Question:
(1) Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) whichdistributes and sells yachting clothing and equipment. As well as a warehouse and attached shop,Sailaway owns a large block of waterfront land which it uses for storage. Alan is also thechairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land forsubdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase.It already has a large overdraft and has no unencumbered assets to use as security for anotherloan. Alan organized a loan of $1.5 million to Broadacres from ABC Bank on the basis thatSailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signedthe mortgage documents as a director of Sailaway and forged Bill's signature as the othersignatory. Tom, the local manager of ABC Bank, had been involved in earlier dealings withSailaway and knew that its business did not include property development. He was on holidaysbut had left detailed notes to be used in his absence. While he was away the documents and other 5matters regarding the loan to Broadacres were organized by a substitute manager, John, who hadquickly scanned through Tom's notes but did not ask Alan any questions about Sailaway'sinvolvement.Broadacres is now in financial difficulties and has defaulted on the loan from ABC Bank. ABCBank is now seeking to enforce its rights under the mortgage against Sailaway.Advise Sailaway whether it is bound by the mortgage.
(2) Which one of the following is correct?A. Only ordinary shares can be traded on the ASXB. Shares are not transferrableC. Because preference shareholders are a specific class of shareholders their rights as to variationor cancellation of shares are protected in the Corporations ActD. Both ordinary and preference shareholders have the same entitlements in relation to paymentof a dividend
(3) What circumstances might cause directors to cancel a dividend that has been declared? Arethere any time limitations?
(4) Fresh Ltd (Fresh) needs to raise finance for the expansion of its fresh food business. It isconsidering two options:
(a) a public issue of redeemable preference shares: and(b) a loan from Strategic Finance Ltd (Strategic).If it proceeds with option
(b), Strategic requires Fresh to provide security for the loan. Freshowns land, buildings, plant and equipment and trading stock (food for resale).Compare the advantages and disadvantages of both options
.(5) Larry Large started a business in early 2001 involving direct marketing of a range ofgarden products. He operated through a proprietary company, Large Larry Pty Ltd. Thebusiness was quite successful, aided apparently by a media campaign featuring Larry himself.In 2011 he decided to dramatically expand the business and to change the operation fromdirect marketing to distribution of products through various retail outlets. In that year heconverted the proprietary company into a public company (Large Larry Ltd). He now wantsto raise $15 million in additional funds to assist with the expansion and also to retire somedebt. One option that is being considered is to offer shares in Large Larry Ltd to a number oflarge institutional investors. An alternative option is to float the business, that is offer theshares to the public and apply for listing on the Australian Stock Exchange (ASX). Larry isvery upbeat about the company's prospects. He believes that with favourable economicconditions the company will double in size within a year. He approaches you and asks you toadvise him on the following matters:
a) What are the implications under Chapter 6D of the Corporations Act of the twofundraising options being considered?
b) If a decision is made to carry out a float, what type of disclosure document will berequired and what type of information must it contain?
c) If the offer document includes forecasts consistent with Larry's view concerning theprospects of the company, what consequences could follow if the forecasts are not met?