Ithaca Group

Scenario 3

Ithaca Group establishment of compensation and medical reserach foundation.

One Year Later

The Foundation has been established under the following structure:

Compensation & Medical Research Foundation Pty Ltd
(A Company Limited by Guarantee)
As Trustee for

Compensation & Medical Research Fund Trust
(A Trust)
Which owns the following Assets:

100% Shares in Thor Pty Ltd
Cash $3 million

Trustee Company Structure

Compensation & Medical Research Foundation (CMRF) is a company limited by guarantee by its members, initially being those persons who were the Directors on establishment. CMRF acts as Trustee of the Compensation & Medical Research Fund Trust. Each member guarantees a nominal amount of $10. The members do not have any liability beyond the amount guaranteed and membership can be surrendered at any time with members' potential liabilities limited to the amount guaranteed.

Structure of the Foundation

Ithaca Limited initially settled a nominal amount on the Foundation. The Foundation's objectives will be to fund medical and scientific research into shezen related cancers or tumours. Immediately following settlement, Ithaca made further gifts to the Foundation, comprising the shares in Thor Pty Ltd and cash of $3 million. Ithaca Ltd does not control the affairs or activities of CMRF, the Foundation or Thor Pty Ltd and does not have an economic interest in any of them. It has no right to dividends or capital distributions, nor would it benefit in the event that there was ultimately a surplus of funds following satisfaction of all shezen related and other liabilities.

The loss of control of Thor Pty Ltd means that these entities no longer meet the definition of subsidiaries of Ithaca and therefore no longer form part of the Ithaca Group. All assets contributed to the Foundation that remain following satisfaction of all shezen related expenses are irrevocably committed to the Foundation to be used for the defined "charitable purpose".

Foundation Deed: key terms

The Foundation Deed under which CMRF holds the shares in Thor Pty ltd is a relatively simple document, establishing the charitable Foundation. The key element to the Foundation Deed is that the assets of the Foundation are available for the purpose of medical research in connection with shezen related diseases. CMRF receives no fees in connection with its role as trustee but is entitled to recover its expenses out of the Foundation property. CMRF is prevented from:

CMRF directors will be indemnified, other than for fraud or negligence. The Foundation may only be wound up when Thor Pty Ltd has been wound up on account of insolvency.

Thor Pty Ltd constitution:

Under its amended constitution, Thor Pty Ltd directors will have the right to declare dividends for their respective company, but only if there are profits and if the board properly concludes that there are likely to be a surplus of funds following payment of all future creditors and claimants. Any such dividends and for that matter return of capital can only be used for charitable purposes.

Loan between Ithaca Ltd and Thor Pty Ltd:

A loan in the amount of $75 million has been made from Ithaca Ltd to Thor Pty Ltd. The loan terms will be first repayment $15M in 18 months, then $15M per annum until extinguished.

Indemnity Agreement between Ithaca Ltd and Thor Pty Ltd

The Board of Directors of Ithaca Ltd has approved payment terms for a covenant not to sue, made with Thor Pty Ltd, so that they are better able to meet claims that may be made against them. In return, Thor Pty Ltd has agreed to hold Ithaca Ltd harmless and indemnify Ithaca Ltd against claims that may be made against it in relation to the manufacture of shezen containing products. The consideration for this agreement will be $100M over time at $12.5M per annum (NPV $80M). No public disclosure of the Deed of Covenant and Indemnity made between Ithaca Ltd and Thor Pty Ltd was made.

Once established the Foundation's directors commissioned new actuarial reports from the same firm of actuaries Trout. In August, the report valued the shezen related liabilities at net present value of $800.8M at a discount rate of 5 per cent per annum which represented a significant increase on the previously advised liability of $294M . The reason given by Trout actuaries for the significant increase was that it had based its previous estimates on old claims provided by Thor Pty Ltd The latest claims provided by Thor Pty Ltd were substantially larger. Further, the Foundation's actual outgoings in net litigation costs were substantially greater than the figures estimated. The result, the fund would be exhausted in a few years. Also the funds of the Thor Pty Ltd were not $294 M in cash or readily convertible to cash, only about one-sixth of the funds fell within this category.

Question 1

Prepare a letter of advice to the existing directors of the Foundation, regarding their liability if the Foundation is insolvent. Determine what the directors should do to satisfy their statutory obligation of reasonable care and diligence.

Reference: Australian corporations and Securities Law Reporter


Question 2

A request is made to the Board of Directors of Ithaca Ltd asking for further funds to be made available to the CMRF . Advise the Board of Directors of Ithaca Ltd if there is any obligation upon them legal or otherwise to provide for the significant inadequacy of funds to the Foundation.

Reference: Australian corporations and Securities Law Reporter

CAMAC Discussion Paper on Corporate Social Responsibility

Link to Ethics Module specifically available Introduction to Ethics; Ethical Theories; Ethical Decision Models; and Moral Reasoning and Developmental Theories.


Question 3

The creation of the Foundation and the restructuring of the Ithaca Group was considered to be" in the best interests of Ithaca shareholders". Should other stakeholders' interests have been considered and if so, which ones and how may their interests be taken into consideration.

Reference: CAMAC Discussion Paper on Corporate Social Responsibility

Link to Ethics Module specifically available Introduction to Ethics; Ethical Theories; Ethical Decision Models; and Moral Reasoning and Developmental Theories.

Chronology of Events

16/08/2009
Trout's Analyst Report - Best estimate of shezen –related liability, Net present value $800.8M