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Q1) Angela, Brian and Kevin are directors of Carp Ltd, an engineering company. Together they make the following decisions:
- They order six new lathes from Grind Ltd. Grind Ltd pay Angela two thousand pounds commission on the order;
- they refuse an offer from Grind Ltd whereby Carp Ltd would enter into a contract to design a new lathe for Grind Ltd.
- Brian and Kevin use their combined voting power and refuse to allow Angela to vote on proposed changes to the articles
It is discovered later that Angela is also a director of Grind Ltd and that Kevin has resigned his directorship and formed a new company, ‘Sad Ltd,” which has obtained the contract to design the new lathe for Grind Ltd.
Q2) The articles of association of Benitez Ltd provide that, 'Carragher is to be Solicitor of the company for life.' The articles also state that, 'Any dispute between members of the company must be referred to arbitration.'
In June 2007 the directors decide that changes in the company are required and put forth the following proposals to the general meeting :-
- the removal of Carragher as solicitor of the company;
- alter the articles to allow the directors buy the shares of any member with less than 4% shareholding.
The following concern was also addressed at the meeting:
Fred and Bert are shareholders in the company but are in dispute with each other regarding a recent share issue. Bert is threatening to take Fred to court.
Advise the parties concerned.
Q3) Sajeela is engaged in the promotion of a company and she seeks your advice on several points relating to promotion activities.
You are required to advise on the following matters :-
- the restrictions upon the choice of corporate name with which a promoter must comply;
- the legal duties of a promoter in relation to the making of a secret profit;
- the problem for a promoter in obtaining payment for his services from the company once the company has been incorporated.
1. Angela receives 2000 pounds commission – Exception to Foss and Harbottle (Acts which are ultra vires).
This exception states that a gift (commission) cannot be given to a redundant employee from the company's assets. In this case, Angela is a director of both Carp Ltd. and Grind Ltd. So, she is a redundant employee and cannot receive gifts.
2. An order wherein Carp Ltd would have to design for Grind Ltd a new lathe was refused by the three directors of the former company – Exception to Foss and Harbottle (Fraud on the minority)
This exception states that any of the company directors cannot enter into a contract with a company using the information which was gained while working for that company. Here, Kevin resigned from directorship and created his own company, Sad Ltd that obtained the contract of designing the lathe for Grind Ltd. He refused this contract while being in the board of directors of Carp Ltd so that he can get the contract for his own company, Sad Ltd. Kevin used the information gained for this contract while working for Carp Ltd.
3. Refusal of Angela's working voting power on the proposed changes – Exception to Foss and Harbottle( Special majority needed)
This exception states that in order to alter an article, a two-third majority is required and is decided by a simple majority. Carp Ltd has three directors – Angela, Kevin and Brian. A two-third majority would any of the two directors agreeing to change the article amongst these three. This also states that any increase or decrease in members’ contribution should be agreed upon by the same majority. Here, Brian and Kevin decide to revoke the voting power of Angela to propose changes to the articles. They are not violating any law as they represent the two-third majority.
a. Removal of Carragher as the solicitor of the company – (Unfair prejudice) – Sec 994, Companies Act 2006
Any member can approach the court against the company if he feels that the company's affairs are conducted in an unfair manner for the personal interests of the members. In this case, the original article of association states that Carragher would be the company's solicitor for life. However, the directors are proposing to change this article so that they can appoint a solicitor of their choice. This will help them gain undue advantage and will be beneficial to them rather than for the company.
b) Alteration of articles so that the directors can buy shares from any member who has less than four percent shareholding (Protection of members from unfair prejudice – advice to shareholders)
This clause states that the directors of the company cannot force any of the minority shareholders to accept an offer for their own financial interest. In this particular case, the directors of Benitez Ltd wanted to alter the articles which would give them a financial advantage and greater rights by acquiring the shares of minority shareholders.
In the last part of this question, Fred is threatened by Bert that legal action will be taken against him on the basis of a recent dispute regarding share allotment. According to the articles of association of Benitez limited, “Any dispute between the members of the company must be referred to arbitration”. This clearly states that any dispute which may arise between the members of the company should always be resolved by arbitration and not through the court of justice. In this case, Bert is threatening Fred to take legal actions against him in the court. This is a clear violation of the articles of association.