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NSW Corporations Act and Share Offerings

Discussion in 'Commercial Law Forum' started by cyphix, 15 August 2014.

  1. cyphix

    cyphix Well-Known Member

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    Hey guys. I have a question regarding the Corporations Act, at least that's what I think it is about. We have a company constitution (which I believe is pretty much the standard one, if there is such a thing) and on the front of the document it also says "Corporations Act" and "A Proprietary Company Limited by Shares".

    By the way, I have marked this as NSW as that is where the company is registered, but I am located in WA.

    So anyway, I am involved in a company with several others and we usually each put in money into the company in the form of "loans", which I think is the correct term. However we have one useless member who doesn't do anything, is never around and for the last loan installment never put any money in.

    So, to help get this member to put money, the directors recently issued a new share offer, which obviously if said member doesn't pay in time their stake in the company will decrease.

    However, I myself am also not in a position to buy the new shares as I'm currently out of work and don't have the funds.

    Now seeing as I have probably put more work into this company than anybody else, I do not want to lose any stake in the company; however I realize that if I don't buy the shares I will, basically if the useless member and myself don't buy the new shares than my stake will go to about half of what the other member's will have.

    I have spoken with the directors about this and said I'd be ok with it if I could then have the opportunity to repurchase said shares when I am able to, but they told me that they cannot offer just my shares without offering everyone else shares too - is this correct?

    Is there anyway under commercial law that I could get my stake in the company back after the fact or would the best idea just be to cancel the share offer until I have the funds to buy the new shares?

    Thanks!
     
  2. John R

    John R Well-Known Member

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    Hi @cyphix,
    I think that @Hugh, @Worldly1, etc. should have some good input on this question. My thoughts:
    1. I assume that the "useless shareholder" is difficult to deal with - but has the company considered buying back his/her shareholding (as opposed to simply diluting him in a new share issue) to rid themselves of his/her "uselessness"?
    2. Was the last loan instalment compulsory or was the "useless shareholder" able to decline to pay the last loan instalment without breaching a loan agreement (or similar agreement that I assume is in place)?
    Yes, as a general rule, this is correct.

    Hope this helps.
     
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  3. cyphix

    cyphix Well-Known Member

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    Thanks for the post John.


    Yeah, but he wanted too much.


    From what I have been told I thought that these were optional and there really was no way we could make someone pay them; hence that's why we went to a share offer where he was much more likely to pay -- and if he still didn't then at least his % in the company would drop.
     
  4. DennisD

    DennisD Well-Known Member

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    Presumably your shareholders agreement/company constitution have provisions which address member rights in case of share issuances, including which (if any) member(s) have a right of first refusal in relation to new shares. As a start you can review relevant provisions in those documents.

    After considering those documents and other matters, you might prefer simply to purchase the shares at the same time as the other members. If the non-contributing member does not want to pay for new shares, he or she may become willing to negotiate a more reasonable buy out price, given the dilution risks. If you can then agree to a clean separation by agreement, you may well save yourself a lot of time and stress.

    Let us know how it goes.
     
  5. cyphix

    cyphix Well-Known Member

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    Thanks Hugh.

    My main worry at the moment is losing my % share in the company and trying to figure out if there is anyway I can get it back in the near future if I am unable to purchase new shares for the current offering as I would like to get back up to par with the other members ASAP.

    Is the best bet just to cancel the share offering?

    As for our constitution, there are a couple of sections in the document entitled:

    * Issue of classes of shares to members
    * Calls, lien & forfeiture of shares
    * Transfer and transmission of shares

    Happy to post the relevant sections if you have the time to glance over them at all?

    Also, not sure if it matters, but recently everyone not already a director apart from said "useless member" was made a non-executive director. So not sure if this matters to what I will be able to do share wise.
     
  6. DennisD

    DennisD Well-Known Member

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    Hi cyphix

    The provisions may be confidential, so I suggest you do NOT post them. The three provisions you flag would be a good starting point for your review. If you wish to clarify your own reading, you may wish to engage a lawyer.

    Please note that forum contributors such as myself can provide general information, for your critical consideration. You are best placed to decide your course of action, taking into account all the surrounding circumstances in your situation.
     
  7. cyphix

    cyphix Well-Known Member

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    Thanks again Hugh, but yeah..... I have read through them myself and to be honest it's all chinese to me lol.
     
  8. Rod

    Rod Well-Known Member

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    U may be able to convert your previous loans to the company into capital. At least ask the question.
     
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  9. cyphix

    cyphix Well-Known Member

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    Thanks for the idea. Is that something that we are entitled to ask for -- as in is the company required to pay back the loan if requested to said shareholder?
     
  10. John R

    John R Well-Known Member

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    What does the loan agreement say?
     

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