LEGL2002 - Law of Business Organisations

PROBLEM QUESTION Blue Pty Ltd (Blue) is a proprietary company that develops software solutions for finance companies.Melanie, Daniel and Sarah are the three directors of Blue and each hold 25% of the total shares. All three directors are involved in the management of the company. Melanie is the CEO, Daniel the CFO and Sarah is Sales and Marketing Manager. The remaining 25% of shares are held by Daniel’s brother Max, who is not involved in the management of the company. In 2009 Blue approached AMGL to set up JVI as a joint venture between AMGL and Blue to invest in automated finance technology. Asset Management Group Ltd (AMGL) is a public company limited by shares. Blue and AMGL each own half of the shares in JV Investor Pty Ltd (JVI). In 2012, JVI proposes that AMGL and Blue each invest a further $500,000 to allow the company to develop a new automated investment software technology based on block chain. 1 Melanie was the architect of the joint venture proposal with AMGL and she has negotiated the terms of Blue’s recent equity injection in JVI. She is unaware that Daniel and Sarah have formed a new company with Sarah’s boyfriend Mitchell, Crystal Clear Pty Limited (“Crystal”). Mitchell is a brilliant software engineer and is on the verge of a breakthrough in adaptations to block chain that would make it a more accessible product for the finance industry. Blue had previously been invited by Mitchell to invest in his project, but Melanie had declined. The decision was partly based on Daniel’s advice to the Board that the project was not financially viable for Blue. Mitchell subsequently found an angel investor to fund his project in return for shares in Crystal. As Mitchell’s project is nearing completion he and Daniel and Sarah have arranged for  Crystal to be converted to a public company and have listed it on ASX. Daniel and Sarah are both aware that Crystal’s new block chain technology will be a significant competitor to the product that is being developed by JVI. PROBLEM QUESTION PART B   At the time that JVI approached AMGL to make a further investment in its block chain project, the directors of AMGL delegated to Gina Gunter, AGML’s company secretary and general counsel, the task of investigating the investment proposal and reporting back to the board. Gina supervised the due diligence and retained IT experts to prepare a report on the prospects of the proposed block chain technology. She appeared to be a very keen supporter of the project and was very positive about its prospects. The IT report prepared for the board indicated that the proposed investment should be very successful. At the board meeting some of the directors were sceptical about the IT report’s optimistic forecasts. They questioned Mr Chester who was a director of AGML with specialist information technology qualifications. He assured the board that the report was reliable. The board unanimously agreed to go ahead and make the additional investment in JVI. 12 months later it becomes clear that things are not going well for JVI. Gina Gunter has resigned from her position as general counsel for AGML. This followed revelations that her partner, who is JVI’s accountant had been charged with embezzlement and fraud. Gina was not aware of her partner’s fraud, but she was aware that he was under a great deal of pressure and appeared to be very stressed. She admitted that her investigation and reporting on the block chain project was not at the high standard that AGML had come to expect from her. She admitted that her bias in favour of the project was likely to have been influenced by her desire to achieve a positive outcome for JVI and indirectly her partner. It was also discovered that the IT report was negligently prepared. Mr Chester admits that his IT qualifications are rapidly becoming out dated and he was too embarrassed to admit that he lacked a sophisticated understanding of block chain technology.