LAW2450 Company and Finance Law

This assessment is an individual assessment and consists of TWO parts.

The total mark for the assessment is 40 and is made up of:

Written assessment: 25 marks

And

Video presentation 15 marks.

To obtain any marks for this assessment BOTH components must be completed. If only one part is completed, then NO marks will be awarded at all for the assessment.

PART 1:

This part consists of a written advice report where you will be required to provide written advice (supported by legislation, case law and where appropriate regulatory guidelines)

Part 1 is worth 25 marks.

The assessment is available from Wednesday 26 April 2023 at 9 am.

The due date is Friday 5 May 2023 5:00 pm via Turnitin.

The word limit will be 2,000 words plus or minus 10%

WRITTEN REPORT EXPECTATIONS:

REQUIREMENTS IN PREPARATION OF THE REPORT:

The organisation that you work for has a well-respected profile in the profession and therefore expects all staff members to demonstrate a high degree of professionalism.

In the written advice that you are to prepare you are expected to demonstrate that you understand the relevant law and how the law applies to the issues raised by the client and come to a logical conclusion.

You are also expected to discuss the law and the circumstances given the current economic environment that Australia is in and how it may impact on your advice to the client.

In your written advice you must relate the law back to the circumstances of the client. Mere statements of law without relevance to the client facts will be penalised.

You must be able to justify your conclusion by reference to the relevant legislation in the Corporations Act, or any other legislation you think appropriate, regulatory guidelines issued by ASIC where relevant and case law.

You are to prepare the report based on the fact it is to be presented to the clients who are not lawyers or accountants. They expect to see a concise and justified statement of advice and conclusion based on the issues raised.

Your senior manager has high expectations of you and will not accept:

1. any grammatical errors or unsubstantiated statements or conclusions made in your report.
2. Incorrect spelling or references to the client
3. She will not tolerate any material copied from textbooks, google or any other source which you attempt to pass off as your own material, nor the use of artificial intelligence software such as ChatGPT.

You must use the RMIT Harvard System for referencing. See attached link for how to use it.

https://www.rmit.edu.au/library/study/referencing

You have been with the organisation for six months and you are in line for a pay rise and possible promotion. Your performance on this task will determine whether you get them or not.

ChatGPT:

We are aware of ChatGPT as a tool to assist you in preparing your response to the assessment. We are also aware of other sources that you can pay to have people prepare your assessment and for you to pass it off as your own work.

We have put the assessment through the ChatGPT programme and other sources and are aware of the typical response.

If your written report mirrors what ChatGPT or other sources created, we will award NIL marks for the whole assessment 2 which includes NIL for your video presentation. The assessment is to be your OWN personal work and you must all confirm that it is your own work as part of your submission process.

THE WRITTEN ASSESSMENT:

Background:

You have recently graduated as an accountant/ financial adviser and your first position is with an integrated accounting and financial services organisation in Melbourne called Korder Menthol and Associates Pty Ltd (KM). It is an unlimited company.

BMW Ltd (BMW) is a company listed on the ASX and is a client of KM. See below for the corporate structure. It is a vertically integrated House of Natural Brands at the forefront of the global natural beauty and wellness movement and is involved the sale of cosmetics. The company’s portfolio consists of market leading brands that span multiple personal care categories and are currently sold throughout Australasia, Asia, the Americas, Europe and the Middle East.

Retailers reduced their inventories as consumers tightened their belts and the manufacturing sector responded by destocking; in other words, they have reduced their output.

The company’s expertise is in innovation, product development, manufacturing and marketing natural products makes the company unique in the beauty industry.

The goal at BMW is to make natural beauty the only choice for people wanting to live a healthy, balanced life, free from unnecessary toxins.

Its operations are based in Melbourne and California in the United States.

It recently acquired 50.1% of a well know brand of cosmetics call Run-To at a cost of $89.5M. The owner of the Run-To brand is entitled to another $49m in 12 months’ time under the terms of the sales contract for the remaining 49.9%.

However due to rising costs of living, interest rates, consumers are not spending as much on discretionary beauty products and looking for cheaper versions offered by supermarkets and discount chemist chains.

This has led to a downturn in revenue and also the company is struggling to pay back the interest on the debt borrowed from the Commonwealth Bank Ltd (CBA) and may not have the funds to acquire the other 49.9% of Run-To. The CBA has currently relaxed its loan covenants which have been breached by BMW but has indicated that it is unlikely to do so again unless there are legitimate business reasons to continue allowing the company to breach the loan covenants.

The chairperson, the Managing Director and the CFO of BMW have requested a meeting with the managing director of KM to discuss the issues.

The Managing Director is away in Western Australia on business for another client of KM and cannot attend the meeting. He will not be back until Monday 8 May 2023.Therefore, he has requested the senior manager (Serena) to organise the meeting with the clients. You have been asked:

1. To sit in on the meeting and take notes on the issues raised and then to prepare a written report on the matters for review by Serena. The meeting is scheduled for Wednesday 26 April 2023 at 8 am.

You will be expected to take notes of the meeting and then prepare a draft statement of advice for Serena to review. You are to use the attached template form to prepare your draft statement of advice. Once she is happy with the report, she will send to the Managing Director for review.

2. You are also to prepare a video to answer queries raised by the Partner/Managing Director. See part B of the assessment for details.

DETAILED INFORMATION FOR THE CLIENT MEETING:

Extracted from the permanent file records of BMW held by KM.

BMW Ltd (BMW) is a publicly listed company established in 2013 and listed on the ASX in 2015.

Corporate Structure of BMW Ltd

The Board of Directors of the company consist of:

Thinus Knave: Executive Director

Bruce Bodogan: Executive Director

Stephan Wisher: Chairman and Independent Director

Marius Devlin: Independent Director

Linda Ronstadt: Nominee Director#

# Nominated by Bennelong Australia Equity Pty Ltd and Tattarang Ventures Pty Ltd.

Senior Management of the Company:

Thinus Knave: CEO and Managing Director

Bruce Bodogan: Chief Financial Officer

Alistair Gavel: Chief Legal Officer and Company Secretary

Judy Munro: Senior manager of new products and development

Ingrid Sorensen: Chief Peoples Officer

Vladimir Antonov: Chief IT Officer

Shareholding of the company:

                                                                        Number of Shares                          %

Bennelong Australia Equity Pty Ltd     43,599,928                                        21.8

Tattarang Ventures Pty Ltd                     36,586,365                                        18.3

Paradice Investments Pty Ltd                11,392,834                                        5.7      

Vanguard Investments Australia Ltd    2,524,393                                          1.3

Public (3,857 shareholders)                    105,883,982                                      52.9

Total shares                                                199,987,502                                      100.00

The current share price is 20c per share. The shares were as high as $2.05 in mid-2022.

Current market value of the company is $39,997,500 as at 26 April 2023.

Bennelong Australia Equity Pty Ltd and Tattarang Ventures Pty Ltd acquired their shares at $1 each.

The company has written its own constitution and can be accessed from the link below or in Canvas.

https://rmit.instructure.com/courses/111222/files/30667105?wrap=1

Summary of Financial Statements as at 31 December 2022 (half year)

Statement of Profit and Loss                                        

Sales                                                  $79,673,000

Cost of sales                                     ($48,779,000)

Operating costs                                ($134,048,000)

Net loss                                              (103,154,000)

Statement of Financial position

Current assets                                  $119,262,000

Non-current assets                          $185,000,000

Total assets                                     $304,262,000

Current liabilities                              $105,047,000

Non-current liabilities                      $185,913,000

Total Liabilities                               $290,960,000

Net assets                                        $13,302,000

Represented by;

Equity:

Shareholders funds                         $415,425,000

Retained earnings                           ($402,123,000)

Total Equity                                     $13,302,000

Issue 1:

The company since July 2022 to early 2023 has been losing money due to customer destocking and inventory and working capital issues. This means that retailers reduced their purchases as consumers tightened their belts and the manufacturing sector responded by destocking; in other words, they have reduced their output. The company has therefore been forced to hold a significant amount of inventory. In addition the value of brands that they acquired over the last two years have been written down significantly which has also impacted on the financial position of the company.

The Board and senior management expect demand to pick up in early 2024 when the cost of living and interest rate rises ease but are concerned about how the company can survive until then. The Board and senior management is optimistic that the company can ride out the current economic environment.

The draft financial statements for BMW prepared by Bruce for the half year ended 31 December 2022 showed the company making a trading loss of $103,154,000 as above. It is anticipated that for the full year ended 30 June 2023 the loss would be approximately $185,047,000.

Projected results for 30 June 2024 show the company making a trading profit of $1,850,000.

Thinus and Bruce have explained that staff costs, operating expenses, inventory issues, the impairment of brands acquired and the cost of funding the new corporate head office in Clayton were the main reason for the trading loss of $103,154,000.

To address some of these issues the Board has retrenched 25% of the staff (53) leaving 163 staff. Further retrenchments may be possible.

The company took out a fixed interest rate loan at 2.5% for $15,000,000 to build the new head office in Clayton. The fixed interest loan will convert to a 10 year loan with payments on a principal and interest basis from1 July 2023 at a rate of 4.85% which will increase the payments to $158,000 per month.

The directors are mindful of the need to retain funds for working capital and are reluctant to pay a dividend based on the results for 31 December 2022.

However, Andrew Treetop the investment manager for Tattarang Ventures Pty Ltd wants a dividend of at least .04 c per share paid.

Issues they seek advice on:

1. Andrew states that there is a profit of $13,302,000 and if a dividend of .04c is declared and paid it still leaves the company with equity in the company. Is this correct and should the company declare a dividend?
2. What are the rules in the company’s constitution regarding the payment of dividends?
3. Is Ingrid supposed to look after the significant shareholder’s interests or the interests of the company?
4. If the company declares a dividend to be payable on 30 April 2023, but circumstances change can the company refuse to pay the dividend? What can the shareholders do?

Issue 2:

Due to the financial issues affecting the company, the Board decided that they needed a director who had contacts in the finance sector to assist in raising funds for the company.

Gail Kelly was previously the CEO of a large public bank and had numerous contacts.

The Board wanted to appoint her as a director of the company as soon as possible.

Issues they seek advice on:

1. What is the process to appoint Gail as a director?

Issue 3:

During the current financial year Judy was under pressure to look for new customers. A major retail chain in Indonesia was interested in the products manufactured by BMW but could not afford to pay the price charged.

Judy therefore entered negotiations with the Indonesian retailer and signed a contract with them that BMW would sell the cosmetic products at a 20% discount.

Under the internal rules of BMW any discount on the price above 10% had to be approved by the Board of Directors.

Judy did not get the Board’s approval it weas busy trying to organise appropriate finance for the company.

As a result of the contract the retailer in Indonesia gave a “gift” to Judy of 50 FTX coins. At the date of the” gift” they were worth $20,000 each. Today they are worth only $5 each.

Issues they seek advice on:

1. Is BMW bound to sell the goods to the Indonesian retailer at the 20% discount?
2. What actions can BMW against Judy?
3. What compensation can the company claim back from Judy?

Issue 4:

Vladimir the senior IT manager who reports to Alastair employed Alastair’s nephew Matthew as the senior IT manager. Matthew reports to Vladimir.

Matthew has only just graduated from university and has no work experience in IT.

Matthew was asked to monitor IT systems of the company to ensure that hackers could not access the client details.

Unfortunately hackers got into the IT system of the company and stole client confidential data as well as access to the bank accounts of the company.

The hackers demanded a ransom of $1,200,560 payable in bitcoins.

This breach resulted in the company having to shut down its operations for a month which contributed to the financial losses of the company. The breach also compromised the security of the intellectual property of the formulas for the various cosmetics sold.

Vladimir is called an IT director but has not actually been appointed by the Board as a director. However, he attended board meetings on a regular basis to make presentations about the IT status of the company and voted on other board matters.

Ingrid and Marius were aware of the appointment and knew that Matthew did not have the skills to complete the task.

Issues they seek advice on:

1. Is Matthew liable for the losses suffered because of the breach of IT security?
2. Is Vladimir, Ingrid or the company liable?
3. Does the company and all the directors have a responsibility to prevent the theft of client confidential data?

Issue 5:

Given the above financial position of BMW as at 31 December 2022 it is clear to the Board and senior management that the company needs an injection of funds urgently.

Bruce has indicated that BMW only has sufficient cash at bank to fund 3 months of operations. The amount of funds needed is approximately $15,000,000 to $25,000,000.

The Board has spoken to the major shareholders and they are currently reluctant to provide additional finance, given that their initial investment was at $2 per share.

The Board is aware through its social media platform that there are many customers who believe in natural products sold by BMW and may be interested in investing in the company.

The Board has considered the following finance options.

1. Money from potential customers via social media.
2. Private placement to the significant shareholders
3. Invitation to the public
4. Loan from their major bank or another bank

Issues they seek advice on:

1. How can the company raise from potential investors via social media?
2. What are the issues for the directors in respect of borrowing the funds from the CBA or another Bank?
3. In your opinion, what other options are there?