Choosing a Business Entity for a Technology Start-up and Legal Issues for UniVortex Pty Ltd's Consti

Advantages and Disadvantages of Corporations, Trusts, and Partnerships for Technology Start-up

Question 1(a)
Elliot Mask, a young entrepreneur and technology expert, has created new software that promises to give police departments in major cities a much-needed upgrade in their computing and surveillance equipment.  The digital platform he has created promises to simplify some of the most basic aspects of policework, such as dispatching officers, filing reports, and analysing crime patterns, and also comes with high-tech drones with the technological ability to engage in facial recognition and x-ray photography to identify suspects hiding behind solid walls or barriers.

Elliot Mask has assembled this equipment in his own home using equipment and parts available online or in his local retail vicinity.  Elliot Mask created his own advertisement on YouTube which attracted the attention of a number of police departments around the country and the Department of Homeland Security.  In addition, Bezos Expeditions, the investing arm of Amazon founder, Jeff Bezos, expressed an interest in investing in the Elliot Mask’s software.

Elliot Mask was enthusiastic about this support and while appreciative of the interest of Bezos Expeditions did not wish to involve big investors at the moment.  Aware that he needed some money to commence major production and advancement of his new software he approached his two friends, Will Bates and Ark Puckerberg, if they would invest amount of $10,000 dollars each.  Bates and Puckerberg agreed but both said they would like to be involved in the business.  Indeed, both had prior experience in business.  Elliot accepts this condition thinking it was good idea assisting with both financial support and running the business. He agrees that they could be co-owners but as it’s his invention, has the technical expertise and wants to minimise any risks of information regarding his creation from becoming public, Elliot would like to be in charge of the business.

Advise Elliot Mask what type of business entity or association he should use for his start up business. Discuss and compare the features of corporations, trusts and partnerships. What are the advantages and disadvantages of each of them?  Explain the reasons for your choice of business entity for Elliot Mask’s start up.
    

Question 1(b)

Elliot Mask, Will Bates and Ark Puckerberg decide to incorporate the business naming the company UniVortex Pty Ltd.  The company is governed by a mixture of replaceable rules under the Corporations Act and a company constitution.  The constitution contains the following clauses:
1.    Elliot Mask shall be a permanent director of UniVortex Pty Ltd for life. The Replaceable Rule in s203C of the Corporations Act does not apply to Elliot Mask.
2.      Elliot Mask, shall be employed as UniVortex Pty Ltd’s Creative Technology Designer for a period of 10 years commencing 1 January 2019 with an annual salary of $250,000 with annual increases of 10%.    
3.    Before issuing new shares the directors must offer them to existing shareholders.  The number of shares offered to each shareholder must be in proportion to the number of shares they already hold.
    


The Directors call a general meeting of shareholders at which they propose to put the following special resolutions to alter the company’s constitution:
(a)    delete Clause (1) of the constitution; and insert a new clause that permits the directors, upon a written request signed by a majority, to remove any person from the office of Director.
    What rights (if any) does Elliot Mask have to prevent the above resolution being passed?


(b)     Without altering the constitution, the board of directors of UniVortex Pty Ltd dismiss Elliot Mask from his position of Creative Technology Designer after only 1 year.
    Can Elliot Mask stop the company from contravening Clause (2) of the company’s constitution? Would your answer be different if Elliot Mask was a shareholder of the company?

(c)    The board of directors of UniVortex Pty Ltd have decided to issue new shares in UniVorteX Pty Ltd to associates of theirs who are not presently shareholders.  Jeff Bezos, an existing shareholder, argues that this share issue contravenes Clause (3) of the company’s constitution.
    What can Jeff Bezos do to prevent the share issue?



Question 2 (a)
UniVortex has been highly successful and the company has now converted to a public company.  UniVortex Ltd is considering issuing 3 million additional shares with an issue price of $1.  The new ordinary shares will be offered to UniVortex Ltd’s employees, directors and executive officers, and to numerous loyal customers.

(a) Advise UniVortex Ltd’s directors whether they need to provide a disclosure (and if so, what type) prior to inviting employees, directors and executive officers, and customers to subscribe to the share issue?


Ark Zuckerberg, one of the directors of UniVortex Ltd, wants to acquire 10,000 shares in the company.  He borrows $10,000 from Bendigo Bank and wants UniVortex Ltd to guarantee the loan.

(b) What requirements must UniVortex Ltd meet to ensure there is no contravention of the Corporations Act in relation to guaranteeing the loan?