Business Law Case Study: Corporate Governance and Liability Analysis

This business law case study examines three key issues within the framework of the Corporations Act 2001. The first issue concerns the removal of a director and shareholder (Marigold) and the legality of not returning her initial investment, considering the rights of minority shareholders and the company's ability to acquire its own shares. The second issue focuses on a majority shareholder's (Scarlett) attempt to issue new shares to her husband, analyzing pre-emption rights of existing shareholders and the conditions for bypassing these rights. The third issue addresses the liability of a company for the actions of its agent (Azelea), specifically concerning a patron's illness caused by a product, and the application of ostensible authority. The case study applies relevant sections of the Corporations Act 2001 to determine the rights and liabilities of the parties involved, including shareholders, directors, and the company itself, providing a comprehensive analysis of corporate governance and agency law in the Australian context.

Running head: BUSINESS LAW CASE STUDY
BUSINESS LAW CASE STUDY
Name of the Student
Name of the University
Author Note

1BUSINESS LAW CASE STUDY
Introduction
The directors of a company are placed at the apex position in the organizational hierarchy
because of the duties and responsibilities they are entrusted with. This poses a situation where
they have the liberty to act on behalf of the company however in doing so they are obliged to
observe good faith and consider the best interests of the company. Moreover, the shareholders of
a company have an obligation to ensure that by virtue of any majority shareholding the rights of
the minority shareholders must not be oppressed in any way (Bottomley 2016). The following
paragraphs will analyze a factual scenario based on the abovementioned obligations and
endeavor to determine the rights of all parties involved in the same.
Question 4
Issue
In the given set of circumstances the company has four share holders and they hold
shares in the following proportion:
 Scarlett – 50 shares.
 Essence – 30 shares.
 Marigold – 10 shares.
 Daisy – 10 shares.
The directors have a falling out and Scarlett suggests removal of Marigold as a director
and a shareholder of the company. Additionally, Marigold paid $20,000 for her shares however

2BUSINESS LAW CASE STUDY
Scarlett suggests that the money should not be returned to her. The issue here is to determine if
such a resolution can be refuted.
Law
Corporations functioning within the jurisdiction of Australia are subject to the provisions
of the Corporations Act, 2001. As stated in the act a company must have a company constitution
or must incorporate the replaceable rules defined in the act into their structural framework. This
is stated in Section 135 (2) of the Corporations Act, 2001 (Schultz, Tian and Twite 2013).
Section 203C of the Corporations Act, 2001 states that the shareholders of a private
company may pass an ordinary resolution removing a director of a company and appointing a
new director in his/her stead.
Section 259A of the Corporations Act, 2001 states that a company is prohibited from
acquiring its own shares when (De Bakker et al. 2013):
 Exercising buy-back options.
 When getting an interest in fully paid up shares in situations where no consideration is
given for the same.
 When directed by the court by virtue of an order.
Section 232 of the Corporations Act, 2001 states that a company must not act in a way
that is detrimental to the shareholders as a whole or oppressive to a particular class of
shareholder and gives the court powers to intervene in case of the same (Murray 2017).

3BUSINESS LAW CASE STUDY
Application
The resolution to remove Marigold as director would thus have to be passed by virtue of
the powers conferred under Section 203C of the Corporations Act, 2001 which is applicable due
to the provision of Section 135 of the act and the fact that the company does not have its own
constitution. The other 3 directors can thus pass a majority vote removing Marigold as a director.
However, due to the fact that Marigold is a minority shareholder and she was not being
remunerated for services rendered by her the remaining shareholders could be deemed to have
misused their majority position and oppressed a minority shareholder. Marigold could thus refute
the resolution on the same grounds. This would follow the provisions of Section 232 of the act
(Whincop 2017).
However, in removing Marigold as a shareholder, the company would thus have to
acquire her shares in the same. Thus, following the provisions of Section 259A this would be
deemed an acquisition of interest in fully paid up shares where no consideration is being given to
the holder and consequently such an acquisition would be illegal (Ferran and Ho 2014). Thus,
Marigold must be given consideration for her contribution to the share capital if she is to be
removed as a shareholder of the company.
Conclusion
The shareholder can thus pass a resolution removing Marigold as a director but Marigold
would be entitled to contest it.
Scarlett cannot pass a resolution removing Marigold as a shareholder without her giving
her consideration for her share of the share capital. Marigold must also consent to the acquisition
of her shares.

4BUSINESS LAW CASE STUDY
Question 5
Issue
The company is owned by the 4 shareholders and their share holdings in respect of the
same are described above. In such a situation Scarlett wishes to issue 100 new shares for her
husband at a rate of $1000 per share. However Essence does not want such an issue to take place.
Thus, the issue here is to determine if Scarlett can successfully make such an issue.
Law
As stated above companies carrying on business within the jurisdiction of Australia are
governed and regulated by the Corporations Act, 2001.
Section 254D of the act lays down a pre-emption for existing shareholder in case of issue
of new shares. This pre-emption states that in case of issue of new shares by the company (in
case of a proprietary company) the company must thus ensure that these shares are offered to the
existing shareholders (holding shares of that class) first and in case the same are not acquired
they may be offered to others (Tonts and Taylor 2013). However, this section also lays down that
this requirement of offering the shares to the existing shareholders first can be circumvented by
passing a resolution at a general meeting (Herbohn, Walker and Loo 2014).
Application
From the given set of facts and circumstances it can be inferred that all 4 shareholders
held shares of the same class. Scarlett is a majority shareholder and wishes to issue fresh shares
for her husband at a determined price. However as provided for by the provisions of Section
254D of the Corporations Act, 2001 the newly issued shares would first have to be offered to the
shareholders who already hold shares of the same class (King 2017). Ideally this offer should be

5BUSINESS LAW CASE STUDY
made in proportion to their current shareholdings of the same class. Thus for Scarlett to issue
shares of this class to her husband she would first have to offer these shares to the current
shareholders of the company. This thus makes it evident that she would not be able to directly
issue these shares to her husband.
However in light of the fact that Scarlett is a majority shareholder she may pass a
resolution to bypass this requirement at a general meeting. But this would need the ascent of
other shareholders too as a minimum of 50% votes must affirm the action. Thus unless the other
shareholders ascent to it Scarlett would not be able to issue such shares on her own motion.
Conclusion
Scarlett would not be able to make such an issue of shares directly for her husband and
would have to offer these shares to the existing shareholders first.
Question 6
Issue
The issue here is to determine if the acts of an agent are binding on the company and if
the company can be held liable for such acts. The situation is that a patron of the bakery falls ill
due to the consumption of one of their products. Azelea was the employee present on the scene
and was the person responsible for preparing the food that caused this damage.
Law
Corporations Act, 2001 provides for three kinds of authority when dealing with breaches
due to the acts of an employee. The authority vested in the employee could be express, implied
or ostensible. In case of ostensible authority a third person dealing with the company would have

6BUSINESS LAW CASE STUDY
the right to assume that the employee had authority to act on behalf of the company. Section 129
(3) of the Corporations Act, 2001 further reiterates this position (Brown and Dickfos 2015).
The benchmark for determining if the employee had ostensible authority is if such an
authority would be endorsed in another company in the same industry. This was laid down in
NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004] NSWSC 1 (Stephens 2017).
Application
In the given set of circumstances, Azelea was the only employee available on the day that
the patron made the purchase. Azelea was further authorized to engage in cooking activities at
the bakery as that was her primary job there. She thus had implied authority to cook and serve
food on behalf of the company. Furthermore as she was the only employee present and any third
party transacting with the company would be able to assume that she has the authority to cook
and serve following the provisions of Section 129 (3). Thus the person would presumably
attribute liability to the company for the same (Clarke 2013).
Following the judgment in NCR Australia Pty Ltd v Credit Connection Pty Ltd [2004]
NSWSC 1 any bakery would obliviously authorize their employees to cook and serve food thus
the benchmark for the activity would be met. Thus the company would be liable for these acts.
Conclusion
Thus the acts of the agent (Azelea) would bind the company and thus the company would
be liable to be sued for the same.

7BUSINESS LAW CASE STUDY
Reference list
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance.
Routledge.
Schultz, E., Tian, G.Y. and Twite, G., 2013. Corporate governance and the CEO pay–
performance link: Australian evidence. International Review of Finance, 13(4), pp.447-472.
De Bakker, F.G., Den Hond, F., King, B. and Weber, K., 2013. Social movements, civil society
and corporations: Taking stock and looking ahead. Organization studies, 34(5-6), pp.573-593.
Murray, G., 2017. Capitalist networks and social power in Australia and New Zealand.
Routledge.
Whincop, M.J., 2017. Corporate governance in government corporations. Routledge.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Tonts, M. and Taylor, M., 2013. The shifting geography of corporate headquarters in Australia:
A longitudinal analysis. Regional Studies, 47(9), pp.1507-1522.
Herbohn, K., Walker, J. and Loo, H.Y.M., 2014. Corporate social responsibility: the link
between sustainability disclosure and sustainability performance. Abacus, 50(4), pp.422-459.
King, S.P., 2017. Corporatisation and the behaviour of government owned corporations. In From
Bureaucracy to Business Enterprise (pp. 43-58). Routledge.

8BUSINESS LAW CASE STUDY
Brown, C. and Dickfos, J., 2015. Receivership & restructuring: The Australian productivity
commission's proposed reforms to s420A of the Corporations Act 2001 (Cth). Company and
Securities Law Journal, 33(7), pp.501-505.
Clarke, I.M., 2013. The Spatial Organisation of Multinational Corporations (RLE International
Business). Routledge.
Stephens, B., 2017. The amorality of profit: transnational corporations and human rights.
In Human rights and corporations (pp. 21-66). Routledge.