ACC520 Legal Regulation of Business Structures - Callie and Marie Seymour Case Study - Accounting Assessment Answer

Assessment Task:

ACC520 Legal Regulation of Business Structures Accounting Assessment Answer

PART A

Callie and Marie Seymour are musically talented sisters who, after years of touring, decide to open up a music store in Melbourne. The store is incorporated as a company called ‘Calamari Music Pty Ltd.’ Both Callie and Marie are listed as directors and each holds 30% of the company’s shares. The remaining 40% of shares are held by three fans of Callie and Marie’s music (Pearl 10%, Marina 10%, and Octavio 20%). 

Due to Callie and Marie’s moderate fame as musicians, their presence and occasional impromptu performances entice customers to come into the store. The store’s opening year is very profitable but Callie and Marie want more capital to grow their business and open a second store however are reluctant to input this capital themselves. Calamari Music calls a Special General Meeting to alter the constitution. The alteration would require all shareholders that hold less than 15% of the company’s shares to repay the initial purchase price of their shares as additional capital once each year. Proper notice is given and all 5 shareholders attend the Special General Meeting. Callie, Marie and Octavio vote for the alteration, Pearl and Marina vote against. Despite the shock of the constitutional alteration, Pearl and Marina remain shareholders within the company as they continue to be faithful fans of Callie and Marie. 
Following the Special General Meeting, Ink Records Ltd gets in contact with Calamari Music Pty Ltd. Ink Records is the record label that owns the copyright to all of Callie and Marie’s songs, imagery and branding that Callie and Marie have been using to promote Calamari Music. Ink Records demand that Calamari Music contract for a license to use this material in the promotion of their store. Ink Records and Calamari Music agree to the following terms:
‘Ink Records Ltd agrees to license the use of Callie and Marie Seymour’s music, branding, imagery, and any other affiliated materials to Calamari Music Pty Ltd on the condition that Callie Seymour or Marie Seymour collectively or individually maintain at least 80% of the shareholding in Calamari Music Pty Ltd. This term comes into effect 10 days from the signing of the contract. 

Due to the short time limit in the contract, Callie and Marie call Octavio to come to the store for a quick Special General Meeting. At this meeting, Callie and Marie resolve to alter the constitution to expropriate the shares of shareholders who own less than 15% of shares. Callie, Marie and Octavio once again vote for the alteration. 

The next day, Pearl and Marina are notified of the new change to the constitution and are told to transfer their shares to Callie and Marie. Distraught and confused, Pearl and Marina come to you for advice. 

1.    Explain how constitutional alteration takes place. Advise Pearl and Marina whether the first constitutional alteration (that requires them to repay their initial share price) can be enforced against them?        

2.    Advise Pearl and Marina whether the second alteration to the constitution for the expropriation of their shares is valid. 

PART B

‘Genki Ltd’ is a public company that sells high-end medical equipment and machines to hospitals. Genki’s board of directors consist of 5 directors (Sam, Percy, Shali, Kenta and Ryota). Sam, Percy and Shali are non-executive directors and have little to do with the day-to-day running of the business. Kenta and Ryota Takayama, who are identical twins, are executive managing directors of the company. Although Kenta and Ryota are physically identical, Kenta is fluent in English due to his upbringing in Australia however Ryota still struggles with English as he was raised primarily in Japan and moved to Australia as an adult. 

Kenta and Ryota work well together in managing Genki however Ryota’s lack of English skills has recently landed the company in trouble when Ryota signed a contract he did not fully understand on behalf of the company. As a result, at the most recent board meeting, the board resolved that Ryota must consult another director whenever entering into a transaction of more than $10,000 AUD. Ryota is very upset and angered by this decision.

Following this board meeting, Kenta requested that Ryota consult with Sam to organise a loan for Genki from BankWest for $50,000, using a non-circulating interest in a piece of expensive factory equipment as security for the loan. Kenta offered his brother this opportunity as he wanted to show that he still had faith in Ryota’s judgment regardless of the board’s decision. Kenta calls ahead to the BankWest to tell them that Ryota is coming to the bank to organise a loan and has the authority of the company. 

BankWest is aware that two of the directors of Genki Ltd are twins and often request their business cards to identify which twin they are talking to. Upon arriving at the bank, Ryota hands over his business card which identifies him as ‘Ryota Takayama – Managing Director of Genki Ltd’. Once they’ve confirmed his identity, BankWest organises the loan with Ryota. The bank agrees to a $500,000 loan using the Genki’s factory equipment as security and Ryota requests they transfer the funds to a “wholly-owned subsidiary” company of Genki’s: ‘Business Brothers Pty Ltd’. In reality, ‘Business Brothers Pty Ltd’ is a proprietary shelf company that was set up by Kenta and Ryota when they first began working together but the company has never been used after incorporation. It has no association with Genki Ltd beyond Kenta and Ryota each owning 50% of shares in Business Brothers Pty Ltd and being listed as directors. The bank clerk is a little curious about this since it has never been mentioned before by either brother or other directors of Genki but agrees given Ryota’s position in the company. 

The clerk notes that the loan requires two directors to sign on behalf of the company. Ryota signs the document and then tells the clerk that his brother is in the car and will go get him. Ryota walks outside panicking, quickly changes his shirt and tie, puts some hair gel in his hair and puts on some sunglasses, and walks back into the bank pretending to be Kenta. When the bank clerk asks for Kenta’s business card, “Kenta” tells them that he forgot to bring it. “Kenta” hurriedly signs the document, the signature almost identical to Ryota’s then finalises the details in slightly broken English. Once the transaction is completed, “Kenta” rushes out of the bank. 

The bank processes the loan and Genki Ltd is shocked when they discover that their property is being used as security for a $500,000 loan for an unrelated company. 

1.    Advice Genki Ltd whether they are bound by the loan agreement with BankWest. Use both statutory provisions and common law to explain any possible recourse Genki Ltd have.         

2.    Discuss briefly whether Business Brothers Pty Ltd is a subsidiary of Genki Ltd.

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