Advice for The Wire Ltd in Relation to the Procedure in the Transfer of Equipment and Shares - Essay Example

RE: ON THE WIRE LTD OTW OPINION INTRODUCTION I have been asked to advise On the Wire Ltd OTW in relation to the procedure followed in the transfer of equipment and shares when Alex ceased to be a director of the company. I am asked to advise as to whether there was an irregularity in the procedure followed and if so, whether OTW needs to take any steps to remedy such irregularity. 2. I have also been asked to advise OTW in relation to the removal of Daniel, a director, who has ceased involvement in the company and has indicated that he, does not want any involvement with the company. I am asked to advise on the steps OTW can take to remove Daniel as a director and force the transfer of his shares. 3. I have also been asked to advise OTW in relation to a contract it entered into with BKD another company where Daniel was also a majority shareholder and director but without the knowledge of OTW. I am asked to advise on whether there was any irregularity in the contract and if so what should be done about it. FACTS 4. OTW is a private company limited by shares formed in 2010 by five individuals; Daniel, Umar, Janet and Zainab. The shares of the company are owned equally and each shareholder was issued with 6 ordinary shares of £1 each. Each shareholder paid £10,000 for his shares - £1666. 67 per share. Each of the individuals was also a director of the company. 5. In 2013, two of the individuals stopped any active involvement in OTW. They decided that in their opinion, the company was not going to succeed. The remaining three individuals are still hopeful that in the short to medium term, OTW will become profitable. 6. The first individual to leave the company was Alex who had sold some equipment to the company when it was formed. The equipment was bought at the price of £8,000 which was its market price. OTW sold the equipment back to Alex at a price £8,000 when he left. The transaction regarding the equipment is noted in board minutes, but no other paperwork exists in respect of it. 7. The Articles of Association of OTW are the Model Articles as amended by a special resolution. 8. The amended articles provide that where a person ceases to be a director, any shares that he holds are to be offered for sale to the company and the other shareholders at a price calculated using the net asset value of the company. 9. The net asset value of OTW on its most recent accounts is £46,850. Article 26A of the company’s articles provides that the company’s shares are to be sold at a transfer price, which is the net assets of the company indicated in the last audited accounts divided by the number of ordinary shares. 10. When Alex left, he signed a resignation letter and his shares were bought by Umar, Janet and Zainab for £1561. 66 per share. Umar, Janet and Zainab bought two shares each. 11. Stock transfer forms were signed and stamped and the register of members and transfers was written up to reflect the transfer. Existing share certificates were handed in and cancelled and new certificates issued. 12. The Articles of Association of OTW provide that on a person ceasing to be a director, if the company does not buy his shares back, there must be an ordinary resolution passed to approve any transfers of the leaver’s shares. 13. The second individual to leave OTW, Daniel, informed the meeting attended by all the directors that he no longer wished to be involved with the Company. He declined to sign a resignation letter or stock transfer forms at the meeting, but agreed that he would discuss this further with the Company. 14. His last active involvement was in November 2012. Since then he has had no involvement except that he did attend the board meeting referred to above. Since then, he has not responded to any attempts to contact him. 15. On November 2012, OTW entered into a contract for the production of a prototype of its product with a company called BK Design Ltd (“BKD”). Daniel introduced BKD to OTW and said that one of the designers there was a friend of his. 16. OTW has not been very happy with the work that BKD has carried out, but has paid the £1500 agreed contract price for the work. Subsequently OTW discovered that Daniel was actually a majority shareholder in and director of BKD. LIABILITY Alex Resignation of a director under Articles of association 17. The Model Articles are the default provisions that guide companies incorporated after 1 October 2009. Companies are however free to adopt, vary or exclude some or all provisions, but subject to the Companies Act 2006. 18. Article 18 (6) of the Model Articles provides that a person ceases to be a director as soon as that individual gives notice to the company that he or she is leaving office, such resignation takes effect in accordance with the companies terms. 19. Table A, Article 81 of the Model Articles provides that a director shall be vacated if he or she resigns his office by notice to the company. Transfer of shares and equipment from a resigning director 20. Section 544 of the Companies Act provides that the shares and other interests of any member in a company are transferable in accordance with its articles. The transfer is however subject to the Stock Transfer Act 1963, which allows for a simplified process of transferring certain securities, and regulations under Chapter 2 of Part 21 of the Companies Act, which facilitates evidencing and transfer of title to securities without a written instrument. 21. Article 26A (1) of the company’s articles of association provides that if a director ceases to hold office a notice (the “Transfer Notice”) shall be deemed to have been served by that director in respect of the shares that he holds. The Transfer Notice shall constitute an offer to sell the shares to the Company and/or to any other shareholders who wish to buy them at the Transfer Price per share. To the extent that the Company does not buy the Transfer Shares, the shareholders shall pass an Ordinary Resolution to approve any proposed share transfer of any of the other shareholders. 22. Section 1 (1) of the Stock Transfer Act 1963 provides that registered securities transferable under the Act may be transferred by means of a stock transfer form executed by the transferor only. Sub section (2) provides that execution of a stock transfer form need not be attested. 23. Section 770 of the companies Act 2006 stipulates that a company may not register a transfer of shares unless there is a proper instrument of the transfer or the transfer is an exempt within the Stock Transfer Act. 24. Article 8 (1) of the Model Article of association provide that a decision of the directors is taken in accordance with the article when all the eligible directors indicate a common view on a matter. 25. When Alex left, he signed a resignation letter. Stock transfer forms were also signed and stamped and the register of members and transfers was written up to reflect the transfer. Existing share certificates were handed in and cancelled and new certificates issued. 26. The directors of OTW unanimously resolved to sell back the equipment it had purchased from Alex at a price of £8000. 27. In my opinion the procedure followed by the transfer of shares was not irregular as it was within the meaning of section 544 of the Companies Act (see paragraph 20) and article 26a (1) of its articles of association (see paragraph 21). The resignation letter by Alex served as a transfer notice which gave notice to the company and its shareholders of the offer to sell the shares. A stock transfer forms were also signed in accordance with section 1 (1) of the Stock Transfer Act (see paragraph 22) and subsequently registered as required by section 770 of the companies Act (see paragraph 23). 28. In relation to the transfer of equipment it is my view that the transfer was a unanimous resolution of the directors of OTW and therefore there was no irregularity in the transfer discussed in paragraph 24 above. Daniel Removal of a director by an ordinary resolution 29. Section 168 (1) of the Companies Act provides that a company may remove a director by an ordinary resolution before the expiry of his period notwithstanding any agreement between the company and the director. A special notice is required to pass a resolution to remove a director. However, this requirement is not to be taken as derogating from any existing powers to remove the director. 30. According to Section 282 of the Act an ordinary resolution means a resolution passed by a simple majority. Since a special notice is required to pass an ordinary resolution, notice should be given at least 28 days before the meeting. 31. The power to remove a director by an ordinary resolution cannot be excluded by a company’s articles of association, but it can be avoided where its articles contain a provision which gives the director being removed an enhanced voting right if the director is also a shareholder. Removal of a director under the articles of association 32. Article 18 of the Model Articles provides that an individual ceases to be a director of a company as a result of the provisions of the Companies Act. Article 81 provides that the office of the director shall be vacated when the individual resigns his office. 33. The articles of OTW include a provision on any shareholding resolution to remove a director and provides that the shares of the director being removed shall carry a number of votes equal to 51% of the total votes cast in that resolution. 34. It is my view that the provision set out in paragraph 33 prevents the removal of a director by an ordinary resolution and therefore Daniel cannot be removed by an ordinary resolution, discussed in paragraph 29 above. An ordinary resolution is sufficient to remove a director and such resolution requires a simple majority of votes during a resolution. This simple majority cannot be attained because Daniel has a simple majority of the votes. 35. In conclusion, I consider that the prospects of the company removing Daniel as a director through its articles or the companies Act are minimal and the company should try to communicate with Daniel and negotiate with him to sign the resignation letter and the stock transfer form. Amendment of the company’s articles of association 36. The Model Articles are the default provisions that guide companies incorporated after 1 October 2009 (see paragraph 7). Companies are however free to adopt, vary or exclude some or all the provisions, but subject to the provisions of the Companies Act 2006. 37. Section 21 of the Companies Act provides that a company may amend its articles by a special resolution. A special resolution is defined by section 238 of the Act to mean a resolution that is passed by a majority of not less than 75%. A special resolution also requires the notice for the meeting to pass the resolution as a special resolution. 38. Shareholders may amend a company’s constitution by the required majority (see paragraph 37 above) so long as the amendment is legitimate for the benefit of the company as a whole (Allen v Gold Reefs of West Africa Ltd, [182]). This provision is given a wide interpretation and is applicable to situations where an amendment benefits all shareholders while only negatively affecting one individual (Greenhalgh v Arderne Cinemas Ltd, [183]). 39. In my opinion Daniel can only be removed after amending the article discussed at paragraph 33. The amendment can be attained by a special resolution, which will require at least 75% of the votes in the resolution outlined in paragraph 37 above. 40. It is in my view probable that the amendment of the articles of the company by a special resolution can be achieved since the other directors possess shares that can give them a collective majority of over the 75 % required in paragraph 37 above. The directors, each have a total of 8 shares which brings their aggregate total to 24 against Daniels 6 shares. BKD Duties of directors 41. The duties of directors are set out in part 10, chapter 2 of the Companies Act. Among the general duties of a director is the duty to avoid conflicts of interest. Section 175 (1) of the Act provides that a director must avoid a situation which he can obtain a direct or an indirect interest that conflicts or is likely to conflict with the interests of the company. This duty applies to the exploitation of information, property or opportunities by the directors. 42. Section 177 of the Act provides that where a director is directly or indirectly interested in a transaction or arrangement with the company he must declare the nature and intent of his interest. The declaration of interest must be made before the company enters into the transaction. Section 182 also provides that the declaration of interest must be made at a meeting of directors, in a written notice or a general notice. Breach of duty 43. Section 178 of the Act provides that the consequences of breach of the director’s general duties are similar to the corresponding common law rules or equitable principles applied. These duties are enforceable in a similar manner as any other fiduciary duties owed to a company by its directors. 44. Failure to declare interest in a transaction is also an offence. Section 183 provides that an individual who fails to declare an interest in a transaction is liable upon conviction or indictment to a fine or on summary conviction, a fine not more than the statutory maximum. 45. There appears to be a clear breach of the duties of the director arising from the transaction with BKD. Daniel owed a general duty to avoid conflicts of interest and he breached this duty when the contract was entered into because he had a direct interest in the contract. Daniel also failed to declare the interest in the contract. 46. In my view, when directors are on both sides of a transaction, it is a default requirement that they declare the interest to the company, so that the disinterested directors can approve the deal (Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461) 47. It is my opinion that the breach of duty by Daniel amounts to a breach of the contract entered into between OTW and BKD. Where a director enters into a transaction with the company there is a conflict of interest between his interests to gain as much as possible out of the transaction and his duty to ensure that the company gains as much as possible from the transaction and this duty must be applied strictly (Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461). REMEDIES 48. The transaction regarding the transfer of shares and equipment was done according to regulation, see paragraph 20-28 above, and the company does not need to take any steps to remedy the transactions. 49. The company should negotiate with Daniel to resign as director of the company. The company will need to persuade Daniel to transfer his shares to the company or the other shareholders. Where such negotiation does not yield the desired results the company can opt to amend its constitution as discussed in paragraph 36-40 above. Such amendment will enable the company to force Daniel to resign as director and force the transfer of his shares. 50. With respect to the contract between OTW and BKD it is apparent that Daniel breached his duty and the remedies available to the company for the breach include actions to disgorge profits arising out of the transaction. The company can also bring a criminal action where a self-dealing transaction has already occurred which is subject to a £5000 fine see paragraph 44. NEXT STEPS Further information 51. I would request the company to notify Companies house of the resignation of its director. It is the responsibility of the company to inform the Companies House of the resignation of a director. 52. If Daniel is not willing to resign the company should give a notice for a special resolution to amend its constitution subject to paragraph 36-40. Procedure 53. The company should file form TM01 with the company’s house. The company should also update its statutory register to reflect the changes in its directors. 54. The company should call for a special resolution by giving notice of the resolution 28 days in advance of the meeting. The resolution should be called to amend the company’s constitution as discussed in paragraph 36-40 above. CONCLUSION 55. In conclusion, I advise OTW that the transaction regarding the transfer of shares and equipment from Alex following his resignation was done according to regulation and the company does not need to take any steps to remedy the transfer. 56. I also advise the company that it is unlikely to remove Daniel as a director through the companies Act or its articles and it should negotiate with him to resign. Where the negotiations cannot be accomplished the company should amend its articles to facilitate his removal and transfer of his shares. 57. In respect to the transaction between OTW and BKD I advise the company to bring an action to force Daniel to disgorge the profits he made out of the transaction and also bring a claim against him for failure to disclose an interest in a transaction. 58. Should those instructing me require any further assistance with this case they should not hesitate to contact me. Dated Sign Read More