MLL221 Corporate Law: LulLaBy Case Study on Director's Duties

This case study examines the conduct of Luna Billy, the managing director of LulLaBy, an ASX-listed company, in relation to disclosure requirements under the Corporations Act 2001. The company announced a significant infrastructure investment deal in February 2017, despite uncertainty about its financial resources. By August 2017, it was clear the project was facing financial difficulties, but no public announcement was made until 2018, leading to a share price decline. The analysis concludes that LulLaBy breached disclosure norms under Chapter 6D of the Corporations Act 2001, potentially to inflate the share price before Luna's retirement. Furthermore, Luna is found to have violated her duty of care as a director by failing to inform investors of the financial difficulties, prioritizing her personal interests over those of the shareholders. The study determines that the available defenses under the Corporations Act 2001 do not apply to Luna's actions.

Executive Summary
Corporations Act 2001 was enacted with the intention of safeguarding the interest of the
investors by ensuring better corporate governance, transparency and accountability of
directors. A key aspect of this act related to directors duties and the resultant punishment
incase there is failure on the part of the directors to full the same. Additionally, the
Corporations Act also has certain provisions relating to the disclosures that companies need
to make on periodic basis so that the informational needs of the external users is fulfilled. The
given case relates to a ASX listed company named LulLaBy whose managing director is
Luna Billy. The company finalised a deal with regards to infrastructure investment which
could significantly enhance the stock price and made public announcement of the same in
February 2017 despite being unaware of whether the requisite financial resources are
available with the company or not. Even though by August 2017, it was clear that the
company would not be able to go ahead with the project, still Luna did not make a public
announcement of the same. It was only in 2018 that investors started doubted about the
financial difficulties faced by the company which led to fall in share price.
In the given case, there has been violation of the requisite disclosure requirements highlighted
in Chapter 6D of Corporations Act 2001. It seems that the advertising of offer was carried out
so as to lead to price increase before the retirement of Luna so that she could maximise her
pay and retirement package. Clearly, there has been a violation of the disclosure
requirements and the defence available do not apply. Also, Luna has also violated the duties
of directors since she did extent the due care towards the investors. She should have informed
the investors in August 2017 atleast that the project is facing financial difficulties but fearing
negative impact on stock price, she did not allow any disclosure and hence breached the duty
to care. The various personal defences available for Luna would not apply in this case based
on the given circumstances.
Introduction
The Corporations Act 2001 was incorporated after a plethora of scandals were witnessed in
the 1990’s the most popular being HIH Insurance. As a result, it was felt at the time that a
comprehensive law is required which can regulate the functioning of the companies and in
turn can upload the legitimate interests of the investors. One of the key provisions of the

Corporations Act 2001 relates to the duties of the directors which were introduced so that the
accountability of directors can be enhanced in case of any financial fraud or loss to the
company. These duties ensure that directors discharge their duties in a manner that uploads
and furthers the interests of the owners or the shareholders. An interesting feature of this act
is that there are civil and criminal penalties outlined for breach of duty by the directors. Thus,
after this act, the directors can no longer claim immunity under the agency law especially in
cases when there is wrongdoing on their behalf. Another key aspect related to Corporations
Act 2001 is the list of provisions related to mandatory disclosures that are required to be
made at a periodic interval with the shareholders. These provisions have been designed so
that there are differential disclosures required based on the precise needs of the shareholders
of the company. There are penalties for directors for not adhering with the requisite
disclosure norms.
In the above background, the objective of the given report is to analyse the conduct of Luna
Billy who is the managing director of an ASX listed company LulLaBy. The given case
related to incomplete disclosures on part of the company whereby the company discloses a
particular deal but does not highlight the extent of financial commitment required. However,
later the company is not able to execute the advertised plan due to which the share price
declines. In wake of the given facts, it needs to be ascertained whether the company has
violated the disclosure requirements as required by Corporations Act 2001. Also, it needs to
be opined on with regards to relevant sections of the Corporations Act as to whether Luna has
breached her duties as the director of the company along with any potential defence that she
may cite for her conduct during her stay with the company.
Conclusion
Based on the discussion carried out above in accordance with the relevant sections of
Corporations Act 2001, it would be fair to conclude that there has been a breach of the
disclosure norms by the company. The company through advertising of the offer made
attempt to persuade the investors to buy the securities of the company which is not
permissible as per s. 734. Further, the various defences available for the same under s. 708
are not applicable based on the circumstantial evidence. Also, the conduct of Luna does not
seem to confer with the guidelines highlighted in the Corporations Act 2001. Luna as
managing director of the company had a duty to care directed towards the investors.

As a result, it was expected that when there were financial difficulties in the implementation
of the infrastructure deal as was apparent by August 2017, then she should have made
disclosure to the shareholders about the status of the project. However, at this stage also she
did not make disclosures about the financial difficulties faced by the company in the
implementation of the infrastructure deal. It seems that Luna was driven by her own interest
and wanted to keep the share price high so that she can maximise her own compensation and
retirement package. The various personal defences available under s. 731, s. 733(1) & s.
733(3) neither apply to the given situation and hence it would be appropriate to conclude that
there has been indeed a breach of directors’ duties by Luna.