Ramifications for Shareholder Class Actions †MyAssignmenthelp.com

Question: Discuss about the Ramifications for Shareholder Class Actions. Answer: Introduction: On 22 February 2018, Business News Australia published an article relating to GetSwift that has been served notice of class action from shareholders. The Logistics Software Company GetSwift has been facing a class action from shareholders. The company is alleged to have been engaged in deceptive and misleading conduct. Two other legal firms are considering launching a class action against the company. The law firm Squire Patton Boggs has applied to initiate action in the Federal Court against the company while law firm, Corrs Chambers Westgarth has claimed to initiate legal action against the company as well. The shareholders have been initiating class action against the company on grounds of continuous misleading and deceptive conduct and non-disclosures on part of the company. The firms have claimed to be seeking damages against the company on similar grounds. The company is alleged to have declared its deals with the Commonwealth Bank, the Fruitbox company, NA Williams and Fantastic Furniture, which were either subjectd to review, or cancelled subsequent to such announcements. The exaggerated announcement led the investors believe that GetSwift has become financially stable and has began to create revenue from significant clients like Fruitbox company, NA Williams. However, when it was disclosed that the contracts did not survive the trial period, the market capitalization declined to less than half the amount, causing violation of its market obligations. The company had been subjected to trading halt since 22 January and has requested to release its suspension. It has been reported that apart from its non-disclosure about the deals or contracts, the company released revenue forecasts from a deal it declared with Commonwealth Bank of Australia, in advance. The company was hit by more than fifty percent on Monday after it resumed its operations post the trading halt that resulted from the ASX enquiries on the breach of its continuous disclosure obligations several times. However, GetSwift which is run by Bane Hunter, the Executive Chairperson and former AFL player and entrepreneur Joel McDonald stated that the investigation carried out by ASX has found that the company has not breached its continuous disclosure obligations and that the company has been working with PricewaterhouseCoopers (PwC) to review the compliance procedures of the company. The company has further been subjected to ASX query due to its delay in submission of notice pertaining to the change in the interest of the director while the corporate giant faces trading halt to resolve issues regarding its compliance and disclosure obligations with listing rules. In the contemporary era, the business organizations are required to maintain good corporate governance framework to ensure that the business operations are being carried out in the best interests of the company, shareholders and its stakeholders including the community. In Australia, the ASX Corporate Governance Council Principles and Recommendations stipulates that a good corporate governance stimulates the confidence of the investors that is fundamental to the ability of the corporate entities that are listed on the ASX to compete for capital (ArAs 2016). The issue that has been raised in the article is about the failure of the organization to make disclosure of material information about the company, which misled as well as deceived the investors, resulting in a trading halt of the company. Such corporate governance failure has not only resulted in financial and reputational loss but has reduced the confidence and trust of the investors from the company as well. Theories of Corporate Governance Corporate governance describes the relationship between the board, stakeholders and shareholders of a company. It provides the structural framework that enables the company to achieve its set objectives and goals while it controls and direct the companies to achieve such objectives. The ASX Principles and Recommendations stipulate certain corporate governance principles and recommendations that enable the companies to meet the expectations and needs of the investors. However, since several corporations may adopt different principles, the principles and recommendations are not obligatory to the corporation (Cassell, Myers and Seidel 2015). Nevertheless, if a listed entity fails to adopt the principles, it is mandatory that such organizations provide a valid reason for not adopting the governance principles. The theoretical perspectives explain the significance of corporate governance and the challenges that arises from such theories. The most common theories include stewardship theories, resource-dependence theories, stakeholder theories and agency theories. The agency theory states that the role of principal/shareholders and the executives/agents employed to manage the business operations is often characterized by frequent conflicts. The principle is based on the presumption that since the agents manage the company on behalf of the principals, the principals often are subjected to loss of agency signifying low return on investment (Tricker and Tricker 2015). For example, a principal will always strive to hire employees to perform several tasks at low cost but sell them at higher prices whereas the employees attempt to obtain more money to carry out such task/activities. According to the Resource-Dependence theory, the resources that the board provide to the executives purports to enable them achieve the organizational goals. Although the Board intervenes into the matter dealt by the executives, it also provides financial, human and intangible supports to the executives as well. The issues associated with this governance theory arise when the Board does not approve for the decisions that are taken by the executives. The stakeholder theory states that the corporation has responsibility towards the customers, suppliers, communities and client. The theory requires the business operations of any organization to be carried out ethically ensuring the stakeholders receive a fair return from their stake in the organization (Du Plessis, Hargovan and Harris 2018). The stakeholder theory necessitates the company to carry out its operations ethically, giving its corporate social responsibility more importance than its profit-making objective. The stewardship theory states that the management and the owners of the company have common organizational goals which can be achieved if the company board exercises less control and be more supportive, thus, encouraging executives to achieve higher performance. The issue that may arise from this theory is regarding the relationship and lack of cooperation between the owners and the management of the company (Sivathaasan 2016). The shareholders theory states that the interests of the shareholders are given much importance than the other stakeholders in any organizations (Shields et al. 2015). This theory may give rise to issues when there is reorganizing of business organizations as an outcome of enhancing the shareholder value, it may have an adverse impact on the employees in the form of change of jobs, loss of jobs as well as poor working conditions, etc. Since the shareholders exercise control over the internal structure of the company, they mainly emphasizes on the profitmaking objective of the company and in the enhancement of the wealth of the shareholders. Corporate governance issue raised in the article The corporate governance issue that has been raised in this article is related to misleading and deceiving the investors by failing to disclose material information on part of GenSwift. This issue is related to the issues that may arise in shareholder theory of corporate governance where the interest and welfare of the shareholder is considered fundamental in an organization. As it is mentioned earlier, that shareholder exercises control over the internal management of an organization and monitors its business operations and a corporation is obligated to make accurate and timely disclosure about its operations (Exchange 2014). Shareholders may bring legal actions directly against the company under the Federal law to address inaccurate or incomplete disclosures on the grounds of non-disclosure of material information. In this article, it is observed that GenSwift has been alleged to have declared its deals with the Commonwealth Bank, the Fruitbox company, NA Williams and Fantastic Furniture, which were either subjected to review, or cancelled subsequent to such announcements. Due to such announcement, the investors were misled as they believed that the company has become financially stable and has started to create revenue for such significant clients. Further, the company released revenue forecasts from a deal it declared with Commonwealth Bank of Australia, impulsively and in advance which further misled the investors about the financial stability of the organization (Shimeld, Williams and Shimeld 2017). Due to such corporate governance failure, the company trading has been put to halt, that resulted in significant financial loss. After revelation of the facts that the company had concealed, the shareholders initiated a class action against the company to seek damages for the non-compliance with the corporate governance and the disclosure obligations of the organization. Importance of issues to Public and Business According to the ASX Principles and Recommendations state that a listed entity is obligated to carry out its business transactions in an ethical manner and with due responsibility. An ethical business practice not only safeguards an organization from any legal implications, which helps the company to build up a reputation in the corporate world as well as in the society. In regards to the disclosure obligations of an organization, a listed entity is required to make balanced and timely disclosure of all the matters that is crucial to the company, stakeholders and its shareholders. An organization has obligations not to conceal any matter that any prudent person would consider to have an effect on the value or price of its securities (Issacharoff and Eagles 2015). In the given article, the company GetSwift revealed that it has been entering into deal with significant clients like Fruitbox company and Fantastic Furniture but it did not disclose the essential fact that those deals or contract were yet to be finalized. Further, even after the deals or contracts were cancelled, the company did not reveal that they were cancel, which misled the investors into believing that it had a stable financial situation. This can be termed as unethical business practice and non-disclosure of material facts essential to the company. Significance of ethical business practice and accurate disclosure to public Non-compliance with disclosure obligations implies lack of transparency, which not only affects the investors and shareholders but also affects the image of the company before the public (Day 2016). A business organization carrying out its operations ethically not only achieves its organizational goals but also achieves the trust of the investors and public. Today, public is aware of the business transactions being carried out by the organizations and cannot be fooled easily. The business transactions carried out by the organization ethically shall not only ensure interest of the business organization, but also consider the interests of the shareholders and the stakeholders including the community altogether. The lack of confidence and trust in the investors on the company is paramount for the company to retain its good image in the corporate world but its is equally important to maintain its goodwill in the eyes of the public. An organization is not only mandated to disclose matters that are considered by any prudent person to have a substantial impact on the price or value of the securities. As the very purpose of the Corporate Principles and Recommendations is to attain desirable results and meet the reasonable expectations of majority investors under several circumstances, it is important to maintain a relationship of trust between the investors and the organization and to make possible attempts to obtain the confidence of the investors in the company (Emmerig and Legg 2016). A company that has failed to gain confidence of the investors by deceptively misleading them into the belief that its financial condition has been stabilized, where, in reality, the company had not entered into any deals with significant clients, demonstrates the failure of the company to maintain a relationship of trust with its investors. Further, the company has been reluctant enough not to disclose material information like the two contracts with the its significant clients have been cancelled, to its shareholders and making advance announcement about revenue that it was not about to earn, are also indicators of the failure of the company to comply with corporate governance and its market obligations. Therefore, the class of action and legal actions to seek damages against the company is justified. Reference list ArAs, G., 2016.A handbook of corporate governance and social responsibility. CRC Press. Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in Australia: A re?examination.Accounting Finance,55(4), pp.931-963. Beekes, W., Brown, P., Zhan, W. and Zhang, Q., 2016. Corporate governance, companies disclosure practices and market transparency: A cross country study.Journal of Business Finance Accounting,43(3-4), pp.263-297. Cassell, C.A., Myers, L.A. and Seidel, T.A., 2015. Disclosure transparency about activity in valuation allowance and reserve accounts and accruals-based earnings management.Accounting, Organizations and Society,46, pp.23-38. Day, J., 2016. Class Actions in Australia: 2015 in Review. Du Plessis, J.J., Hargovan, A. and Harris, J., 2018.Principles of contemporary corporate governance. Cambridge University Press. Emmerig, J. and Legg, M., 2016. Corporate law: Indirect causation accepted in shareholder claim of misleading conduct: Ramifications for shareholder class actions.Governance Directions,68(8), p.490. Exchange, A.S., 2014. Corporate Governance Principles and Recommendations . Sydney: ASX Corporate Governance Council, 27 March. Issacharoff, S. and Eagles, T., 2015. Australian Alternative: A View from Abroad of Recent Developments in Securities Class Actions.UNSWLJ,38, p.179. Shields, J., Brown, M., Kaine, S., Dolle-Samuel, C., North-Samardzic, A., McLean, P., Johns, R., O'Leary, P., Robinson, J. and Plimmer, G., 2015.Managing Employee Performance Reward: Concepts, Practices, Strategies. Cambridge University Press. Shimeld, S., Williams, B. and Shimeld, J., 2017. Diversity ASX corporate governance recommendations: a step towards change?.Sustainability Accounting, Management and Policy Journal,8(3), pp.335-357. Sivathaasan, N., 2016. Corporate governance and leverage in Australia: A pitch.Journal of Accounting and Management Information Systems,15(4), pp.819-825. Tricker, R.B. and Tricker, R.I., 2015.Corporate governance: Principles, policies, and practices. Oxford University Press, USA. Xu, S., How, J. and Verhoeven, P., 2015. Corporate governance and private placement issuance in Australia.Accounting Finance.