limitless in terms of
nthier action. The company can engage in any lawful activities provided it is not stated otherwise
in the article of association. Therefore AS company was in a right position to enter into the
contract and act. However, for a company to enter into a contract, there should be a signatory
from one of all or one of the directors or any other person appointed to take bind the company.
Therefore, AS company is not bound in that contract as there was no consent of one or two
company directors of any other person appointed by the directors to do so
10 Eisenberg, Melvin A. The structure of the corporation: A legal analysis. Beard Books, 2006.
11Chiu, I. H.-Y., Mckee, M., & Donovan, A. P. The law on corporate governance in banks, 2015.
12 Harper, M. C. Business organizations: keyed to courses using bauman, palmiter, and partnoy's corporations. [Place of publication not
identified], Kluwer Law International, 2008.
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The move by the manager to enter into the contract by the Em architects is a legally
accepted move as per the guidelines of the 2006 corporation act. However, the contract breach
comes in place when Miles and Patricia who are the directors of the company are not consulted
in the signing of the contract. Initially, a company would use a common seal while entering the
contract, the seal was made to represent the general view and decision of the company. However,
the seal was abolished and power of the company representation given to directors. Therefore,
the manger, being of legal age and employee of the company could source of contracts and deal
for the company, but needed directors signatories to enter the contract. Therefore, there was a
breach of company policies in entering the contract, making AS not bound by the contract.
Question 2
Legal regulations mandate the directors of companies to exercise power within the
confines and due carefulness. The Corporations Act 2001, s180 require corporate directors to
practice authority and perform duties with necessary care carefulness. The responsibility is
subjected to business judgment rule will need the director to act in good faith and not to use the
judgment for his personal gain. The directors should ensure there are well informed about the
subject matter to decide with corporate interest. In reference to the case, “Stone v. Ritter, 911
A.2d 362, 370 Del. 2006 (2006),” the court declared that, a director or any other member of the
companies’ managerial board should act in the interest of the whole company.13 Also, the other
shareholders and the officers of the firm must undertake their obliged duties in good faith for the
13 Stone v. Ritter, 911 A.2d 362, 370 Del. 2006 (2006).
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benefit of the corporation (s 181). Additionally, managers are also restricted from improper use
of managerial position and power mandated to them to their personal advantage (s 182).
Honesty is a vital tool that a manager should possess to act in good faith for the goal of
maximizing the shareholder's wealth. If the manager uses the mandated powers to perform
duties for his personal interest, he will have acted for the wrong purpose and therefore not acting
in good faith for the welfare of the firm. Responsibilities concerning the equity will require an
individual with the full fiduciary capacity to be a trustee for the benefactors. Most duties are
obliged to the directors because the relationship between them and the company is fiduciary.
The breach of duty is not always subjective even if the responsibilities mandated to the
directors focus on honesty and sincere beliefs. The reason is that the honest director can also fail
to fulfill the mandated obligation even if he was acting in the company’s best interest. However,
if the director believes that his deeds were for the firm’s interest, the law court will not assess the
values but instead look at objective and independent evidence that the director believes so.
As the directors of Great Games Ltd Company, Taylor and Abdullah are liable for the breach of
Company Act 2001, s180. The Act indicates that the judgment rule to be conducted by the
directors requires him to act in good faith, do the right purpose and to avoid personal interest
from the subject matter.
The act also requires the directors to have a clear definition of the subject matter in such a
manner that they will act for the welfare of the company. Additionally, regarding s181 the
company officials together with the directors are responsible for undertaking duties in good faith
for the wellbeing of the firm and proper purpose. According to the section, the director is
expected to act in good faith to benefit the shareholders and also to fulfill the objective of the
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company. Intimately, the duty is connected and directly related to the responsibility of acting for
the proper purpose. The court is required to determine whether Taylor and Abdullah have
breached or have performed in the best way to benefit the company. They will be required to use
both objective and subjective tests to come up with a sound conclusion. Taylor and Abdullah
genuinely believe that the actions are in the best welfare and interest of the firm, the court,
therefore, should not repudiate the declaration by only assessing the value of the act itself
commercially. The court should take a look at the objective evidence that the Taylor and
Abdullah truthfully embrace the belief.
The Australian Securities and Investment Commission (ASIC) is accountable for setting
remedies for directors regarding the act. The commission does that to impose and also control the
permission of Act. If the court makes an order regarding the 1317E of the same Act, the directors
may face the consequences inform of a monetary penalty. The director, therefore, is required to
pay the amount to the ASIC on behalf of the commonwealth. The overall penalty required is
$200,000 according to the Act. The court may also rule to discontinue the director or order for
compensation. Consequently, Taylor and Abdullah are subject to the remedies provided above
for the breach of Act 2001.
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