Reference no: EM132106733

Written Hypothetical Assignment

QUESTION 1:

Raj and Alana have owned a vineyard and winery in South Australia for many years. In 2010 they decided that they wanted to make provision for including their children in the business in the future. As such, they incorporated the company Organic Wines Pty Ltd ("OW") and transferred the vineyard and winery to the company. They then asked a solicitor friend of theirs, Ted, to draft the company's constitution.

Because of their desire for the company to continue their practice of organic farming and wine production, Raj and Alana asked Ted to include an ‘objects clause' in the constitution which restricted the activities of the corporation to the organic framing of grapes, the production of organic wines and any related and incidental activities. When drafting the constitution Ted included this clause, along with a clause appointing himself as the company's solicitor and stating that he could only be dismissed for misconduct. Ted received an allotment of 5% of the shares in the corporation as consideration for drafting the constitution.

Up until 2016, the board of OW was made up of Raj, Alana and their son Jack (who is also the company's Chief Financial Officer). In January 2016, Raj and Alana's daughter Priya moved back from Melbourne after finishing her university studies. Raj and Alana were wanting to step back from the business and allow their children to have a more active role. On the 1st of February 2016, Priya was appointed to the position of Managing Director of OW for a period of two years. The board did not formally reappoint Priya as Managing Director after 1 February 2018, but she has continued to act in that position. In February 2018, Priya arranged for the 2 appointment of Carl, a recently admitted solicitor and her current boyfriend, as company secretary of OW.

One of the terms of Priya's appointment, which were set out in a contract between her and OW, included a restriction to the effect that she was not to commit the company to any transactions in excess of $100,000 without approval by the Board of Directors. Priya had been looking at ways of expanding the business, and has been discussing potential supply agreements with Bob Murphy's, a large national liquor supplier. However, in order to increase production sufficiently OW would need to purchase additional grapes from other vineyards.

In June 2018, Priya negotiated an agreement for the supply of grapes from Seedy Vineyards Pty Ltd, for the value of $500,000. Seedy Vineyards use a range of pesticides on their grapes and have not subscribed to any principles of organic farming. On the 1st of July, Priya signed the contract as managing director along with Carl as company secretary.

On the 5th of July, Priya notified Ted that his services are no longer required by OW, as they now have sufficient legal expertise with the appointment of Carl. When Jack receives the first invoice from Seedy Vineyards requesting payment, he raises the contract with Raj and Alana who are not pleased. They both call Ted for advice, but he says that he has been dismissed from his role and is about to bring an action against the company for breach of contract.

Advise Raj and Alana:

A. Whether OW is bound by the supply contract with Seedy Vineyards given they believe that:

a. Priya has exceeded her authority to enter into such agreements;

and

b. The agreement is in breach of the objects clause in OW's constitution;

B. Whether Ted can enforce the clause in the constitution appointing him as company solicitor and what type of remedy would be applicable.

QUESTION 2:

The directors of Seedy Vineyards Pty Ltd are Karim and Miles, who each also own 45% of the company's shares. The remaining 10% of the shares are owned by Olive. Whilst Seedy Vineyards has had a number of customers, their profits have not been significant and therefore they have not regularly paid dividends. As such, Olive has been trying to sell her shares.

Karim and Miles want to retain control of the shareholding, but have generally refused to purchase Olive's shares because of a lack of funds. However, on the 20th of June 2018, Miles agrees to buy 5% of Olive's shares and they execute the agreement and transfer the shares.

At the same time, Olive also managed to secure a sale of her remaining 5% of the shares to Priya. However, after completing the sale contract, Karim and Miles refuse to register the transfer of shares. Karim then offers to buy the shares at 10% less than the price Priya was paying.

After the transaction with Organic Wines is finalised on the 1st of July 2018, Seedy Vineyards declares a dividend five-time higher than any of the dividends declared in the past three years.

Advise Olive:

A. Whether Karim and Miles have breached s181 of the Corporations Act 2001 (Cth) or their equivalent equitable duties by refusing to register the transfer of shares and what penalties or remedies might be applicable; and

B. Whether she has an action against Miles for a breach of directors’ duties for his purchasing the shares without telling her of the improved prospects of the company.