law regulating partnerships and corporations Assessment
Question 1 (40 marks)
Jamie is the owner of a vineyard. As a qualified winemaker, Jamie is confident about his ability to produce excellent wines. However, he is less confident about other aspects of the business and realises that he needs professional assistance with marketing of the winery’s products, among other things, to ensure commercial success. Jamie’s cousin, Bethany, has a background in marketing. She has recently launched a number of very successful online marketing campaigns and is willing to help Jamie to build brand awareness around the winery’s products. Jamie is very appreciative of her offer, but as the business has not been very profitable, he is not in a position to pay her the usual professional rates for her services. Instead, Jamie offers Bethany a 10% share in the profits of the business over the next 3 years.
Bethany is very excited about the opportunity to help Jamie and be ‘a part of the business’ in this way. She succeeds in launching a very successful brand awareness campaign, as is evident from the increase in orders for the wines that Jamie produces, as well as an increase in the number of visitors to the winery.
Bethany suspects that the business would benefit significantly if they hosted events at the winery, which is in a very picturesque spot. She decides to surprise Jamie and to refurbish a large shed on the property to make it suitable for hosting weddings and other events on the premises. Jamie is indeed very surprised when he returns from holiday to find that contractors have commenced construction work on the shed to turn it into a suitable events venue. Although he is very appreciative of Bethany’s marketing efforts, Jamie is not happy with the initiative that she has taken regarding the refurbishment of the shed. He informs Bethany that the business will not be paying the contractors, due to Bethany not having obtained his approval for the contract with the construction company. Bethany argues that she, as a partner in the business, is entitled to make those types of decisions and to engage the construction company. Jamie is shocked to hear that she regards herself as a partner. He is also convinced that the business is not liable for the contract that Bethany made with the construction company, even if she were a partner, as Bethany’s role is restricted to marketing and does not involve expanding the business to allow it to operate an events venue.
1.1 Explain whether Bethany is correct in her assumption that she is a partner in the business. [20]
1.2 Explain whether Jamie is correct that the business is not liable for the contract that Bethany made with the construction company, even if she were a partner in the business. [20]
Question 2 (60 marks)
Jamie and Bethany succeed in resolving their issues regarding the refurbishment of the shed. The immediate success of the events venue contributes to Jamie’s realisation that Bethany is a valuable addition to the business. On that basis, he decides to ‘formalise’ their business relationship. At the same time, Jamie would like to change the business structure to that of a company, to obtain the benefits of separate legal personality and to ensure clarity in respect of the structure of the business and the involvement of various parties.
Jamie registers a company, JB Winery Pty Ltd, to continue the business. The company is registered with a constitution that stipulates, among other things, that shareholders wishing to sell their shares have to offer it to other (existing) shareholders first before they can offer it to outsiders. The shareholders of the company are Jamie (who holds 60 shares), Bethany (who holds 20 shares) and Jamie’s daughter, Alicia (who holds 20 shares). Jamie and Bethany are appointed as the directors of the company. Jamie continues with his role as winemaker, while Bethany is primarily responsible for ensuring that the business activities in relation to the events venue are operating smoothly.
The events venue is regularly booked out over weekends, but often under-utilised during the week. Bethany suggests that they should use the venue to function as a restaurant during the week. Rather than operating the restaurant themselves, Bethany furthermore suggests that they should give an opportunity to someone to rent the venue during the week to operate a restaurant. The winery is well-known and popular among the local community, and Bethany is convinced that a restaurant business at the winery will do very well. Jamie trusts Bethany’s business acumen and has come to rely on her for business type decisions more and more over time, giving him the opportunity to do what he really loves doing, namely creating exciting new wines.
Bethany decides to form her own company, Bibi Pty Ltd, with her as the only shareholder and director. She asks Jamie to enter into an agreement with Bibi Pty Ltd in terms of which Bibi Pty Ltd will be allowed to rent the events venue during the week to conduct business as an exclusive restaurant, without disclosing to Jamie that she is the sole shareholder and director of Bibi Pty Ltd. She also convinces Jamie that JB Winery Pty Ltd should update the furniture and décor, to ensure the restaurant’s success. The restaurant is indeed as popular as Bethany envisaged, and it manages to operate very profitably – partly due to the fact that Bethany ensured that Bibi Pty Ltd is renting the premises very cheaply.
Jamie gets suspicious when he hears Bethany referring to ‘her restaurant’ and after some investigation, realises that Bethany is in fact the person behind Bibi Pty Ltd. He is also upset when Alicia tells him that the venue could have been rented to someone else at a much better price. Jamie would like for Bethany to be removed from the board of directors in light of her conduct, but is not sure if or how that could be achieved, seeing that the constitution does not provide any information in regard to this aspect.
To add to his woes, Alicia indicates that she wishes to sell her shares in the company. Jamie’s best friend, Adam, is interested in acquiring Alicia’s shares. Jamie is keen on having Adam, an accountant, involved in the company. However, Jamie remembers the stipulation in the constitution that Alicia should offer her shares to other shareholders before offering it to external parties. Jamie is not in a position to purchase Alicia’s shares from her, but does not wish for Bethany to be able to increase her shareholding in the company either. He would like for Adam to purchase the shares, but is not sure whether Alicia would be allowed to do that in light of the stipulation in the constitution.
Jamie decides to obtain legal advice regarding some of the issues that he is facing at the moment.
Provide Jamie with detailed advice in regard to
2.1 whether it would be possible for Alicia to sell her shares to Adam; [20]
2.2 whether it is possible to have Bethany removed from the board of directors; [10]
2.2 the legal consequences in respect of the contract between JB Winery Pty Ltd and Bibi Pty Ltd that Bethany initiated and the potential loss that JB Winery Pty Ltd suffered as a result, with reference to the relevant provisions of the Corporations Act 2001 (Cth). [30]
