A Company Law Problem Scenario

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Table of Contents Introduction Facts in the Scenario Identification of the Legal Issues Arising From the Facts in the Scenario Identification and Application of Appropriate Legislation or Case Law Conclusion Bibliography In Advising Jane Introduction Company law primarily discourses certain major sets of fundamentals that are integral in the structure of large companies. These principles mainly arise amid the management and the shareholder, majority shareholders and minority shareholder, and the controller of the company and the non-shareholder. Among these principles, it is widely prevalent that a company often suffers from the disputes between the shareholders. It is commonly believed that minority shareholders have to abide by the will of majority shareholders. It has been observed that protecting minority shareholders within the scope of corporate activity has emerged as one of the most difficult issues in the modern company law. However, there are certain legislations and rules articulated under common law which ensure the adequate protection of minority shareholders. Furthermore, there has been constant debate on the issues related with the exercise of director’s power. It has often been argued that directors of the company apply their power for proper purpose and in the best interest of the company. However, there are certain instances where directors rendering their fiduciary duty can be considered to violate certain specific laws. Correspondingly, this study intends to address the issue of related with the legal protection for minority shareholders and directors fiduciary duty pertaining to the case provided. Moreover, the study further intends to provide relevant advice to Jane.[1] Facts in the Scenario It has been observed from this case that directors of Wolf Toys Limited are allocated with powers to issue shares in their absolute discretion in such quantity and at such value as they shall determine under the company’s Article of Association. Notably, Tom and Ben the two directors of the company, is observed to hold 51% of the total company’s shares while Jane, the other director possessed 10% of the total shares. Tom and Ben who hold the majority of shares of the company decided to expand the business by buying another company which is involved in making soft toys. This decision was reached due to the continuing decline in soft toy market. However, Jane who holds 10% of the total shares disagree with this decision of Tom and Ben on the ground that this decision would not be in the best interest of the company and it would lead to disaster. Later, Tom and Ben discover a successful firm that had been involved in making of teddy bears but due to the insufficient fund availability within the company, it was not possible to make immediate bid for the firm. Thus, both Tom and Ben issued shares and placed it to known supporters to raise fund. This eventually led towards reducing the power of Jane Subsequently, a general meeting was called in which a resolution was passed resulting in dismissal of Jane as a director. At the same time, a special resolution was passed by Tom and Ben along with the consent of the supporters in which certain provisions articulated in the article were deleted. Owing to this reason Jane’s right towards attaining compensation and selling of her shares were restricted.[2] Identification of the Legal Issues Arising From the Facts in the Scenario It is apparent from the facts identified in the above scenario that there are certain pertinent legal issues. In this regard, one of the most vital issues can be identified in the form of abuse of majority shareholder position exercised against the minority shareholders interest. Another issue can be identified as the exercise of power by the directors holding majority of shares for an improper purpose depriving rights of other director holding minimum shares. It can be ascertained from the case that Tom and Ben along with other shareholders passed a special resolution with the intention to secure control of the company and discourage and restrict Jane from interfering in the issue related to proceeding bids. This issue can be identified to have emerged solely for acquiring directors benefits rather meeting the interest of the company. Moreover, breach of director’s duty can be identified in relation to issuing shares to acquire majority support for their side in an internal power struggle. It can be recognised from the case scenario that Tom and Ben have issued shares to known supporters in order to wrest the power and control from Jane. Furthermore, the allotment of share by Tom and Ben to known supporters was made with the intention to execute possible takeover bid. Correspondingly, such action of Tom and Ben can be considered as improper exercise of their power. It is worth mentioning that director’s power related with issue of shares is a fiduciary duty. This implies that directors are required to act as bonafide in what they consider to be in the best interest of the company and in good faith while their action should not be intended towards attaining collateral benefits or purposes. How, it is apparent from the case that the two directors namely Tom and Ben exercised their fiduciary power just to wrest the control from Jane and acquire funding. Thus, it can be firmly stated that there was a breach of fiduciary duty of directors.[3]that directors must remain within the scope of the powers which have been conferred upon them, that directors must act in good faith to promote the success of the company, that directors must exercise independent judgment, and directors must not put themselves in a position in which their personal interest or duties to other conflict with their duty to the company. It is clear that Tom and Ben have breached their fiduciary duties. The damage for breach of fiduciary duty is based on tort principle this was established in the case of Cohen v.Selby. (a) Return of property a director has received in breach of duty, (b) confiscation of account or profits a director has made as a result of breach of duty, (c) rescission of contracts made in breach of duty, (d) equitable compensation. Jane can claim for damages from Tom and Ben based on this principle. Identification and Application of Appropriate Legislation and Case Law The United Kingdom has incorporated codified statement related with the duties of directors under the companies Act 2006. The sections 171 to 177 articulated in the Companies Act 2006 specify the general duties of directors. These general duties are based on the rules incorporated in the common law. These general rules are to be applied on an equitable basis. Furthermore, the section 172 (1) of the Companies Act 2006 requires that directors are obligated to act in the way that they consider to be good faith which will stimulate the success of the company and the other members. Thus, it can be stated that Tom and Ben concerning the issue of shares has breached the terms articulated under the section 172 (1) of the Companies Act 2006. Thus, it is suggested to Jane to proceed with criminal prosecution on the ground of breach of fiduciary duty articulated in section 172 (1) of the company Act 2006. However, it is worth mentioning that it would be quite a difficult task for Jane to prove that the action of Tom and Ben was associated with the breach of fiduciary duty as the Articles of Association of Wolf Toys Limited give the directors power to issue shares in their absolute discretion in such quantity and at such value as they determine, In this regard, Jane can seek for derivative action under the Companies Act 2006. According the Companies Act 2006, it permits majority shareholders to remove directors from his/her position as a director of the company. It would thus be difficult for Jane to prove that the directors including Tom and Ben along with other shareholder did not act in good faith. This was illustrated in the case of Bushell v Faith (1970) AC 1099. Jane can seek for derivative claim by alleging breach of any of the general duties related with directors set out in the Companies Act 2006 comprising duty to apply skill and reasonable care based on their best of knowledge that would benefit the company.[4] Moreover, under section 994 (1) of the companies Act 2006, Jane can apply for unfair prejudice petitions in order to seek remedies. It can be ascertained that in the case study provided there has been a significant breach of fiduciary duty by the two directors namely Tom and Ben which has been witnessed. Correspondingly, the breach of fiduciary duty can be viewed in relation to misuse of director’s power to issue of shares. It can be argued that directors are required to use their fiduciary power for proper purpose which implies that any decision or rendering of duty by directors ought to be in the best interest of the company and it needs to be delivered in good faith. In this regard, it can be stated that the issue of shares is one of the major ways of acquiring fund for the company’s operation. This activity of the directors is one of the important fiduciary duties performed by the directors. The other proper purpose of executing the power of directors can be observed in the form of fostering the desirable business relationship with the other directors and members of the company for ensuring adequate enhancement of the financial performance of the company. On the other hand, improper purpose for issue of shares generally involves executing or defeating takeover, attaining control of a company by allotting share to known supporters in order to wrest control of other directors or shareholders and prevention of interest of unfriendly directors. Thus, it can be observed from the case provided that a majority of the stated improper purposes were executed by Tom and Ben. Similar issues have been identified in the case of Howard Smith Ltd v Ampol Petroleum Ltd, where it was observed that the directors used their fiduciary power related with allotment of shares in order to weaken the voting power of the majority shareholder. With regard to this case, judgement was made that such actions of the directors related with the exercise of fiduciary power can be attributed to the aspect of improper purpose and was self-motivated. It was firmly stated that directors were motivated by self-interest that was to acquire complete control over the company. On hearing, Lordships affirmed that unconstitutional for directors to use their fiduciary powers over shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. Correspondingly, based on this case law, it can be suggested to Jane that the action executed by Tom and Ben is unconstitutional, Jane has the right to sue both the directors against the breach of fiduciary power and loss of office. Similarly, in the case of Ngurli Ltd v McCann, it was ascertained that the directors issued shares to friends for the purpose of maintaining their position of control which result in breach of fiduciary duty. Concerning this case, judgment was passed by the high court where the court ruled that a director cannot use the fiduciary power to issue shares at self-interest to the exclusion of minority shareholder. Based on this judgment made by the high Court, it is advised that Jane holds the right to sue Tom and Ben against the issue of share to known supporters and there was an exclusion experienced by her, due to the special resolution passed by majority shareholders. Tom and Ben is also in breach of standard articles of association 2008 Schedule 1 for deleting the provision in the articles which entitled Jane to compensation..[5] In the case of Hogg v Cramphorn Ltd it was observed that the directors issued shares to trustees with the self-motive of destroying the takeover and retaining the control of the company’s board. In this case. Plaintiff claimed that the issue of share was invalid and directors were involved in the violation of their fiduciary power. In the trial, the court declared that this issue of share by the shareholders was invalid and ordered for conducting a meeting for rectifying the issues of shares. Based on this case law, it can be affirmed that Jane has the right to undertake legal actions against Tom and Ben and can seek for equitable relief. Conclusion Several important aspects have been observed from the analysis of this case. It is noteworthy that the two directors namely Tom and Ben had issued shares to known supporter in order to wrest the control from Jane. Furthermore, they had used their fiduciary power with the self-motive which can be categorised as the breach of fiduciary duty under the section 171 to 177 of the companies Act 2006 which firmly seeks that directors are required to execute their fiduciary power in good faith and for proper purpose. In this regard, Jane has the right to file a petition on the ground that the execution of fiduciary duty by Tom and Ben in terms of issue of shares was invalid and was against the duties articulated in the Companies Act 2006. Similar cases where judgment was delivered in favour of the plaintiff have also been identified. Thus, based on this case law, Jane can seek equitable relief and derivative claim against the damage or loss incurred by her; she is also entitle to compensation for loss of office due to action of Tom and Ben. Bibliography 1. Table of Cases Cohen v Selby (2000) All ER Bushell v Faith (1970) AC 1099 Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 Ngurli Ltd v McCann (1953) 90 CLR 425 Hogg v Cramphorn Ltd (1967) Ch 254 2. Table of Legislation Companies Act 2006 Companies Act (2006) Directors Duties Section 171-177 Section 172 (1) companies Act (2006) Section 994 (1) companies Act (2006) Section 195 companies Act (2006) Standard Articles of Association (2008) Schedule 1 3. Books
[1] Paul L Davies, The Board Directors: Composition, Structure, Duties and Powers (Core Company Law and principal/Agent Problems, 2000) www.oecd.org/daf/ca/corporategovernanceprinciples/1857291.pdf Accessed 12 January 2011 [2] Carr Law, Rights of minority shareholders (Business-Incorporation-Organization-And-Operation, 2014) www.carrlaw.com/business-incorporation-organisation-and-operation/rights-of-minority-shareholders accessed 12 January 2014 Jinlong Zhao and Si Lv, On Fiduciary Duties of Controlling Shareholders of Targeted Corporation,(2011) 4 (2) Journal of Politics and Law www.ccsenet.org/journal accessed 20 January 2014 [3]3 company act 2006,directors duties Company act 2006 S.178 breach of directors duties Cohen v. Selby (200) ALL ER Section.195 companies act 2006 [4] Companies Act 2006 Director duties section 171 to 177 companies act 2006 Section 172 (1) companies act 2006 Breach of fiduciary duty Bushell v Faith (1970) AC 1099 Section 994 (1) companies act 2006 [5] Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC821 Ngurli Ltd v McCann (1953) 90 CLR 425 at 438 Articles of association (2008) sch 1 Hogg v Cramphorn Ltd (1967) Ch 254
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