Tender Offers and Stockholder Returns - Essay Example

?BUSINESS LAW Introduction The case study at hand touches on two major aspects of business law, which are director’s role and shareholders and their rights. This is because the directors of Kings plc have taken a corporate action and decision, which Mary and Joseph are seeking legal advice on if they are within the jurisdiction of the directors in relation to their duties as directors. The issue of shareholders and their rights come in because Mary and Joseph are seeking this explanatory memorandum in their capacities as shareholders of the company, who have a feeling that they have been treated unfairly. In the present explanatory memorandum, one major public UK regulation is going to be used, which is the Companies Act 2006. This is selected because it contains very relevant explanations and outlines of how directors and shareholders are expected to relate towards the collective success of their companies. Several UK case laws are also going to be analysed in such a way that by the end of the discussions, Mary and Joseph would clearly identify areas of legal liability in the conduct of their directors and areas where no legal liabilities exist. Directors’ Duty Duty owed to the company and not individual shareholders First, it is important for Mary and Joseph to realise that prior to CA 2006, the directors owe their duty to the company as a body and not to individual shareholders of the company. However, it has been explained earlier that the company is only an artificial person, who must be represented by natural people. Mary and Joseph could therefore direct their actions in such ways that they are either seen as individual shareholders fighting for their interest in the company or as members of the company as a body1. By implication, any questions and legal redress that Mary and Joseph seek must be one that is sought in accordance to the collective interest of the company and not one that is seen as a battle over their individual parts of the shares that were traded off in the sale of the subsidiary company2. In Heron International Ltd v Lord Grade (1983), it was held that the directors of the company owed duties to their company members in the case of the takeover bid. This judgement was made possible because how the position taken by the petitioners, not as interested parties in the takeover but as constitute members of the company. Similarly, in Percival v Wright (1902), it was held that the director of the directors in some instances owe fiduciary duties to individual shareholders of the company. By further implication, how a petitioner positions him or herself in cases against the adjudication of the duties of directos is very important in determining what the outcome of the petition would be3. Mary and Joseph will therefore be advised to position their selves as constitute members of the company rather than as interested parties in the acquisition because of the directors’ duty is owed to the company and not to individual shareholders4. Power to issue shares Further advice given to Mary and Joseph would bother on the power that the directors of the company have to issue shares. It would be noted that s 171 CA 2006, which touches on the duty of directors to act within powers clearly outlines the powers given to the directors to exercise powers for the purposes for which they are conferred5. As part of the powers, given by most companies to their directors also, there is the power for the issuance of shares where directors have the right to issue shares that they deem as acts profitable ventures for the company6. In effect, the argument of Mary and Joseph cannot be against the mere issuance of shares in the acquisition process of the subsidiary firm. The acquisition of the subsidiary company through the issuance of shares could easily be justified by the directors through their power to issue shares if the purpose for the formation of the subsidiary company had finished serving its roles7. In Hogg v Cramphorn Ltd (1967), it was held that the directors of the company could not be charged for any wrong doing for the mere fact that they issued the sale of shares and eventually owned greater part of the shares8. However in Extrasure Travel Insurances Ltd v Scattergood (2003), it was held by the High Court that the claimants did not have an obligation to prove that the directors of the company were being dishonest with the trading of shares9. This was a responsibility that was left with the court to ascertain. What this implies is that the approach that Mary and Joseph take towards the fact that the directors issued the sale of shares is very important. It will be advised that as much as possible, accusations of wrong doing in the issuance of shares should be a decision that should be left to the court to take.10. Duty to promote the success of the company Regardless of the powers of the directors discussed above, which somewhat seem to give them so much room to operate based on discretional qualities, it would be observed that under s 172 of CA 2006, directors are mandated by law to have a duty of promoting the success of the company. This means that the promotion of the success and wellbeing of the company should always and at ever point in time supersede the promotion of the personal interest of the directors11. In effect, in the issuance of shares and performance of any fiscal business transactions must be undertaken in a spirit that fosters company success and development12. In Bishopsgate Investment Management Ltd v Maxwell (No 2) [1993], it was held that the director of the company, Ian Maxwell was liable for the losses in the value of the shares that were traded not because Ian Maxwell was negligent in the processing of the issuance of shares but because there was evidence of misapplication of assets13. What this judgement implies is that the mere fact that the directors of a company may have some level of duty to issue shares does not mean their actions should amount to misapplication of assets and for that matter, amount to any action that demotes the success of the company. The premise of this judgement however leaves a responsibility to Mary and Joseph to prove in the court of competent jurisdiction that the decision of the directors to sale the subsidiary company and the manner in which the acquisition was done amounted to moves that demoted the success of Kings plc. Duty to avoid conflicts of interest The issue of conflict of interest is an important and popular in UK business law because it sets the basis and tone for which several actions of directors of various companies may be judged as either being for the interest of their companies or for their personal interests14. Having noted that regardless of all the powers held by directors of Kings plc to take decision on acquisition and issuance of shares the directors also have a responsibility of promoting the success of the company, a very likely law that could be levelled against them if the latter is not fulfilled is conflict of interest. Under s 175 of CA 2006, it is required that “A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.” In the current circumstance where the parties in the purchase of the sales for the subsidiary company were the directors of Kings plc on one hand and shareholders of Kings plc representing the company on the other hand, all other legal tussles should be focused on finding prove of acts and actions of the directors that might have influenced or constituted conflict of interest15. Assessing if there is Conflict of Interest Assessing whether a practice or conduct amounts to conflict of interest is not very easy. To know for sure if a practice put up by a director amount to conflict of interest, there are some key considerations that must be made. In the first place, it is said that an act of conflict of interest has taken place if a director “owe separate duties to act in the best interests of two or more clients in relation to the same or related matters”16. The regulation continues to stress that such interest and duties must conflict, or have a significant risk that those duties may conflict17. In the case of Mary and Joseph therefore, charges of conflict of interest can be levelled against the directors only under a circumstance where there is enough evidence that by purchasing larger shares in the subsidiary company, they are going to use their interest in the subsidiary company to act against the success of Kings plc18. In Regal (Hastings) Ltd v Gulliver [1942], it was held that the directors used their position to influence shareholders to gain more votes to approve their action. In effect, if the directors of Kings plc are having higher shares in the subsidiary company than other shareholders because of the influence they had over the shareholders, then conflict of interest applies in this case. The second instance of conflict of interest is where “your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests”19. The legal basis that this provision gives is that it is not always that conflict of interest must directly involve the director20. Rather, there could still be a case of conflict of interest if the director works through a third party or an agent and the action carried out by the third party poses significant risk that may conflict with regular business activity. It is for this reason that even for a director to keep personal profits, the director must have the backing of a General Meeting and not just a vote by the Board of Directors because it is suspected that the director may be acting on behalf of someone among the board. This instance was exhibited in Cook v Deeks (1916) when it was held that the resolution that had already been taken by the general meeting could not be validated because the director who was seeking use of profits controlled the voting in the general meeting. Conclusion and Remedies In conclusion, it will be stated that as far as the right form subsidiary companies and issue shares thereafter is concerned, the directors have a legal backing to the action they took because it is part of their duties21. This notwithstanding, there could be some levels of evidence levelled against them to object to the approach they took towards the purchase of shares by themselves and the solicitor of the company. The evidence is directed at accusing the directors of conflict of interest because they used their positions to gain greater portions of the shares available. In comparison to the larger company of Kings plc as an entity, the welfare of the directors has been promoted instead of the welfare of the company. In accordance with the above, a court of competent jurisdiction may involve remedies prescribed in sect 2 of company directors disqualification act 1986 to sanction the directors to a maximum period of 15 years of disqualification. REFERENCES LAWS AND LEGISLATIONS Companies Acts 2006 CASE LAWS Heron International Ltd v Lord Grade [1983] BCLC 244 Percival v Wright [1902] 2 Ch 421 Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598 Hogg v Cramphorn Ltd [1967] CH 254 Bishopsgate Investment Management Ltd v Maxwell (No 2) [1993] BCLC 814 Regal (Hastings) Ltd v Gulliver [1942] 1 AC 554 Cook v Deeks (1916) 1 AC 554 CITED WORKS Akhigbe A. and Madura J. 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