MBA

LAW 418908
FINAL EXAMINATION TERM 3 2011

Date: Wednesday, Monday 22 June 2011 Time Allowed: 3 hours plus 10 minutes reading for the paper. Items allowed on your desk for this examination:
Pen Hubbard, J, Thomas, C & Varnham, S. (2010). Principles of Law for New Zealand Business Students. (4e), Auckland: Pearson. Course materials as supplied in the course folder only with students own annotations on the pages supplied. One extra A4 page (2 sides) of printed or handwritten notes.

Instructions:
1. 2. 3. 4. 5. 6. 7. Candidates must not write during the reading time. All questions are compulsory and should be attempted. Use blue or black pen only. No dictionaries (of any sort) are allowed. The marks allocated to each part of the question are indicated in brackets. Extra exam paper is available from your exam supervisor. Please print your Student ID number and full name on the front page and every page of the blue answer booklet and on each additional sheet of paper used. 8. Start each question on a new page in the blue answer booklet provided. 9. Candidates should support their answers with appropriate references where possible. 10. Please follow all instructions on the blue answer booklet.

Exam Summary:
Section 1.Report One 2.Report Two TOTAL: Marks 40 40 80 Suggested Time 90 90 180

Millwheel Bakeries Ltd (Millwheel) is a privately owned bread and ingredients manufacturer based in Tirau. Millwheels principal shareholders, John Barleycorn and Tina Grain have built the business up from a small town bakery to an enterprise operating throughout the North Island. The Barleycorn-Grain children, Jessica and Anthony also each have a 10% shareholding. Millwheel manufactures bread, small goods, pizza bases, frozen goods and biscuits. Most of the bread and biscuits are sold under the Millwheel brand, but it also produces bread and biscuits that are sold under house branding in supermarkets and service stations. Millwheel has also diversified into distributing a variety of fine food products under the Village Market brand. This gourmet foods division is managed by Anthony who is very keen to expand operations to include more local produce. Anthony would like to set up retail stores under the Village Market marque specialising in local delicatessen. Millwheel is reluctant to start a new venture in the current economic climate but Anthony is very keen to go ahead and persuades the Board to trial one store in Parnell. He suggests asking his godfather, Tim Mallory, to take a 1% equity stake in Millwheel in return for covering the set up costs for the store. Tim asks to see Millwheels annual accounts, which have just been audited by Johns old school friend, Geoffrey, who is now a local chartered accountant in Tirau. Tim asks Anthony a few questions and agrees to the deal. The fit-out of the premises is to be done by Envirospace Ltd (Envirospace) in time for the grand opening on September 15th. Tim explains that this is a trial venture, with a large promotions budget and stresses how important it is that everything runs to time. Not a problem, says the Envirospace office administrator. You know we always do great work for you guys! Envirospace has previously done office fit-outs for Millwheel providing all the layout and lighting concepts, signage design and other interior decor features and Millwheel has come to rely on it promptly completing the brief with feasible, practical but elegant designs. The usual procedure is for an Envirospace consultant to visit the premises and email the general specifications for the project. These are then printed out, signed and emailed back before work begins. The design work is usually completed within a month and Envirospace can then sort out the logistics to get a fit-out completed as required. However, Millwheel is not aware that Envirospaces foundation shareholders have sold out to an international company which is looking to increase returns on its investment. When the general specifications for the Millwheel project are emailed as usual, they are signed and returned without much examination. A month later when the designs have not arrived, Millwheel contacts Envirospace and is dismayed to find that nothing is ready. But surely you read the specifications, says Bruce, the Envirospace manager. Millwheel is informed that priority work now attracts a 50% premium and that both time and price specifications were expressed as estimates only. Design work could be ready to be confirmed in three weeks time at the premium price. Envirospace are

rapidly running out of time to have the Millwheel fit-out completed for September 15th. The high New Zealand dollar also tempts Anthony to consider exporting local delicatessen products. One of the Village Market branded products is excellent quality farmed venison and Anthony wants to promote this at an international Food Fair to be held in conjunction with the Rugby World Cup. Millwheel takes a stall at the fair and Anthony decides that sizzling barbequed venison kebabs are just the thing to entice the punters and secure some overseas contracts. He decides to select the barbeques to use at the Food Fair himself, thinking that he might keep one of them to use at home later. He looks at the Outdoor Adventure Store website and decides that the Rugged Extra model would be very suitable. The website blurb reads: Total reliability. When our armed forces needed outdoor cookware in East Timor and the Solomons they couldnt go past the Rugged Extra BBQ. Combat test it yourself! Anthony takes his Millwheel credit card into the downtown Outdoor Adventure Store and buys three Rugged Extra BBQs. John and Tina are considering retirement plans. Their succession planning includes the following options provided by their usual business consultant but John sees difficulties with each one. Option One: Sell all shares presently in John and Tinas names to Jessica and Anthony. The difficulties that John sees in this include the fact that Jessica is a traditionalist who loves baking and wants to expand into speciality bread production, while Anthony has different priorities. Neither of the children would be able to raise enough capital to buy John and Tina out. In addition, John would be sad to lose touch with the company and remains confident that it will continue to need his experience and participation for many years to come. Option 2: Hold onto the shares but create and issue more shares to the Chief Financial Officer and the Operations Manager, both of whom have been with the company for years. These two people (Teresa and Rod) have both expressed their willingness and ability to raise the capital necessary to each purchase 5% each of the total shares. John has concerns that this deal would begin the process of removing control of the company from the family. Option 3: Sell the Millwheel brand and baking operations to the large Australasian food enterprise Bonchap Paddock Ltd (Bonchap). Bonchap is listed on both the Australian and New Zealand stock exchanges and is involved in the manufacture and supply of a wide range of ingredients and food products. Its New Zealand bakery and flour mill operations include a range of well known bread brands and flour mills situated in Mount Maunganui and Christchurch. The proposed sale would mean that Millwheel would need to rename the company and rebrand its operations. It would generate sufficient capital to buy back enough of John and Tinas shareholding for them to retire, and provide investment to expand Village Market and to set up a speciality breads operation.

And consideration of Option Three is complicated by an unresolved issue arising from Anthonys visit to an Olive Festival on Waiheke Island. This celebration of local olive and olive oil production is an annual event attended by many of the local growers in the region and their customers, as well as local residents, gourmands and tourists. At this years festival there is considerable discussion about how speciality imports of olive oil by large corporations like Bonchap are restricting the market for local produce. There is a suggestion that speciality and fine food businesses should only distribute NZ olive oils to support the local industry in these difficult times and that they should refuse to distribute high quality imported olive oil. It appears that Anthony may have gone along with this proposal by indicating that Village Market would only distribute NZ sourced olive oil. Bonchap has complained to the Commerce Commission and the issue is currently under investigation. To add to Millwheels woes, the Food Fair is a total disaster. One of the Rugged Extra BBQs malfunctions and in the blustery, harbour front conditions one whole pavilion of the food fair catches fire. Millwheel makes no export sales and loses the large bond paid to the Food Fair organisers when the stall was hired. Envirospace have worked hard but it is still not certain that the Village Market store in Parnell will be ready for its grand opening. And Johns old school friend Geoffrey suffers a serious heart attack and the auditing of the annual accounts has to be undertaken by a large Auckland accounting firm. Serious discrepancies are found in the accounts which Geoffrey has not picked up and it appears that the Millwheel shares may not be so valuable after all.........

Millwheel Bakeries Ltd seeks your advice. You are required to report to the Millwheel Board on several issues: REPORT ONE: Provide independent advice to the Board on the succession planning options provided by Millwheels usual business consultant. In particular identify the legal implications of these options and advise Millwheel of its position. Include consideration of Bonchaps complaint to the Commerce Commission in your advice. REPORT TWO: Advise as to the legal implications of Anthonys ventures into retailing and exporting. Consider who may be liable and for what in the following situations and advise as to legal and practical options available: The delays faced in organising the fit-out of the store by Envirospace Losses resulting from the BBQ malfunction and fire at the Food Fair The auditing oversights which have not detected serious discrepancies in the annual accounts.