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Law of Business Associations
Practice Question – Members’ Remedies
Watermark Specialists Ltd (WSL) is a public company incorporated in the 1970s. At the time of formation, the Memorandum of Association of the company stated that the object of the company was to manufacture high quality paper products and stationery. A large number of the original shareholders were independent producers, concerned to uphold paper quality in the face of increasing mass production.
Over the past few years, competition by large commercial paper producers has seen the original shareholders group dwindle to only 40% of the total shareholding in WSL. Approximately 60% of shares in the company are now held by a few large manufacturers. To date, these large manufacturers have been content to vote in accordance with board recommendations.
The board of WSL has considered the changing trends of the past years and concludes that if WSL is to continue to play any realistic role in looking after the interests of its traditional shareholders it must now also recognise the diminishing public concern for paper quality. The large shareholders in WSL share the board view in this regard. However, a group of independent producers strongly object to the change of board policy to accommodate the large commercial paper producers rather than those of the traditional shareholders.
The board of WSL issues further shares to the large shareholders, ostensibly to raise capital. The minority shareholders say that the issue will have the effect of strengthening the directors` position since they will be able to count upon these proxies in pursuing their new policy. During this same period, several directors also purchase a large block of shares. They say that this is evidence of their commitment to the future of WSL and that this action has been taken in order to ensure that there will be no further erosion of the company`s capital base. The minority shareholders say that this is just further evidence that the directors have deserted the traditional interests of shareholders and are no longer acting in good faith.
What remedies may be open to the minority shareholders? Are they likely to succeed in any legal actions they may take?
Practice Question 2 – Fundraising 200 words
The prospectus accompanying the issue of shares in Future Ltd contained the following statement:
Future Ltd is going to be Australia’s most environmentally progressive energy company. We will be taking advantage of the developments in privatisation laws in many Australian states to open up real business opportunities. In the light of the significance of climate change as an issue, our environmentally friendly approach to the use of alternative energy sources will not only save the planet, but it will make us the cutting edge leader of the energy sector.
Is this statement legal and why? Who might be potentially liable if it is found illegal?