Business Law Lecture Ten (Week Eleven) Tutorial Questions Question One: Kestrel Pty Ltd (Kestrel) is a small family company which operates a business breeding kestrels, eagles, falcons and other large birds of prey. Kim, Kourtney and Khloe are all siblings and the only directors of Kestrel and each owns 25 ordinary shares. Clause 15 of the constitution of Kestrel provides that Kim, Kourtney and Khloe shall be a director of Kestrel at all times. Late last year Kim had a massive fight with the rest of the family and now Kourtney and Khloe won’t speak to her and don’t want her to have anything to do with the company. At a recent board meeting, Kourtney and Khloe passed the following resolution (Kim voted against the resolution): Kestrel Pty Ltd (ACN 123 456 789) Written resolution Share Issue Resolved that: As Kestrel Pty Ltd requires additional capital to purchase more inventory, Kestrel Pty Ltd shall issue 25 ordinary shares to Kourtney and 25 ordinary shares to Khloe in consideration of $5,000.00 for each share. Signed: Kourtney (Chairperson) JANUARY 1, 2016 An extraordinary general meeting was held in February where a special resolution was passed removing Clause 15 of the constitution. Thereafter, a second resolution was passed at the meeting removing Kim as a director. After removing Kim from the board, Kourtney and Khloe attended a board meeting suspending dividends indefinitely and increasing their directors’ salary. After the February meeting, Kourtney and Khloe realized that they could sell bird droppings to farmers to use as fertilizer and make a lot of money. Kourtney and Khloe registered a new company called BirdFert Pty Ltd (“BirdFert”) in which they are the only shareholders and directors. BirdFert collects the droppings from Kestrel at no price (utilizing Kestrel’s employees) and sells the droppings to famers at a massive profit. Kim wants to know if (i) it was legitimate for Kourtney and Khloe to award the new shares to themselves; (ii) have Kourtney and Khloe breached any of their duties to the company in connection with their dealings with BirdFert. Question Two: Peter is a director of Quagmire Pty Ltd. Quagmire Pty Ltd is a joint venture company between Pewterschmidt Ltd and Lois Pty Ltd. Peter is a nominee director, nominated on to the board by Pewterschmidt Ltd. The managing director tells Peter that he “must vote on the board to restrict the development of Quagmire Pty Ltd’s markets in Asia”. Peter worries about this, as expansion into Asia is the best strategy for Quagmire Pty Ltd’s profits. He asks you whether he is just a “rubber stamp and custodian for Pewterschmidt Ltd’s interests”. Advise Peter on his directors’ duties. Question Three: Jack, Bill and George are the only directors of Sand and Snow Ltd (S&S), a company that sells surfing and snowboarding holiday packages. They each own 10% of S&S’s shares. The remainder of the shares are owned by George’s father, Barry, who owns 15% of S&S’s shares, and other members of Barry’s large extended family. (a) After a tsunami devastates much of the Queensland coastline, the S&S board announces that it will be donating $5 million to the relief effort. Barry complains that this is a misuse of shareholder funds. Discuss. (b) S&S is about to purchase a significant amount of inventory from a company called Bill’s Snow Gear Pty Ltd. Bill owns 60% of Bill’s Snow Gear Pty Ltd’s shares. What would you recommend Bill do before S&S enters into the transaction? Question Four: Until June, 2010, Mark served on the boards of several public companies, including Alexandra’s Ltd, a bookstore chain. Unfortunately, due to the shift to online shopping, combined with the high price of books in Australia (due in part to high wages and high rents for retail establishments), Alexandra’s is forced into liquidation. Another company on whose board Mark sat failed because of the global financial crisis and was also would up on insolvency grounds. What is the likelihood that Mark will be disqualified from acting as a director?