ILAC / IRAC Question

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Please advise Diverse Holdings Pty Ltd (DH) if there has been a breach of the Corporations Act 2001 (Cth) or an equitable breach on the above facts.

In July 2019 Diverse Holdings Pty Ltd (DH) became aware of a highly profitable business opportunity to acquire Zing Ltd. To take advantage of this opportunity however they needed to increase their income streams reasonably quickly. If they could do this then this opportunity would substantially increase the value and profits of the company in approximately 5 years.

DH has a number of commercial properties. The largest of the DH properties, the Hayden Street property, makes up about 50% of the DH asset pool. The Hayden Street property however has no income stream.

The Hayden Street property was the first building in DH and has a curious arrangement. Each shareholder is assigned in the company constitution the right to occupy a certain amount of commercial space in the Hayden Street property rent-free. The entitlement is for any space that is available in the Hayden Street property up to a certain amount. Initially the commercial space was assigned by games of chance to make sure everyone had equal chance to pick an area to occupy. The constitution enables the shareholders to call for games of chance to be used again to enable members to have the opportunity to move premises, but no one has bothered to call for this to occur. Once settled, each shareholder has remained in the same premises.

This arrangement was attractive to the shareholders about 4 years ago when they started DH, but now some of the shareholders wonder if they would be better paying rent and expanding their operation.

To date all shareholders have also sat on DH as directors. This arrangement is viable for Liz while DH has limited operations, but if the proposed expansion occurred then the role of directors would increase and she would struggle to keep up her duties as a director and running her own businesses.

The chairman of DH is Garry and the CEO is Kerry. They are the strongest advocates of altering the constitution to impose rent. Emma and Liz are the strongest advocates for not imposing rent. Garry proposes they get the rent value for each property independently valued. Liz objects. Garry moves a motion that: “DH retains an external expert to independently value the rent for each property. The findings of the potential rent value of each of the 10 leases is provided to all members.”

This resolution is passed with 8 members voting yes and Emma and Liz no.

The valuations are obtained and provided to all. It turns out the space that Emma and Liz occupy is worth about 10% more than the other areas of the Hayden Street property. This effectively has meant that Emma and Liz have had a windfall for a number of years.

One of the shareholders, Ling, is quite upset and suggests they immediately impose commercial rent on all the property. Liz objects and Ling suggests that DH simply wind up its operations and distribute profits. Then everyone could go seek new opportunities.

Emma is nearing retirement and is worried as Ling’s suggestion would result in her paying a substantial amount of capital gains tax. On the other hand, she is interested in long-term growth and the purchase of Zing Ltd would achieve this for her. Emma decided to propose that the constitution is amended so that: “If 90% of members agreed that rent should be paid on all leases in the Hayden Street property, based on independent valuations, then all members would have to either pay rent for the commercial space they occupied or vacate premises within 2 months.”

Emma’s motion was passed with 9 members voting yes and Liz strongly objecting. As the constitution of DH enabled constitutional amendments in this way, then this change was immediately effective. Kerry then moved that: “Rent be imposed upon all leases in the Hayden Street property based upon the valuations provided to members.”

This motion passed 9/1 with Liz objecting. Liz stormed out threatening to sue.

Please advise Diverse Holdings Pty Ltd (DH) if there has been a breach of the Corporations Act 2001 (Cth) or an equitable breach on the above facts.

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