Question

Shambolic Ltd is a listed company, that specialises in property investment. It was founded by two sisters, Venus and Serena. At different times Venus and Serena have issued shares to bring funds into the company, and together they now own 35 per cent of the issued shares. The other major shareholder is Olympia, who owns 40 per cent, and who is also a director. The rest of the shareholding is held by a range of other shareholders.

There has been a lot of disagreement between Olympia and Venus concerning the direction of the company. Serena always supports her sister. At a board meeting, a decision is made to allot a substantial number of shares to another property investment company, Tutu Pty Ltd. The reason given at the meeting is that Tutu will be able to bring in more funding for Shambolic's investment deals. As a result, Olympia's voting power is reduced to 10 per cent.

Olympia overhears a conversation between Venus and Serena. She finds out that Tutu Pty Ltd is controlled by Venus and Serena's mother, and the real reason the shares were issued was to dilute Olympia's shareholding and voting power, as the sisters were concerned about a takeover attempt.

Advise the directors about the possibility of a legal challenge to their actions.

Answer 1

Relevant facts of the case: Serena and Venus allot substantial number of shares to another company with intention to reduce Olympia's voting power.

There has been clear guidelines based on previous court rulings on when and how SHARE ISSUES can be done and when it cannot be done:

PROPER PURPOSE OF SHARE ISSUE:

- To raise capital - Nguril Ltd v McCann

- To provide consideration for acquisitions

- For employee/director incentive schemes - Harlowe's Nominees Pty Ltd v Woodside

IMPROPER PURPOSE OF SHARE ISSUE

- To maintain control – Ngurli v McCann

- To eliminate existing majority/creating or destroying majority voting

power- Howard Smith Ltd v Ampol Petroleum Ltd

- To create new majority shareholders – Whitehouse v Carlton Hotel Pty

Ltd

Now, it is clear that share issues to new company has been in contravention to the established norm. This is true if the real intent of S&V can be exposed in court. If the intent is shown then consequences follow from following cases:

Issue: Raising share and manipulating voting rights: Howard Smith Ltd v Ampol Petroleum Ltd

- Issue shares for self interests and personal benefit– Hannes v MJH Pty Ltd

- Raising capital and manipulating voting rights :Kokotovich Constructions Pty Ltd v Wallington

- Allotment of shares are for improper purpose as it aims to manipulate voting rights – Whitehouse v Carlton Hotel Pty Ltd

Possible action on S and V:

Howard Smith says that issuing share to dilute holdings is improper purpose.Therefore, issuing share to dilute holding breaches 181 under Howard Smith

S184(1): A director or officer commits an offence if he is reckless OR intentionally dishonest; and fail to act in good faith in the best interests of the company or for a proper purpose.

Civil penalty orders by court - s1317E

Criminal penalty applied- s184(1) if directors are reckless or intentionally dishonest and fails to exercise power in the good faith in the best interests and for proper purpose.