LAW OF BUSINESS ASSOCIATIONS
TAKE HOME EXAM
2007
PLEASE READ THESE INSTRUCTIONS VERY CAREFULLY:
This open-book take home examination is worth 75 marks and counts for 75% of your assessment in the unit.
You should answer any 3 questions. All questions are worth equal marks.
You must hand in your exam by 1.00 pm on Monday 29 October 2007.
Exams handed in late will be subject to a 1 mark per day penalty per lateness, as per the unit outline. For this purpose a “day” begins at 1.00 pm each day, starting on the due day of 30 October 2006. Any exam handed in more than 7 days late will not be accepted.
Extensions will be granted on the basis of a medical certificate. A student who is unable to hand in their exam on the due date must contact me on or before the due date to notify me of this fact and to ask for an extension. The extension that will be granted will depend on what is stated on the medical certificate, but the maximum that will be granted is 7 days, after which the rule in paragraph 11 below will apply.
There is a word limit of 3000 words across all three answers (in other words, you should aim for an average of 1000 words per answer). This word limit will be strictly enforced and you must put a word-count on your cover sheet.
Please be aware of the University’s rules relating to plagiarism, contained in the University’s Academic Integrity Policy.
As this is an exam, you do NOT need to use footnotes or any other form of referencing. Case names should be in italics but you do not have to put a citation after the case name.
You must fill in the cover sheet (below) and have it as the first page of your answers. On the cover sheet you must fill in:
Your student ID number
The number of words you have used and
The numbers of the questions you have answered – eg 1
3
4
Put your exam paper into the mailbox of (mailbox No. 18 near Law School reception), Building 6, Level C. Do NOT put your exam into the general Law School mailbox at Building 6 Level B. You do NOT need to have your assignment stamped by reception staff.
In accordance with BLIS Divisional policy, any student who has a medical certificate and has been given an extension but who does not hand in the exam by the expiry of the extension granted in accordance with paragraph 5 above, may then submit a further medical certificate and apply (by completing the required application form, available at the BLIS student affairs office, Bldg 6, Level B) to sit a deferred exam, which will take place at the start of Semester 1, 2008 – in other words, such a student would not be able to graduate in December 2007. A deferred exam will take the form of a formal 2 ¼ - hour open-book paper answered under exam conditions.
Any student who fails the unit having passed all other units for his or her course may apply to the lecturer for a supplementary exam, which will take place at the start of Semester 1, 2008 – in other words, such a student would not be able to graduate in December 2007. A supplementary exam will take the form of a formal 2 ¼ - hour open-book paper answered under exam conditions. A student applying for a supplementary exam must provide the lecturer with a letter from their course convenor confirming that they have passed all other units.
As this is an exam, you will be notified of your result for the unit in the usual way – that is via OSIS when all other exam results are released. You may see your paper on the nominated exam feedback day, but you may not take your paper away.
EXAMINER:
It is strongly advised that you do not sit this exam if you are ill or hold a current medical certificate. No consideration will be given for illness when the examination is marked.
LAW OF BUSINESS ASSOCIATIONS
TAKE HOME ASSESSMENT
COVER SHEET
STUDENT NUMBER: _________
QUESTIONS ANSWERED: ________
________
________
WORD COUNT: ________
QUESTION ONE
Tony is Managing Director of Anglo-American Corporation (AAC) Ltd, a major engineering and mining company. AAC’s share capital consists of 100,000 shares. Its total assets are valued at approximately $ 100 million, and its cash reserves form $ 20 million of that.
The Board of AAC is aware that United Steel Ltd, which is also engaged in engineering is purchasing AAC shares on the open market, and has already secured a 40% holding in AAC. AAC is currently engaged in negotiations with General Electric Ltd (GE) over a proposed joint venture to construct a new jail for the ACT government. The ACT government has announced that the company which succeeds in constructing a jail meeting the government’s specifications will receive a substantial bonus. The Boards of AAC and GE are confident of success, and are therefore eager to undertake the project. The project would however cost $ 25 million. The Board of AAC enters into an agreement with GE in terms of which AAC will issue GE with 20,000 shares in AAC in return for $ 20 million in capital. In due course the Board of AAC issues the shares. As a result of this, AAC and GE are able to commence work on the project, while United Steel’s holding in AAC is reduced to 33% and it fails in its attempt to obtain a majority holding in AAC. AAC has received a letter from Aching Clutz, a firm of solicitors who act for United Steel, threatening legal action against AAC.
Tony has been negotiating a multi-million dollar deal on behalf of the company to sell a consignment of iron ore to Consolidated Mining industries Ltd (CMI), who has been represented during negotiations by its Managing Director, Gordon. At 9 am on Monday 1 October Tony telephones Gordon and says “I’ll come over to your office to sign the deal at 3 pm”. Later that day there is an acrimonious Board Meeting at AAC, at which Tony is removed from his position as Managing Director (as is permitted by the constitution of AAC, which is the sole basis for his holding the position). At 12 noon Gordon is having lunch at the City Club. At his table is Susan, Chief Accountant of AAC Ltd, who says “I heard that our MD was fired at this morning’s Board Meeting – though it’s just a rumour, no-one has told me officially”. At 3 pm Tony comes to Gordon’s office and signs the contract. The Board of AAC believes that the contract will not be a profitable one, but has received a letter from CMI demanding delivery of the iron ore.
Advice AAC on its legal position arising out of the above issues.
QUESTION TWO
United Agricultural Technologies Ltd (UAT) is a company which owns large agricultural holdings, 90% of which are cattle stations, all over Australia. It has a board of 20 directors, of which Tom Lam is a member. In January 2004 a horticulturist, Peter O’Malley, contacted UAT with an offer to sell it a patented genetically-modified corn seed (called THX 1138) which, he said, had the potential to increase crop yield 50% over what is currently obtained in this country. UAT’s board decided to reject the offer by a 16-4 majority, stating that exploiting it would mean converting grazing land into arable fields, which would require expensive irrigation and ploughing. Lam however remains convinced that the corn-seed option is a potential money-spinner and, without further reference to the board of UAT, contacts O’Malley. They commission a report by an expert botanist, who says that the estimate of a 50% increase in yield is far too conservative, and that the yield increase is in fact likely to be 100% better than is currently obtainable.
Lam resigns from UAT, but retains his 10% shareholding in that company. He and O’Malley form a company called L & O Ltd, which buys a farm in southern Queensland. Cultivation of THX 1138 commences. However it transpires that development costs are significant, and more capital is needed. Lam, who is very wealthy, consults his stockbroker with a view to deciding which of his substantial share portfolio to sell. He is about to instruct his stockbroker to sell his holding in BHP Ltd when he receives a copy of the monthly in-house veterinary report from UAT Ltd, which he has continued to receive because, due to an oversight by UAT’s company secretary, Lam was not removed from the UAT mailing list when he resigned. The report contains a pessimistic statement as to the likely effect of an outbreak of bovine encephalitis (BCE) on UAT’s herds. Lam sells his UAT shares for $ 3.30 each to Jeff Slaughter, and counts himself lucky to escape the crash to $ 1.05 each which occurs once the company revises its profit predictions downwards in its annual report published a month later, in which it explains the likely effect on the company of the outbreak of BCE.
Lam is also pleased at his decision to exploit TXH 1138 – crop yields exceed all expectations, and he and O’Malley make profits of $ 1 million in the first year of operation.
Advise Lam as to any liability arising out of the above facts, citing full authority for your answer.
QUESTION THREE
De Beers Ltd is a mining company which owns several claims in Western Australia. It needs capital in order to exploit the claims. On 1 July 2004 Sam Kruger, Managing Director of De Beers circulates the following notice to shareholders at the company’s annual general meeting:
STOCK ISSUE
The board is proud to announce an upcoming offer of shares to the public. The offer will be of 10 000 000 ordinary shares at $ 5.00 each. Your company expects that this infusion of capital will permit it to exploit hitherto dormant resources.
On 3 July 2004 Sam has lunch at his club in downtown Perth, the West Australian Club. He sees Mary Rothschild having lunch, goes up to her and says “Can I interest you in our new share issue – how about $ 1 million’s worth?”. Mary accepts the offer and agrees to buy $ 1 million worth of shares. Sam then goes over to Paul Hunt’s table, and offers him $ 10 000 worth of shares, which Paul agrees to take.
On 10 July 2004 De Beers lodges a prospectus with ASIC, signed by all the directors. In the prospectus the following is stated:
FUTURE EARNINGS – GEOLOGICAL REPORT
Mining claims are likely to yield 25 carats per metric tonne of ore which, at present costs, gives a production price of $ 500 per tonne.
Signed: Peter Grunt, Qualified Geologist
Elsewhere the prospectus states
OUR MARKET FORECAST
Assuming a production price of $ 500 per tonne, and in view of our expectation that
world diamond prices can only go up in coming months, De Beers Ltd expects earnings
of $ 0.50 per share in the first year of operations – that is, a return of 10%.
Henry purchases 1 000 shares at $ 5.00 each. A few months later he is sitting in a dentist’s waiting room in Kalgoorlie and reads an article in a magazine called The Diamond Miner, issue No 6 of June 2004. The article contains the following statement “unfortunately, most experts predict a crash in world diamond prices in the short to medium term”. It also transpires that the mine had yielded only 15 carats per tonne. Henry sells his shares immediately, but is able to get only $ 1.00 for them. Needless to say, he has never received any earnings.
Advise De Beers Ltd on the legal issues arising out of these facts, citing full authority for your answer.
QUESTION FOUR
Blue Star Hotels Ltd operates a chain of hotels in NSW and Victoria. Its directors are Tom Sharp, Charles Dickens and Mary Wollstonecraft. On 1 April Taylor’s Linen Hire Ltd presented a demand to Blue Star in respect of a $ 2 500 laundry bill owed by the hotel group. Blue Star was unable to meet this debt. On the basis of this insolvency, Taylor’s Linen Hire then filed an application for winding up on 23 April. The application was successful, and Ivan Trump was appointed as liquidator under a winding up order granted on 1 May. Ivan has requested that the directors meet with him on 5 May and provide him with a report on the company’s affairs. Advise him as to what impact the following facts have on the liquidation, giving full authority for your answer:
On 12 April Blue Star executed a floating charge in favour of Wholesale Liquors Ltd, securing a debt of $ 100 000 owed to Wholesale for wine supplied by it in February and March.
On 2 April the Board of Blue Star, in an attempt to deal with its cash-flow problems, borrowed $ 200 000 from Grasping Bank, paying the bank an application fee of $ 50 000 and agreeing to a 25% per annum interest rate.
Leonard Royce, who is in charge of the fleet of limousines run by the hotel tells Ivan that the contract with Ultra Lube Ltd, which services the vehicles, is up for renewal. Ultra-Lube requires that its clients sign a maintenance contract that is of a minimum of 4 months’ duration.
Ivan has found the following in Blue Star’s files: a contract dated 1 February for the purchase of 25 ivory chess sets from Dunhill Ornaments Ltd (which Blue Star would sell in gift shops in its hotels) on terms of payment after 6 months, and a letter dated 21 April varying the terms of the contract by adding to it a new clause in terms of which Blue Star agreed to transfer ownership in the goods back to Dunhill, and to sell them on consignment from Dunhill at 20% commission.
Ivan has also discovered a receipt for a one-way ticket for a flight which leaves for Argentina on 3 May, booked by Mary Wollstonecraft.
Tom, Charles and Mary are owed $ 20 000 each in respect of salary and $ 5 000 each in respect of leave entitlements. The hotel chain’s 500 employees are owed $ 1 000 000 in respect of salaries, $ 35 000 in respect of superannuation entitlements and $ 40 000 in respect of leave entitlements.
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