Law for Fame Decorator Agencies Pty Limited v Jeffries Industries Limi

Question: Discuss about the Ccrporate Law Fame Decorator Agencies Pty Limited v Jeffries Industries Limited. Answer: Introduction In Fame Decorator Agencies Pty Limited v Jeffries Industries Limited, the respondent was a public company listed in the stock exchange. The appellant was an ordinary and convertible preference shareholder in the respondent company. The appellant was allowed to transform its convertible shares into ordinary one on a given day. The method for the conversion of the shares required lower average sale rate of ordinary shares in respondent in the last twenty working days before the day of conversion so that after conversion more number of ordinary shares may be given to the appellant. Accordingly, on the last day of the said period, the appellant sold the ordinary shares of the respondent company resulting into lowering the market rate of the shares of the respondent company. The judge at the trial court decided that the appellant has breached sections 995 and 998 of the Corporation Act, 2001 (Fame Decorator Agencies Pty Limited v Jeffries Industries Limited (1999) HCATrans 52; AustLii 199 9). In the instant case the company holding the convertible preference shares, the procedure for the conversion of which was linked to the average selling rate of the given ordinary shares for a period of twenty days, positioned an order soon before the closing of the working day for the period of the said twenty days with an object to bring down the average selling rate of the shares for that particular day thereby raising the count of ordinary shares that is to be given after conversion. The effect of the act of the appellant company was that the value of the shares reduced by 22 cents. This act was therefore considered to be in contravention of section 1041B of the Corporation Act. Also the act was of deceiving nature as the persons who wanted to buy the shares of the respondent company were influenced to think that the market rate of the shares imitated the real relation of the force of demand and supply. Issues The main issue in the instant case was that whether the appellant has made contravention of Sections 995 and 998 by deceiving the share purchasers in the stock market by selling shares at a lower rate. Further the question was did the director of the appellant company owed any duty with regard to the deceptive trading of shares. Rules The Corporation Act prohibits misleading and deceptive conduct of a person of an organisation with regard to trading of securities (Corporation Act 2001 (Cth) s 995(2)). Further the Act also prohibits any act which is in the nature of creating a false or deceptive appearance with regard to the rate of any share in the share market (Corporation Act 2001 (Cth) s 998(1)). The Corporation Act also prohibits a person to engage or to enter into a dealing which might result into the creation of an artificial rate for the purpose of dealing into shares listed in a stock exchange (Corporations Act 2001 (Cth) s 1041A). Under the Corporation Act a director is not exempted from his general duties (as given under sections 180, 181, 182, 183 and 184) or his fiduciary duties with regard to any of the transactions related to shares or their conversion where such transaction is authorised under the provisions of the Corporation Act or is permitted under a resolution by the members (Corporation Act 2001 (Cth) s 260E; Director of Public Prosecutions (Cth) v JM (2013) HCA 30). The general duties of a director include certain legal obligations. As laid down in the provisions of the Corporation Act a director of a company is required to perform the functions that have been cast upon him with caution and assiduousness of a standard that a prudent man would have taken in the similar circumstances (Corporation Act 2001 (Cth) s180(1)). The director of a company owes responsibilities towards the company and its shareholders. The director holds a duty to make sure that the company works at standard values and abides by the relevant laws made for the governance of the corporations and also that the day to day business of the company is carried on appropriately. If the director fails to perform his duties penalties may be imposed on him as given under the provisions of the Corporation Act (Australian Securities Investments Commission 2014). Application A person who holds shares which are of alternative or convertible nature and the conversion rate of which is linked to the market value of the given shares on a fixed date or for a fixed period such person may require that the market rate of such shares is comparatively low so that he may receive more shares on the conversion of such shares. The court held that the act of the vendor of thinly traded shares, intended to conclude the sale of the shares at a low rate and scheduled in order to influence the potential buyers of the shares at a higher rate, had the aim and result of making an artificial market and rate for a provisional period (Corporation Act 2001 (Cth) s 1014B) and this act was of deceiving nature with regard to the potential buyers of the shares of the respondent company (Corporation Act 2001 (Cth) s 1014H). Section 998 focuses on saving the veracity of the stock market. While reflecting the relations of influence of demand and supply the market may undergo different deficiencies without such deficiencies affecting their veracity. On the other hand, the behaviour of a vendor of thinly- traded stocks, intended to conduct selling of shares at a minimum rate instead of selling it on maximum possible rate and is scheduled in order to reduce the chances of the buyers calling higher rates, had the aim and result of making an artificial market and rate for a temporary period (Australian Stock Exchange 2000). The market purchaser and single purchaser, who made bids soon before the trading for the period got over, are distinct from each other. The impact of the appellants action upon the market for the stakes of the respondent, and the market rate, was not incidental only. The main purpose of the act of the appellant was to affect the market rate of the shares. The judge at the trial court observed that both the aim and result of the appellants action was to make an artificial market rate for the shares in the respondent company which was in violation of the section 998. Further regarding section 995 of the Corporation Act 2001, the majority opinion of the bench was that while the buyers of the shares of the respondent company that were sold by the appellant on the last day of the said trading period were not deceived by the acceptance of the proposal to purchase the shares by the appellant. The appellants action violated section 995 as his action could possibly deceive the prospective buyers of shares of the respondent company to believe that the market rate showed the real relations of influence of demand and supply. The prospective buyers would not have been able to predict that the appellant was looking forward to sell his shares at a minimum rate possible as against the prospective higher bidder. These above mentioned sections (i.e. Sections 995 and 998) when read in harmony with Section 260E it may be observed that the directors of the appellant company owed a general duty towards the respondent company. Accordingly, the director of the shareholder company were bound not to deal into shares in way that the transaction misleads or deceives the potential buyers of the respondent company. In the instant case the directors of the shareholding company were under a general obligation to take due care that the company should not act in a manner which is detrimental to the interest of the company in which they held shares. The directors were also under a fiduciary obligation to ensure that the company did not make any such conduct while selling the shares in the stock market which leads to deception in the mind of the potential buyers of the shares of the respondent company (Australian Senate 1989). Further the directors were under a duty to make sure that the company works with respect to the standard values of the corporate governance rules while complying with the laws governing the conduct of the business. The Supreme Court of New South Wales has laid down a principle that it is the obligation on the part of the director to take reasonable measures in order to direct and observe the administration of the organisation (ASIC v Adler 2002 NSWSC 171; Parliament of Australia n.d.). The observations made in the instant case were later on followed in a number of cases. In a Singaporean case the Court of Appeal held that the judge at the trial court made a correct observation that both the aim and result of the appellants action was to make an artificial market rate for the shares in the respondent company which was in violation of the section 998. The ratio of the judgement given in the instant case were applicable to the Singaporean case as well (Tan Chong Koay v Monetary Authority of Singapore (2011) SGCA 36). Conclusion Therefore, on the basis of the observations made above it can be concluded that the directors of the shareholding company were under obligation to ensure that their company was abiding by the rules of conduct of a corporation as laid down under the various provisions of the Corporation Act. Further the directors could have been made liable by the court for failing to perform their general duties as prescribed under the corporate governance rules. The company failed to make genuine dealing in shares as it acted against the rules of the Corporation Act which required it not to make any deceptive or false dealings such that it interference in the interest of the respondent company. The judge at the trial and the court of appeal made a correct opinion by taking decision by abiding by the rules of the Corporation Act. The observations made by the court of appeal were further referred in a number of latter cases relating to the misleading and deceptive conduct of the companies while dealing in shares. References AustLii 1999, Fame Decorator Agencies Pty Limited v Jeffries Industries Limited. Available from: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCATrans/1999/52.html. [11 September 2017]. Australian Securities Investments Commission 2014, Directors- what are my duties as a director? Available from https://www.asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/. [11 September 2017]. Australian Senate 1989, Company directors duties; report on the social and fiduciary duties and obligations of company directors, Senate Standing Committee on Legal and Constitutional Affairs. Available from: https://www.takeovers.gov.au/content/Resources/parliamentary_reports/downloads/social_fuduciary_duties_obligations.pdf. [11 September 2017]. Australian Stock Exchange 2000, Business rule guidance note. Available from: https://www.asx.com.au/pdf/TradingPractices.pdf. [11 September 2017]. Corporations Act 2001 (Cth). Director of Public Prosecutions (Cth) v JM (2013) HCA 30; 250 CLR 135; 87 ALJR 836; 298 ALR 615; 228 A Crim R 570; 94 ACSR 1; 6 BFRA 662; (2012) VSCA 21. Fame Decorator Agencies Pty Limited v Jeffries Industries Limited (1999) HCATrans 52. Parliament of Australia n.d., Chapter four- directors duties, Available from https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/c04. [11 September 2017]. Tan Chong Koay v Monetary Authority of Singapore (2011) SGCA 36.