Reference no: EM133062992

Question 1: Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway owns a large block of waterfront land which it uses for storage. Alan is also the chairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a large overdraft and has no unencumbered assets to use as security for another loan. Alan organized a loan of $1.5 million to Broadacres from ABC Bank on the basis that Sailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signed the mortgage documents as a director of Sailaway and forged Bill's signature as the other signatory. Tom, the local manager of ABC Bank, had been involved in earlier dealings with Sailaway and knew that its business did not include property development. He was on holidays but had left detailed notes to be used in his absence. While he was away the documents and other matters regarding the loan to Broadacres were organized by a substitute manager, John, who had quickly scanned through Tom's notes but did not ask Alan any questions about Sailaway's involvement.

Broadacres is now in financial difficulties and has defaulted on the loan from ABC Bank. ABC Bank is now seeking to enforce its rights under the mortgage against Sailaway.
Advise Sailaway whether it is bound by the mortgage.

Question 2: Which one of the following is correct?
A. Only ordinary shares can be traded on the ASX
B. Shares are not transferrable
C. Because preference shareholders are a specific class of shareholders their rights as to variation or cancellation of shares are protected in the Corporations Act
D. Both ordinary and preference shareholders have the same entitlements in relation to payment of a dividend.

Question 3: What circumstances might cause directors to cancel a dividend that has been declared? Are there any time limitations?

Question 4: Fresh Ltd (Fresh) needs to raise finance for the expansion of its fresh food business. It is considering two options:
(a) a public issue of redeemable preference shares: and
(b) a loan from Strategic Finance Ltd (Strategic).

If it proceeds with option (b), Strategic requires Fresh to provide security for the loan. Fresh owns land, buildings, plant and equipment and trading stock (food for resale).

Compare the advantages and disadvantages of both options.

Question 5: Larry Large started a business in early 2001 involving direct marketing of a range of garden products. He operated through a proprietary company, Large Larry Pty Ltd. The business was quite successful, aided apparently by a media campaign featuring Larry himself. In 2017 he decided to dramatically expand the business and to change the operation from direct marketing to distribution of products through various retail outlets. In that year he converted the proprietary company into a public company (Large Larry Ltd). He now wants to raise $15 million in additional funds to assist with the expansion and also to retire some debt. One option that is being considered is to offer shares in Large Larry Ltd to a number of large institutional investors. An alternative option is to float the business, that is offer the shares to the public and apply for listing on the Australian Stock Exchange (ASX). Larry is very upbeat about the company's prospects. He believes that with favourable economic conditions the company will double in size within a year. He approaches you and asks you to advise him on the following matters:

a) What are the implications under Chapter 6D of the Corporations Act of the two fundraising options being considered?

b) If a decision is made to carry out a float, what type of disclosure document will be required and what type of information must it contain?

c) If the offer document includes forecasts consistent with Larry's view concerning the prospects of the company, what consequences could follow if the forecasts are not met?