A nation's lawmakers pass laws that specify how businesses must conduct their business. To avoid being held accountable for any illegal activities, a corporation's management must carefully adhere to the rules set forth. (Tricker and Tricker, 2015). Storm is a publicly traded business on the Australian Stock Exchange in this specific instance. Corporations that conduct business on the Australian Stock Exchange are subject to regulation by the Australian Securities and Investment Commission (ASIC). (Securities, 2010). Storm is one of the companies that are listed on that particular market and has no option but to abide by the set down criteria of operations. These criteria of operations set down to become the basis for legal action in cases of the contravention.
A public investment advisor company is best described as a scenario where individuals have come together to invest their funds and entrusted a body of management to advice and thus maximize the benefits on their investments (Krug, 2011). Comparably, Storm had this particular structure of a public listed company where individuals were advised on how to invest with a promise of obtaining profits from their investments. The Australian Corporation Act (2001) requires that an investor is fully supplied with the details of the particular company they are investing in and the estimated amounts of profits they should anticipate obtaining from their investments (Franck, 2006). Such a measure is required to prevent investments in companies that may otherwise be Ponzi schemes or pyramid schemes. Also, it is applied so that an individual who opts to invest in a Ponzi or pyramid scheme may do so after realizing the underlying risks (Musaraj, 2011).
The underlying asset disclosure issues are some of the reasons why Storm found itself in a mess. The management of the company was tasked with the responsibility of carrying out a due diligence research on their clients before landing them into a situation of locked up assets that would not yield liquid cash any time soon. The management team ought to have taken broader steps that included having the individual investor identify the maturity period of their investment. For instance, in a life assurance policy the investor or the buyer of the policy is often informed when the policy would mature and the estimated amounts they or their beneficiaries would receive. Disclosure issues are one of the main reasons why Storm management team would be grilled (Husted, 2005).
The management board was further charged for not issuing a statement of advice that was tailored to each customer. This default is illustrated in the case since the same statement of advice was served to all clients regardless of their financial position. For this reason, some of the investors found themselves in an investment locked up position. For instance, it is quoted in the files that the employees who were almost retiring found themselves in a rather tight position since the Storm a company that they had entrusted with almost their entire assets was not in a position to liquidate their earnings from the investments (Husted, 2005). Besides, the company clearly spelled it out to their clients that there would not be an exit strategy after getting into their investment bracket. An alternative was needed to offer simultaneous dividends.
Laws Relevant to the Case
There are certain laws that regulate operations of corporations within the Australian markets. Most of these laws are as per the Corporations Act (2001), for instance, in the case where financial investment companies are offering education and workshop on financial investment they are required to do so by strictly adhering to the Australian Securities and Investment Commission guidelines. It is meant to be done within the provided guidelines in order to prevent a hypnotizing scenario where a malicious agent and company does not take this investment opportunity to offer education and workshops that may warranty contempt to defraud the people. For instance, Storm is alleged to have run a particular encouragement to invest in the workshop sessions, this particular encouragement message meant that the clients were encouraged to borrow in order to invest in as maximum shares as possible (Tills and Wills, 2016).
The question was meant to hypnotize the clients that the more you invested the more you would stand a chance of accumulating a good value of assets. This particular education did not auger well with the clients who were almost retiring and sank their entire life savings into the company. As a result, they ended up finding themselves in a locked capital position with unpredictable liquidity scenario. It is quoted that the customers even borrowed using their homes as the collateral yet the homes were the only kind of assets that remained in their hands. This scenario showcases the role that education and workshops can play in creating a false investment decision. This is the reason why the Australian Securities and Investment commission has sought to regulate the education on investments that is fed to potential investors (Tills and Wills, 2016).
Another legal issue that arises in this particular case is on issuing investment advice to a client. The Australian regulators always make emphasis on how financial advice should be given by any fraternity to its clients. Every financial advice needs to be regulated because, through this, a company may as well issue false advice with promises of huge returns that may not actually be the case (Tills and Wills, 2016). This issue reveals why Storm was found to have contravened the law that regulates issuing advice to their clients. Storm is one of the companies that should comply with the regulators'' standards. It is alleged in the case files that Storm as a corporate entity ought to have issued advice that was tailored for each client. However, the company is accused of applying the same statement of advice to all its clients while not taking into consideration that the customers differed in terms of financial masculinity (Franck, 2006).
Arguments of the Parties
This case consisted of several parties including the petitioner and the respondents. The respondents to this particular case included Mr. and Mrs. Cassimatis who were leading the management role at this particular moment. Also, the Australian Securities and investment commission was regarded as the petitioner, in this case, to represent the interest of investors allegedly tricked to invest. Both the teams have issued their arguments for having taken the steps, for instance, tricking clients to invest is contravening the corporation laws and the regulator being compelled to take a lawful action against Storm Limited. Arguably Storm is an investment company whose survival fully depends on the continuity of the stream of investors hence it may have willfully misadvised the clients to get more investments coming (Tills and Wills, 2016).
On the other hand, Australian Securities and Investment Commission may have wrongly filed a petition against Storm. These particular arguments are validated by the factors put forward by the individual parties in their defenses. For instance, the Cassimatis called in professional witnesses to drive their arguments forward. They argue that they gave every client an opportunity to choose for themselves the kind of investment they would like to have. It was supported by the fact that every client was issued with a set of questionnaires that were meant to get information on their financial position (Barry, 2011). Since they would not have made it carrying out private interviews for every client they had to issue questionnaires that were meant to highlight the major points that needed to be put into consideration. Secondly, Storm management board put up a defense that every training and workshop session was carried out after having filled the questionnaire.
On the other hand, the (ASIC) argues that the questions were too general and would not warranty a confidential gathering of information. Similarly, it puts forward the argument that the questionnaires issued could not differentiate a scenario where someone had a continuous stream of income and where one just had a little amount to invest. In addition, ASIC assumes that Storm may have issued false advice to the clients to benefit. These arguments put forward by both parties give the extent to which every party is considered right in its motive. The Cassimatis also argue that they are not personally liable to the accusations since some of the transactions were facilitated by their staff (Barry, 2011).
Decisions in the Case
Storm directors were found to have contravened the law that governed issuing of the statement of advice to clients. This notion was proved by the fact that the directors at Storm failed to recognize that the company’s model of investment was applied on a rather delicate group of investors. It was particularly anchored on the rule that professionalism had to accompany the kind of advice given to a client. For instance, Storm’s staff had unreasonably used the same model to advise all its clients. Besides, such model was realized to have posed a greater risk of loss to those clients who were nearing retirement and would not get an opportunity to rebuild themselves financially (Conaglen and Hill, 2017).
Part B
A company is basically run by the directors who ensure that the shareholders’ interests are fully considered and that shareholders get value for their investments (Stevenson and Hojati 2007). In the listed hypothetical case Koala Pty Ltd is a private limited company with the structure of a family business (Khan 2006). The shares are owned by each of the family members to an equal percentage and acceptance of a mutually voted for idea lies among them since they are supposedly the directors. The business structure of a company is laid such that the interests of all the stakeholders are put into considerations to ensure there is a smooth running of the businesses. A company structure often provides for the existence of a separate board of directors to make decisions on behalf of the shareholders (Khan 2006).
Kanye’s Concerns on Share Issues
In this case, Kanye is kicked off as a director. However, he can have a position of argument since the company’s constitution stated that the shareholders were entitled to be the directors. In addition, the directors were entitled to equal ownership of the company and so they would automatically serve as the board of directors to the company. It would then mean that kicking off of Kanye by the rest of the board members in a malicious manner contravened the laws that governed the composition of the top management. If the associates of the company would have cited cases of misconduct and inability to deliver a reasonable position for argument, it would have been put forth, but this does not happen to be the case. Basically, the ability to sue and seek a remedy is dependent on the ability to prove that a particular rule enacted in the Constitution has been contravened (Cassim 2011).
An insight on the public limited company can give an understanding of the important factors surrounding this case. For instance, every public limited company has provisions such as how the minority shareholders issues would be placed into consideration. The company is first of all entitled to a different membership of directors who in most circumstances are not shareholders to a company (Gopalan, Nanda, and Seru, 2007). The directors are not denied an opportunity to own shares in the company but can alternatively do so as seen in this case. Any action concerning the top management should be carried out with care to prevent the rise of conflict of interest. The law nowadays permits the directors to trade in the shares of a company that they are also directors. This fact has been so to ensure ownership and to reduce the possibilities of negligence due to lack of interest in the business. In fact, this has been an issue of concern with some companies making it mandatory for the top management to acquire shares of the business they run (Gopalan, Nanda, and Seru, 2007).
A private limited company just as the one listed in this hypothetical scenario is entitled to some of the fair play rules in shareholder ownership in decision-making. This measure is to avoid a scenario of conflicting ideas and mismanagement of the assets. The law clearly stipulates the particular standards and regulations that facilitate the company’s operation of a company (Pattberg, 2005). For instance, the company’s article of association reveals how the company would be entitled to operate for instance in dealing with the outsiders and the actual shareholders. In addition, it requires that all shareholders are served with a notice to a meeting. It was so with the particular meeting that proposed for the additional sale of shares to the other three members. However, the rules that govern the company emphasize on equal ownership of the company among the four directors (Pattberg, 2005). This particular clause is part of the 9k clause of the given company.
The Company’s Act for private limited companies clearly outlines how the extra capital would be raised. This is so to avoid bringing in of shareholders who are not fully welcomed by the company’s owners. Kanye would have a position for argument in relation to the additional share issues since the additional shares were issued to the already existing owners of the company in contravention with clause 9K of the constitution laid down. It is therefore arguably in a defensive position that Kanye may have skipped the purchase of the shares just as one would do in a rights issue scenario. Such an act may have given the other shareholders more ownership of the company (Ball and Shivakumar, 2005). Since initially all the directors had equal share ownership the company may have decided to obtain more capital to streamline its operations.
Kanye would have a position for argument concerning the directors’ act of embezzling the funds and failing to maximize their revenues. The Limited company’s act incorporates the remedies to a minority shareholder in case the directors implement objectives, which do not maximize the organization’s income. Kanye would thus be monitoring the organization's operations to check for any inconsistencies in regard to their earnings and in case of any, he will issue a red alert in their meetings. With the issue of additional shares, Kanye would act as a whistleblower and at the same time be the main subject of this particular case. Therefore, he would only raise issues where the other directors would contravene maximization of his benefit as a shareholder. So long as the company’s directors remained focused on their goal of increasing their combined benefit Kanye would stay back and check on the operations. Having already contravened the company’s constitution that advocated for equal ownership of shares Kanye has a position to sue (Talbot, 2007).
In the case of expulsion from the board of directors, Kanye would have a position to seek remedy for having been allegedly kicked off while the company’s constitution provided equal rights to all the directors. Again the other directors have contravened the law in this particular scenario and Kanye can seek remedy against them. Basically, the laws laid down at the inception of a company play a very important role in ensuring every party is entitled to redemption (Talbot 2007). The courts may not be in a position to enforce what is not legally provided for in the constitution of a business enterprise especially those that exceed a single owner. It is also evident that the removal of Kanye from the board would have warranted to operations that were not relevant to the aims and goals of the company, for instance, Kanye would also seek redemption while citing the manner in which they illegally increased their salaries. Finally, as a shareholder, he can cite the fact that the other member did not consult him when suspending the dividends and so it was an illegal act (Talbot, 2007).
Khaled and Kanye’s Success in this Case
Khalid and Kanye were parties to a private Limited Company that also incorporated the ownership of Kylie and Keith. In this particular case, they would be successful since they were initially entitled to make decisions as directors of one single business entity. It meant that either of them was not allowed to have a conflict of interest to ensure the prompt running of the operations of the company. Where a conflict of interest is clearly captured in terms of ensuring no decision would be made that would contravene the decisions that would comparably increase the shareholders' benefit. The main reason for the existence of limited companies that issue shares is basically to maximize shareholders benefit. For instance, in a case where one sits on the board of a company that produces shoes and at the same time owns a company that imports shoes and sells locally he/she may make a decision that prevents production to allow them to benefit (Cassim 2011).
This is one of the reasons why an individual who is a director of a company is strictly prohibited by law not to engage in businesses that are comparably similar to the operations of the company. Koala Pty itself engages in a business that sells Koala soft toys to the international markets. Kylie and Keith have incorporated a company that aims to sell Koala related products. Such an act in itself is a contravention of the law that prohibits engagement in similar businesses. The law goes ahead to illustrate that even engaging in raw materials and by products of a particular brand that you deal with warrants that contravention. This is so because the law wants to prevent a scenario of a conflict of interest where one may award a tender to supply raw materials and buy a byproduct produced or even hamper the operations of the company to benefit their own businesses (Talbot 2007).
In this particular case, Khaled and Kanye would not be just seeking for redemption against Kylie and Keith for starting a new company without involving them but for contravening the law that prohibits the establishment of competing businesses. This is because they still sit on the board of directors’ position in the company hence their act was malicious since it could hinder smooth operations of the company. In this particular case, Kylie is the chairperson to the meetings held by the board of directors. The law prohibits these attachments to the two competing companies since Kylie may intentionally lead to the collapse of the other company. (Talbot 2007). Khaled and Kanye would be successful if they took an action against Kylie and Keith in regards to the argument that no director is allowed to carry out a competing business against the core business of the company.
This particular case would give Khaled and Kanye an opportunity to put forward an argument that the two directors contravened the company’s constitution and also contravened the law governing operations of companies.
References
Ball, R. and Shivakumar, L., 2005. Earnings quality in UK private firms: comparative loss recognition timeliness. Journal of accounting and economics, 39(1), pp.83-128.
Barry, P., 2011. In the Eye of the Storm: The Collapse of Storm Financial. Monthly, The, (Feb 2011), p.40.
Cassim, F., 2011. Contemporary Company Law. Juta and Company Ltd.
Conaglen, M. and Hill, J.G., 2017. Directors’ Duties and Legal Safe Harbours: A Comparative Analysis.
Franck, S.D., 2006. Foreign direct investment, investment treaty arbitration, and the rule of law. Pac. McGeorge Global Bus. & Dev. LJ, 19, p.337.
Gopalan, R., Nanda, V. and Seru, A., 2007. Affiliated firms and financial support: Evidence from Indian business groups. Journal of Financial Economics, 86(3), pp.759-795.
Husted, B.W., 2005. Risk management, real options, corporate social responsibility. Journal of Business Ethics, 60(2), pp.175-183.
Khan, T., 2006. Company dividends and ownership structure: Evidence from UK panel data. The Economic Journal, 116(510).
Krug, A.K., 2011. Institutionalization, Investment Adviser Regulation, and the Hedge Fund Problem.
Musaraj, S., 2011. Tales from Albarado: The materiality of pyramid schemes in postsocialist Albania. Cultural Anthropology, 26(1), pp.84-110.
Pattberg, P., 2005. The institutionalization of private governance: How business and nonprofit organizations agree on transnational rules. Governance, 18(4), pp.589-610.
Securities, A., 2010. Investments Commission (ASIC)(2011). ASIC seeks consistency in micro lenders’ responsible lending practices. Canberra, ASIC.
Stevenson, W.J. and Hojati, M., 2007. Operations management (Vol. 8). Boston: McGraw-Hill/Irwin.
Talbot, L., 2007. Critical company law. Routledge.
Tills, M. and Wills, C., 2016. Corporate law: Directors found guilty of breaching duties following corporation's breaches. Governance Directions, 68(10), p.624.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
