BX2112 - Law of Business Organizations: Retail Food Group Limited Case

This case study provides an overview of the legal and regulatory issues surrounding Retail Food Group Limited (RFG), an Australian-based global food and beverage company. The report focuses on potential class actions against RFG due to accusations of misleading investors regarding the impact of its business model on store owners. It highlights investigations into the Donut King and Gloria Jeans chains, triggered by revelations of a secret deal involving a former executive. The analysis delves into potential breaches of Regulatory Guide 76 concerning related party transactions and violations of the Corporations Act 2001, particularly regarding director duties and disclosure requirements. The report identifies the Australian Securities and Investments Commission (ASIC) as the primary regulatory authority involved and explores possible remedies, including compensation for shareholders and disqualification of directors. It concludes that RFG faces significant legal challenges due to its management's failure to disclose related party transactions, potentially leading to adverse consequences determined by the court.

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Law of Business Organization
Retail Food Group Limited
29-Mar-18
(Student Details: )

Case Study
Overview
Retail Food Group, or RFG, is a global food and beverage company, having its
headquarters in Australia. It is the largest multiband retail food franchise in the nation, along
with being a roaster and a supplier of high quality coffee products. The company is also coming
out as a leader in the wholesale bakery sectors, foodservices and dairy processing (RFG, 2018).
Even with so much working in its favour, RFB has been in the headlines in the recent times,
particularly regarding the potential class actions by the different parties. This report focused on
what these issues had been and the major developments in this context. Once this is done, the
report would shed light on the regulatory authority which might be involved in the possible
investigation. And lastly, before concluding, the possible remedies in such situation would be
discussed.
Issues
RFG is present a troubled franchisor, which is facing possible class action owing to the
accusations regarding the group misleading its investors regarding the manner in which the
business model of RFG would affect the store owners. Investigations have already been started
against the Donut King and “Gloria Jeans” chains by Maurice Blackburn in a clash action on
shareholders’ behalf. There is another class action being investigated by Bannister, a law firm
(Rask Media, 2018). All this happened in the light of the shares of RFG tumbling once the
revelation regarding a secret deal being made by Fairfax Media with a former executive for
managing stores came out. The troubled owners of Donut King and “Gloria Jeans” chains failed
to inform their shareholders that the business was being done with a private company, which was
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being run by former executive, who also had been the partner of long standing boss of the
company. This deal came to light in context of RFG and Exit 57 Investments of Alicia Atkinson
after the collapse of private company collapsed (Danckert, 2018a).
It was stated by Ben Slade, the Maurice Blackburn principal that the class action
investigation would be for the shareholders who had purchased shares back in June 2015 to this
year’s February on the allegations of breaching the continuous disclosures (Pash, 2018). The
shares of RFG fell badly on consecutive days due to this possible class action looming in the
future of the company. The crux of this matter was the deal between Atkinson and RFG, which
fell through, resulting in company getting a $2.8 million tax debt and stated that RFG subsidiary
owed $1.6 million. The deal between Exit 57 and RFG was such that the former had to
temporarily manage the stores, which included the ones abandoned by RFG. This deal took place
in 2014 and was ended in 2015 and 2016. In 2016, Alford stepped down from the position of
managing director, but he continued to be a director of company till July 2017, after which he
left the company. All this had been valid and of no problem, if the requisite disclosures had been
made. But the annual reports of last five years of RFG made no mention of Exit 57 and the
arrangement had not been listed in the related party dealings of the company. The company
failed in taking the reporting obligations in serious manner, even when it is an ASX listed
company (Danckert, 2018b).
The issue in this case majorly revolves around the potential breach of Regulatory Guide
76, which is related to “related party transactions”. Every listed company on Australian Stock
Exchange is required to follow RG 76, in addition to the provisions which had been laid down in
the Corporations Act, 2001. Based on this, there is a need to disclose the transactions which take
place with the related party, and to take necessary permission before such transactions are
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Case Study
entered into. Section 208 of the Corporations Act, 2001 provide that an entity controlled by
public company, or a public company in itself is required to give the financial benefit to the
public company’s financial benefit. This requires members of the company to approve
transactions as have been covered under section 217-227; unless the financial benefit falls in
exceptions covered under sections 210-216. There are also statutory duties imposed on directors
of the companies through sections 180-184 of this act, and the common law duties, regarding it
being a duty of the directors of the company to take approval and to disclose of such matters
(ASIC, 2011).
Regulatory Authority
In the event where the aforementioned sections and regulations are not complied with by
any organization, a case can be raised against the directors and the company for the breach of
pertinent sections to the ASIC, i.e. Australian Securities and Investments Commission. So, the
potential class action can be initially brought to the ASIC as it is the regulatory body which looks
into the breaches of Corporations Act, and also that of the breaches of the regulatory guides
which the ASX listed companies have to follow (ASIC, 2011). Upon a case being raised before
the ASIC, a fully fledged investigation would be launched into the affairs of RFG. Apart from
this, the role of different directors, particularly the former executive who also had been the
partner of long standing boss of the company, would be under investigation. This would be in
particular reference to the breach of director duties.
The reason for a breach of director duties being investigated upon in this case against
RFG stems from the fact that the Corporations Act bestows important duties which the directors
have to abide by. These include the civil obligation of duty of care and diligence under section
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180; good faith under section 181; use of position under section 182; use of information under
section 183; and criminal offence for breach of good faith, and use of position and information
under section 184 (Cassidy, 2006). Where the significant matters like related party transactions
are not disclosed in a proper manner by the directors of the company, before the shareholders,
and the requisite permission is not taken from the shareholders, it shows that the directors had
not worked in a diligent and careful manner. This also shows that the lack of good faith being
deployed, and the misuse of both position and information of company. The severity of this
matter would also attract the criminal penalties, in addition to the civil penalties (Paolini, 2014).
Apart from the directors’ duties, the provisions covered under section 208 were also
beached by RFG as they did not take the relevant approval from the members in accordance with
section 230 of this act (Federal Register of Legislation, 2018). Apart from the legislative
requirements, the regulatory guide was also contravened, giving ASIC the full chance of raising
claims against RFG for breaching the regulatory requirements in terms of Corporations Act and
ASX Listing Rules (ASIC, 2011).
Possible remedies
Whenever a claim is made against the company or the directors in context of the
aforementioned provisions, there are certain defences which the parties can claim, to safeguard
against possible liabilities attached with these claims. RFG too is ready to defend this class
action vigorously (RFG, 2018b). For instance, the directors can make use of the business
judgement rule given under section 180(2) of the Corporations Act (CCH Australia, 2011). By
using this section, the directors can show that they undertook the business decision after
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carefully analysing the situation based on their skill level and based on the information provided
by others, which they analysed on the basis of their knowledge.
However, due to the magnitude of case being prepared against RFG in terms of class
action, there is high chance of such defence failing. This is because the ASIC would make an
application for the class action applicants to get adequate compensation as a remedy for the
different breached by the RFG and its directors. This would enable the shareholders in
recovering their lost money, when the shares of the group fell down. Also, as remedy, the guilty
directors could be disqualified for breaching their director duties, and barred from holding
directorship positions for certain time. So, the order passed by the ASIC would have to be
confirmed by the court, before the remedies actually come in the hands of the class action
applications.
Conclusion
Thus, from the analysis of the present storm being faced by RFG, it can be concluded that
the position of the company is not strong enough. It is most likely to face the brunt of the actions
undertaken by its management, where the shareholders were duped. Not only were their rights
snapped away, but they also had to bear loss in terms of tumbling stock prices, all because the
management failed in disclosing the related party transactions. As a result of this instance,
different regulatory and legislative compliances were not undertaken, resulting in the ASIC
getting the power of investigating on the claimed upon breaches. Where this investigation reveals
that the company and its directors had been guilty of such contraventions, the class action would
provide the applicants with remedies, as decided upon by the court.
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References
ASIC. (2011). Related party transactions. Retrieved from:
http://download.asic.gov.au/media/1239851/rg76-published-11-may-2011.pdf
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
CCH Australia. (2011). Australian Corporations & Securities Legislation 2011: Corporations
Act 2001, ASIC Act 2001, related regulations. Sydney, NSW: CCH Australia.
Corporations Act, 2001 (Cth)
Danckert, S. (2018a). RFG's secret deal to manage stores under scrutiny. Retrieved from:
https://www.smh.com.au/business/consumer-affairs/rfg-s-secret-deal-to-manage-stores-
under-scrutiny-20180305-p4z2xh.html
Danckert, S. (2018b). Troubled Retail Food Group faces potential class action. Retrieved from:
https://www.smh.com.au/business/consumer-affairs/troubled-retail-food-group-faces-
potential-class-action-20180306-p4z32w.html
Federal Register of Legislation. (2018). Corporations Act 2001. Retrieved from:
https://www.legislation.gov.au/Details/C2013C00605
Paolini, A. (2014). Research Handbook on Directors Duties. Northampton, Massachusetts,
United States: Edward Elgar.
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Pash, C. (2018). Retail Food Group now faces a potential class action from disgruntled
shareholders. Retrieved from: https://www.businessinsider.com.au/retail-food-group-
class-action-maurice-blackburn-2018-3
Rask Media. (2018). Why Retail Food Group Limited Shares Fell 5% on Friday. Retrieved from:
https://www.raskmedia.com.au/2018/01/19/retail-food-group-limited-shares-fell-5-friday/
RFG. (2018a). People who put the love in food. Retrieved from: https://www.rfg.com.au/
RFG. (2018b). RFG Response to Potential Class Action. Retrieved from:
https://www.rfg.com.au/2018/02/02/rfg-response-to-potential-class-action/
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