LEGL2002 LAW OF BUSINESS ORGANISATIONS

BACKGROUND FACTS

Shaun The Sheep Farms Pty Ltd (SSF) is a family-owned company that produces corn and breeds sheep.   Its current constitution incorporates all the replaceable rules in the Corporations Act 2001 (Cth).   SSF shareholding comprises 120 shares held by Alan Proust (30 shares), who is also the CEO/MD (chief executive officer/managing director); Bernie Proust (25 shares), who is the COO (chief operating officer); and Cassie Proust (25 shares), who is the CMO (chief marketing officer). Other members of the Proust family hold the rest of the shares.   SSF board of directors is composed of four directors, including Alan, Bernie, Cassie and Peter Parker, who has been with SSF for a long time and is a close friend of the Proust Family.

SSF has been considering buying a major new piece of feeding machinery for the sheep, the Auto Sheep Feeder 3000. Alan saw the machine for the first time in an agricultural exhibition in a neighbouring city and at the cost of $5 million. He firmly believes it is a bargain.   Mr Hughes, acting on behalf of the Vendor company, tells him this is a once-in-a-lifetime opportunity, so Alan calls a Board of Directors meeting for the following day.   He emails the other directors with the big news, saying they will meet the next day at 8:00 AM to vote and sign off the corresponding board resolution to buy the Feeder 3000.   Cassie replies immediately and says that she cannot attend the meeting and requests Alan to reschedule the meeting for the next time available, in accordance with the law and the SSF constitution.   Fifteen minutes later, Bernie also replies that he has a doctor’s appointment he cannot reschedule, so he will not be present either.   Bernie agrees with Cassie that the meeting should be another day and reminds Alan that all meetings need to observe the legal requirements and the company constitution for a valid directors’ board resolution.

Nevertheless, the meeting takes place the next day with Alan and Peter, who then vote in favour of acquiring the Feeder 3000 with the utmost urgency. Hence, they authorise the signature of the corresponding contract in accordance with the law.   Later in the day, after the meeting, Cassie and Bernie express their disappointment and complain that the meeting went on without their opinion and votes. Instead, they will propose a motion for the next directors’ board to hire a consultant to conduct a market and feasibility study to obtain the most value-for-money investment possible.

QUESTIONS

1.     Would a contract to buy the Feeder 3000 be enforceable by the Vendor company, as represented by Mr Hughes, if the contract was executed:

(a) by being signed by Alan Proust for and on behalf of SSF?

(b) by being signed by Bernie Proust for and on behalf of SSF?

(c) by the SSF common seal being fixed in the presence of, and witnessed by, Bernie Proust and Cassie Proust?

(d) by being signed by Bernie Proust and Cassie Proust?

(e) by being signed by Alan Proust and Peter Parker, whose signature has been forged by Alan as Peter had second thoughts regarding the validity of the directors’ board resolution?

2.     Now the Feeder 3000 has been delivered to SSF premises, but Cassie and Bernie oppose paying for it.   Advise Mr Hughes as to whether the Vendor company can enforce the contract against SSF.

HINTS

In the process of working your way through answering this question, you should make sure you always state the source of the relevant legal rules (e.g., a section of legislation or a court case) and apply those legal rules to the facts. A possible structure for your assignment would be as follows:

-   First – consider the validity of the contract between SSF Pty Ltd and the Vendor company on the basis of formal and substantive authority to enter into contracts directly and indirectly with outsiders in the different given scenarios (questions 1 (a) to (e)).

-   Second – consider whether there were any procedural irregularities in relation to the purported meeting of the board of directors and, if so, whether this means the court would find that the resolution passed by Alan and Peter at that meeting was valid/invalid; therefore SSF has/does not have to honour the contract with the vendor company.

In the course of writing your answer, you may find it useful to argue ‘in the alternative’. For example, if you argue that the court would likely find that the resolution passed by Alan and Peter at the purported meeting of the board of directors was valid, then (in addition to exploring the legal implications of this) you may want to write something like:

While I have argued above that Alan and Peter’s resolution was valid, it is also worth considering the legal implications if the court determines that it was invalid. In that case …

Conversely, if you argue that a court would likely find the resolution invalid, then you might like to discuss the legal implications if the court instead finds that it was valid.