Riddle Ltd (Riddle) operates a gold mine in Western Australia. It has four members who are Harold (who holds 30% of the shares), Gary (who holds 30% of the shares), Marie (who holds 30% of the shares) and Johnson (who holds 10% of the shares). Marie is the managing director and Gary is the chairman of the company. Harold was appointed as a non-executive director of Riddle as a favour to Marie. However he has an understanding that he will not be involved in the affairs of the company and he will rely on Marie to advise him on any relevant issues that he needs to be aware of. Riddle is investigating the possibility of extending the mine beyond its current footprint after hearing reports that a competing mine, Super Pit mine, is planning a major expansion.

Accordingly, Riddle commissioned a report from Earthwork, an engineering firm to assess the viability of extending the operation of its gold mine. The report noted that the carbon footprint and the electricity needs of this expansion would be massive and as a result the expansion is not commercially viable. Further, the company's auditor, Mike, also wrote a report in relation to this matter and he noted that the company would need more capital to be able to pay for such an expansion.

The directors, encouraged by Marie, decided that the expansion is viable if the company can raise $30 million. Accordingly, they pass a resolution to raise capital by issuing debentures to financial institutions, friends and other members of the public. Marie puts an advertisement in Australian Financial Review for interested investors detailing the rights and obligations that come with the debenture.

Before the outcome of the fundraising becomes known to the company, the directors pass a resolution to go ahead with the expansion. During the meeting that passed the resolution, Gary asked Marie to summarise the Earthwork and the auditor's reports because he did not have time to read the reports. He noted that he relied on Marie to provide him with the information. Marie stated confidently that the expansion would be a huge success irrespective of the reports and Gary voted in favour of the decision. Harold was absent from the meeting. The expansion proceeded but it was unsuccessful and the company, while remaining solvent, suffered a huge financial loss.

When Johnson discovered this, he becomes dissatisfied with the affairs of the company. Since Johnson seems to be dissatisfied with how the company is run, the directors propose to buy his shares at market value. Johnson refuses. As a consequence, the board of directors calls for a members meeting to change the company's constitution to allow anyone who has more than 30% of the shares to expropriate the shares of Johnson. The resolution is passed with a majority of 90% and the change of the constitution takes effect. As a result, Johnson's shares are expropriated at market value. However, Johnson believes that the change of the constitution is invalid and comes to you for advice.

Advise the company, the directors and Johnson about their rights and liabilities. In your answer consider any remedies that may apply for the different breaches of the law.

using IRAC method.

Answer rating: 100% (QA)

Answer Issue The issue involves legal implications arising from the actions of Riddle Ltd Riddle and its directors as well as the rights and liabiliti... View the full answer