DART Organics Ltd - Corporate Law - Coursework Example

?Solicitors Address Telephone Numbers Board of Directors DART Organics Ltd. Address Attention: CEO Dear CEO: Re: DART Organics Ltd Further to your instructions relative to the various issues confronting the board of directors in respect of the subject company please be advised as follows: A. Obtaining Further Investments and Types of Capital that can be Raised As a private company, DART may not raise capital by offering its shares to the public.1 The sale and transfer of DART’s shares are therefore subject to the Articles of Association.2 Regardless, since private company shares are not traded publically, the valuation and marketability of private company shares for the purpose of attracting investments and raising capital is not as straightforward as with publically listed companies who may publically list their shares. In this regard, DART will have to be valued as business or a company either or on the basis of “an individual block of shares”.3 For the most part accountants or courts will assess the value of the company on the basis of its profitability.4 Essentially, the shares in the company may be used to obtain further investments. Shares may be issues in excess of the nominal value in that they are issued at premium value.5 There are two basic types of capital relevant to attracting further investments and raising capital. The first type of capital is equity share capital which is raised by injecting capital into the company by virtue of increasing share value by profitability or by adding assets. The second type of capital is in the form of debentures in which shares are submitted as security for loans. In this regard debenture holders become creditors as opposed to members of the company.6 B. The Protection that Potential Lenders might seek over and above a Simple Loan Agreement There are several avenues of protection that potential lenders may use over and above a simple loan agreement. Lenders may insist on the security over the company’s assets either in whole or in part. This may be conducted by virtue of a fixed charge or a floating charge.7 A fixed charge is attached to specific assets and when an “event occurs” the charge crystalize.8 In other words, loans will be made based on security against a specific asset. Should DART fail to satisfy the terms of the loan agreement, the lender will have the right to take possession of the asset subject to the fixed charge. This limits the extent to which the company may deal with the asset subject to a fixed charge until such time as the loan is discharged. However, by virtue of a floating charge, the charge is for the most part treated as unsecured allowing the company to deal with the asset or assets to which the charge is attached as if it was not subject to a loan.9 In addition or as an alternative, lenders may insist on including a clause in the loan agreement allowing them to have a measure of control over the business transactions of the company. This kind of an arrangement involves an obligation on the part of corporate management to obtain the lender’s consent prior to conducting specific business transactions.10 There are other mechanisms that lenders may use that go beyond that which is typically characteristic of a simple loan agreement. One of these mechanisms is the attachment of larger than usual interest payments or the retention of title to an asset purchased by virtue of a loan until such time as the loan is discharged.11 Essentially, the various mechanisms of going beyond the simple loan agreement for additional lender protection are known as “creditor self-help”.12 C. If new ordinary shares were to be issued, to raise additional capital, the entitlement of each of the existing shareholders to these shares Ordinary shares confer upon the owner the right to dividends as well as voting entitlements.13 When a company contemplates issuing new ordinary shares it must first offer those shares to existing shareholders under the right of pre-emption.14 However, since the statutory provision prescribing pre-emptive rights of existing ordinary shareholders does not distinguish between the various classes of ordinary shareholders this means that the new ordinary shares must be offered to all ordinary shareholders and not merely those with preference shares.15 Moreover, existing holders of ordinary shares have a statutory right to be informed of the right of pre-emption.16 However, pre-emption rights may be precluded via the company’s Articles.17 Since DART used the model Articles for private company the right to exclusion of pre-emptive rights is not within the company’s mandate. The other escape mechanism is for the ordinary shareholders to give DART’s directors the right to avoid the pre-emptive obligations.18 D. Who, if anyone, is liable to pay for the new computers? David, a director of DART purportedly purchased a computer on behalf of DART at a time when according to the Company’s Registry, DART was not fully formed yet. Section 51 of the Companies Act 2006 resolves the issue as follows: A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.19 In other words both DART and David who is purporting to act on behalf of DART will be liable to pay for the computer. Whether or not David was authorised to enter into the contract is a matter for him and DART to resolve. For the purposes of the computer provider, both DART and David are liable to pay for the computer pursuant to Section 51 of the Companies Act 2006. E. Whether or not DART is bound by the agreement to supply the non-organic carrots DART’s Articles specifically states that: The activities of the company are restricted to the supply of organic fruit and organic vegetables to retailers and individual consumers. This is essentially an objects clause and as such constrains the power of the board of directors.20 In other words, DART’s directors may only conduct activities that involve the supply of organic fruit and vegetables to individual consumers and/or retailers. This is known as the doctrine of ultra vires.21 Ordinarily a company need not confine itself to the doctrine of ultra vires by restricting its objects.22 However, since DART chose to do so, they are guided by the doctrine of ultra vires.23 The fact is, directors have a statutory duty to comply with the company’s constitution and may therefore not rely on the unrestricted objects contained in the Companies Act 2006 by virtue of Section 31.24 DART’s board of directors agreed to provide Quick and EasyFoods Plc with non-organic carrots and this was subsequently approved at a board meeting where only Anna and David were present. The question is therefore whether or not the agreement was ultra vires the company’s object clause and whether or not the company is bound by the agreement to act ultra vires the company’s objects. At first glance it appears obvious that the agreement with Quick and Easy is ultra vires the company’s object clause and is thus void, excusing DART from the obligation to supply non-organic goods to Quick and Easy. However, it was held in in Rolled Steel Products (Holdings) Ltd. British Steel Corporation that ratification of a director’s or board’s transaction can waive any restriction on the powers of the directors provided it is lawful.25 Previously, this was not possible as any transaction that was ultra vires the company’s objects could not be subsequently ratified by the company’s shareholders.26 However, as evidenced by the decision in Rolled Steel, this is no longer the case provided the directors did not act outside of their respective fiduciary duties and the action was ratified by the shareholders in a meeting.27 The shareholders of the company are Anna, David, Ruth and Thomas with Thomas holding a majority of the shares. The agreement to supply Quick and Easy with non-organic fruit and vegetables was approved by all of the shareholders although it was ratified subsequently by only two shareholders at an ordinary meeting. It is therefore questionable whether or not the transaction was indeed ratified since it was not ratified by a majority of the shareholders. However, the ruling in Bell Houses Ltd v City Wall Properties Ltd. allows the courts a degree of flexibility in determining the extent to which the doctrine of ultra vires may be used to enable a company to escape liability to a third party.28 In Bell it was held that any clause within the company’s constitution allowing directors the discretion to conduct legitimate business transactions for the general good of the company’s business pursuant to other ancillary of complimentary clauses will not be regarded as ultra vires the company’s objects.29 It can therefore be argued that based on the model Articles adopted by DART there is a general power of the company to conduct business in general that will advance the company’s business and profitability. Thus the provision of organic fruit and vegetable may be construed loosely to include the incidental provision of non-organic vegetables and fruit for the improvement of the company’s profits. Therefore arguably, the transaction is not ultra vires and does not require formal ratification by the company’s shareholder particularly since it was previously approved by all of the shareholders in the first place acting in their capacities as directors of the company. It therefore follows that DART is bound by the agreement to provide Quick and Easy with the supply of non-organic fruit and vegetables. F. All the breaches of directors’ duty and other legal shortcomings arising from the facts Anna’s conduct gives rise to the issue of a breach of director’s duties. It is uncertain whether or not David’s conduct was in breach of director’s duties as it is not known whether or not he acted outside of his authority. However, it is entirely clear that Anna was in breach of the fiduciary duty imposed upon directors of companies. The House of Lords has made it abundantly clear that director’s fiduciary duties are strictly applied in terms of corporate opportunity tenets.30 In Regal (Hastings) v Gulliver and Ors it was held that corporate directors may not take advantage of a corporate opportunity because it was a breach of the director’s fiduciary duties to the company it served. The House of Lords ruled that a director may not take advantage of a corporate opportunity that the company itself would have been interested in and may not have taken advantage of that opportunity.31 Where it has emerged that a director took advantage of a corporate opportunity and realized profits as a result of that transaction, the director has a duty to account for those profits to the company. According to Russell, LJ, this equitable principle of fiduciary duties will be narrowly and strictly interpreted. Any person who by virtue of a fiduciary position used his or her fiduciary position to realize a personal profit, is “liable to account for that profit” and it makes no difference whatsoever, if the director acted fraudulently or acted “bona fides”.32 Russell LJ added that the duty to account for profits in such circumstances functioned irrespective of: questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances been made.33 Regal Hastings therefore established or rather confirmed that the duty of disclosure was an implicit duty within the duty of fiduciary responsibilities of directors. It was previously held in Ex Parte Lacey essentially established the implicit duty to disclose and explained that: Though you may see in a particular case, that the trustee has not made advantage, it is utterly impossible to examine upon satisfactory evidence in the power of the Court, by which I mean, in the power of the parties, in ninety-nine case out of a hundred, whether he has made advantage or not….if he chooses to deny it, how can the court try that against that denial.34 In Aberdeen Railway Co. v Blaikie Lord Cranworth elaborated that the rule relative to the duty of disclosure is predicated on the assumption that the director in a fiduciary position is not at liberty to “place himself in a situation to have his interests conflicting with that duty”.35 Sedley LJ subsequently ruled in Plus Group v Pyke that the duty of directors to avoid a conflict of interest was based on the assumption that: An objectionable position is not only one in which duty conflicts with interest but one in which duty conflicts with duty or interest with interest.36 The reality is, the law requires that directors look after the company’s interests. In Boulting v Assn of Cinematograph Television and Allied Technicians the Court of Appeal ruled that the duty to account for profits applies in an exhaustive list of circumstances.37 Ultimately, the fiduciary duty imposed upon directors requires that directors make business decisions and make business judgments in a way that safeguards the company’s welfare and the interest of all shareholders and a wider class of stakeholders. 38 Essentially, directors have a duty to promote the success of the company, for the benefit of the members of the company generally.39 Clearly Anna sought to promote her own success and did not promote the company’s success for the benefit of its members. It therefore follows that Anna is in breach of her fiduciary duties as a director of the DART and is accountable for any profits that she may have derived as a result of the diversion of company business in her direction. Had she obtained the consent of the other members she would not have breached her duty as a director of the company. G. Possible reasons why the Company Names Adjudicator has written to the company and whether the company is obliged to change its name. Pursuant to Section 69 of the Companies Act 2006 the Company Names Adjudicator may require a company change its name where that registered name: (i) That it is the same as a name associated with the applicant in which he has goodwill, or, (ii) That it is sufficiently similar to such a name that its use in the United Kingdom would be likely to mislead by suggesting a connection between the company and the applicant.40 In other words, a company or a trade name may have a registered or acquired brand or copyright investment in the name DART and wishes to protect that name and to prevent passing off by DART. Pursuant to Section 73 of the Companies Act 2006, DART is required to change its name and failure to do so will result in the Names adjudicator changing the company’s name for them.41 Thus it would appear that the only recourse for DART is to change its name or to appeal the decision to a court.42 However, the court might very well confirm the Names’ Adjudicator’s decision. It therefore follows that DART may wish to forego the expense of litigation and simply choose a new name to save time and money. H. The right of Thomas to receive dividends and return of capital on a winding up By virtue of Section 582 of the Companies Act 2006, shares are only looked upon as paid shares in a manner that corresponds with the receipt of money or like worth by the company. Thus any shortfall in terms of payment can only be realized at a future date and this is particularly so when the company become insolvent and goes into liquidation.43 Thus Thomas will not have a right to receive dividends and capital returns until such time as the company has capital representative of Thomas’s shares and dividend entitlements since the company is being wound up and has to wait for two years to realize investment returns. Thomas may not modify or agree to a discounted return in lieu of waiting for the investment returns.44 Moreover, a company may not pay dividends in cases where profits do not correspond with dividend payments. In such a case, the directors will be liable to repay the dividends to the company.45 To put it simply, dividends may only be paid out of profits.46 In other words, since the company is in liquidation or is being wound up, it can be assumed that the company has no profits at this time and the only profits that will be obtained by the company are tied up in investments that will not reap returns for at least two years. Thomas therefore has no other alternative but to wait for two years. We hope that the advice given in this letter has been helpful to you. If you have any further questions or need further clarification of any of the points made herein please do not hesitate to contact me via return mail or telephone to set up another appointment if necessary. Yours Sincerely Solicitor Partner. Bibliography Aberdeen Railway Co. v Blaikie (1854) 1 Macq 461. Ashbury Railway Carriage & Iron Co. Ltd. v Richer [1875] LR 7 HL 653. Bell Houses Ltd v City Wall Properties Ltd. [1966] 2 QB 656. Boulting v Assn of Cinematograph Television and Allied Technicians [1963] 2 QB 606. Cahn, A. and Donald, D.C. (2010). Comparative Company Law. Cambridge, UK: Cambridge University Press. Companies Act 2006. Davies, P. L. (2010). Introduction to Company Law. Oxford, UK: Oxford University Press. Ex parte Lacey (1802) 6 Ves 627. Hicks, A. and Goo, S. H. (2008). Cases and Material on Company Law. Oxford, UK: Oxford University Press. Naniwadekar, M. (2008). “Regal (Hastings) v Gulliver: An Equitable Principle Stretched too Far?” International Journal of Corporate Governance, 1(2): 197-206. Plus Group v Pyke [2002] EWCA Civ 370. Regal (Hastings) v Gulliver and Ors [1967] 2 AC 134. Re Exchange Banking Co. Flitcroft’s Case [1882] 21 CHD 519. Rolled Steel Products (Holdings) Ltd. British Steel Corporation [1986] Ch. 246. Sheikh, S. (2008). A Guide to the Companies Act, London, UK: Taylor and Francis. Slorach, J. S. and Ellis J. G. (2007). Business Law 2007-2008. Oxford, UK: Oxford University Press. Sealy, L. and Worthington, S. (2007). Cases and Materials in Company Law. Oxford, UK: Oxford University Press. Wood, P. R. (1995). International Loans, Bonds and Securities Regulations. London, UK: Sweet & Maxwell. Read More