Exclusive Contract with Megabit Consultancy Ltd - Case Study Example

Company Law COMPANY LAW Titus Rock Manickam Order No. 285933 13 April 2009 COMPANY LAW Larry's consultancy service has proved expensive and Sam and Paul have signed a new exclusive contract with Megabit Consultancy Ltd. Larry is a minority shareholder in Averno Ltd. Larry also provides information technology consultancy to Averno Ltd in accordance with the company's Articles of Association. However, recently Sam and Paul have signed a new exclusive contract with Megabit Consultancy Ltd since Larry's consultancy service has proved expensive. There is no mention if Larry's consultancy has or has not proved beneficial to the business. The company accommodated Larry as information technology consultant on the basis of its Articles of Association. In order to change this position, Sam and Paul must first make an amendment to this effect in its Articles of Association by a special resolution. They do not appear to have done this. Perhaps the company is on the look out for better information from concept to delivery. Whatever may be the reason, Sam and Paul, as majority shareholders, are not using the right way of handling business situations. The action against Larry cannot be seen in isolation because other minority shareholders, that is, Carl, Mark and Jennifer too have their own problems with Sam and Paul. Thus, there is the possibility that the action against Larry is just a tip in the iceberg of Sam and Paul's strong-arm policy aimed at disciplinary measures or removal of the minority shareholders. Sam and Paul have also not talked to Larry and given him the opportunity to explain his position. Sam and Paul have simply come to the conclusion that it is not possible to carry on with Larry because his service has proved expensive. Hence, in Sam and Paul's view, the company has to discontinue with Larry's services. Nonetheless, Averno Ltd is an established corporation. A corporation is described as a person in a political capacity created by law, to endure perpetually. For non-binding external actions or transactions, corporations enjoy the same latitude as private individuals. But it is in the internal affairs that one sees advantage or disadvantages in the corporation. Sam and Paul's actions do not appear to augur well for Averno. Larry now has the legal option to file a suit as minority shareholder in accordance with the rule in Foss versus Harbottle (A summary of the law on minority shareholder protection) Under the case of Foss versus Harbottle, Larry can file a suit as representing Averno Ltd and carry the case to its logical end. There appears to be undue haste on the part of Sam and Paul to have signed an exclusive contract with Megabit Consultancy Ltd. In the first place, they have not adhered to the important provision of its Articles of Association. Secondly, they have placed themselves precariously in a situation where they could be jumping from the proverbial frying pan into the fire. There is no mention about Megabit's rates. Obviously, their rates are attractive as compared to Larry's rates. Nonetheless, the fact that Larry is a shareholder in Averno does not seem to have made any impression on Sam and Paul. It is pertinent to note that Sam and Paul ought to have signed up with Megabit after consulting Larry. There is a clause in the Articles of Association that mentions Larry is the consultant for information technology in Averno. Sam and Paul ought to suitably amend this clause after calling a special meeting. If the company means business and wants to excel in the sphere of information technology be it networking, web designing, databases, maintenance, application, projects, or procurement, then it must follow the rules and ensure that the relevant point is amended in its Articles of Association (ITC - The Information Technology Consultancy). Sam and Paul must call a meeting of the board and have a special resolution passed to the effect that Larry's services are not needed anymore. It remains to be seen how they wish to induct Megabit. They may pass another resolution that Megabit is the new consultant, or they may choose to handle the selection of consultant on the basis of their own finding (Companies Act 2006). Sam and Paul wish to reduce the annual bonus payable to the marketing manager to two per cent of the profits Averno's Articles of Association has a clause to the effect that the marketing manager must receive annual bonus equivalent to 5% of the company's profit. If Sam and Paul wish to reduce this amount, they must call a meeting of the shareholders and have special resolution passed to the effect. Averno is bound to pay the marketing manager the bonus amount irrespective of this clause not appearing in the contract. Bonus is an important decision and the marketing manager is vital component of the organization whose motivation in achieving high targets is spurred because of bonus. It is mandatory on the company part to honor its own clause in the Articles of Association. Nevertheless, it can modify the clause after raising the point in a shareholders' meet. Carl as the marketing manager is also the shareholder in Averno. There are four alternatives before Carl. If Sam and Paul go ahead with the move and have the resolution passed to reduce the bonus to two percent, Carl can resign from the job and sell his shares to Sam and Paul or anyone else. Or he can resign his job and prefer not to sell his shares. Or he can stay on and accept the reduced bonus. Or he can stay on the job and file a suit challenging the move. Sam and Paul are not too inclined on raising their shares ratio. They are not ready to buy Jennifer's share. They may not be ready to buy Carl's shares either. In the event Sam and Paul do not buy Carl's shares, Carl may move the court on the same ground as Larry. Carl can cite the case of Foss versus Harbottle as the example and file a suit on behalf of the Averno as minority shareholder. Sam and Paul are reneging on the Articles of Association clause that clearly mentions that if any member wishes to transfer his/her share, he or she shall offer them to the directors who will take them at a fair price. In the event Sam and Paul agree on buying Carl's share, it will not impact Carl's determination to seek justice on the issue of bonus. However, he may not be able to cite the case of Foss versus Harbottle and he will have to fight the case as an aggrieved employee. Nevertheless, there is also a clause in the Articles of Association where it is mentioned that any dispute between the company and its members shall be referred to arbitration. Hence, before taking the matter to court, Carl can refer the matter to arbitration. There is no mention of the selection process of the arbitration. However, the provision for arbitration is there. As such, Carl's first approach must be the arbitration. In the event he is not satisfied with the outcome, he can approach the court. The bonus is an invigorating and intrinsic barometer of the marketing manager's performance. The company is dealing in a product that has assumed global characteristics and its applications are used worldwide. The company must aim at paying remunerations that match the best in the industry in order to attract the best talents. Undoubtedly, the company is new and it may not be possible to pay high salaries and bonuses right away. But it must encourage achievers by making compensations and allowances whenever and wherever necessary. Good manpower is a high stake in information technology companies. The company can ill-afford to be tagged as poor paymasters (Classification of Costs as Product or Period Costs under Absorption and Variable Costing). Mark has recently become a director in Caltech Ltd, whose principal business is also IT installations for retail trade. Sam and Paul intend to get rid of Mark. They call an EGM to insert a provision in the company's article allowing the directors to require any shareholder whose statements or conduct is, in their opinion detrimental to the company's future prosperity to transfer his or her shares to the directors at a fair price. Mark is a shareholder in Averno Ltd. As a shareholder, he has little to do with the company's activities except attend the annual general meetings and extraordinary general meetings that may be called from time to time. A shareholder does not hold any prominent position in the company where he has invested his money. He can only attend general meetings such as the annual general meeting or extraordinary general meeting that may be called from time to time. As a minority shareholder, Mark, on his own, cannot do anything without the backing of other shareholders. The Articles of Association of Averno does not forbid its members from taking up directorship or any other assignment with any firm outside Averno. Nonetheless, Mark's activities as director in Caltech may be detrimental to the interests of Averno. Caltech is a competitor and Sam and Paul are justified in their reservations about Mark and their decision to call an EGM to insert a provision in the company's Article of Association allowing directors to require any shareholder whose statements or conduct is in their opinion detrimental to the company's future prosperity to transfer his or her shares to the directors at fair price. Mark's position as director in Caltech can put Averno at a disadvantage in the event of a competition. There is the possibility of Mark using his position as shareholder to undermine Averno's interests by various means. Simply put, Mark is a persona non grata to Averno as long as he is director in Caltech. As director of Caltech, Mark's statements from time to time may appear to be challenging and not in the best interest of Averno. There may also be times when he may want to know how decisions are taken at Averno in case there is a conflict of interest between Averno and Caltech. As shareholder in Averno, Mark has the right to place an item on the agenda for an annual general meeting. He has the right to circulate a written statement. He has the right to refuse to consent to short notice. Mark holds 10% of the company's share. So his powers are limited to the extent of the shares he holds. His holding is not sufficient enough for Mark to become a trouble maker, although his moves may cause concern (Private Limited Companies). Nevertheless, as shareholder, Mark enjoys certain privileges. In order that these privileges do not prove to be detrimental to Averno, Sam and Paul are interested in having Mark sell his share to the directors at fair price. Jennifer desperately needs money and decides to sell her shares. She offers them to Sam and Paul who refuse to buy them As per the provisions of law, when a member wishes to sell her shares, she will have to complete and sign a stock transfer form, which she will then pass to the buyer together with the share certificate representing the shares the seller is entitled to. Once the buyer has paid the stamp duty on the stock transfer form, she can send the share certificate together with the transfer form to the company for the name of the buyers to be entered in the company's register of members. The ability of a member of a company to transfer her shares to whomever she wants is governed by the articles of association of the company. The law does not restrict the transferability of fully-paid shares. However, it is common to find a special article in the company's article of association placing some restrictions on members wishing to transfer her shares (Private Limited Companies). The strict rights and entitlements that come with the ownership of shares in a company are seldom fully exploited or utilized by shareholders. This is because shareholders are generally unaware of the rights that they have simply by virtue of being a shareholder. Most company directors would be alarmed at the strict obligations that they have as regards the company's shareholders which include maintaining a Register of Directors/Secretaries, a Register of Shareholders, a Register of Director's Interest in shares, a Register of charges and minutes books. These must be kept open to inspection by shareholders (Rights of a Shareholder). In case Sam and Paul refuse to buy her shares, she can approach Larry, Carl or Mark. Or she can sell them to anyone else who is willing to buy them. She may not have problems selling off her shares. However, she may face hurdles in case there are provisions in the articles of association that stop her from selling her shares to any individual. In the case of Averno, if any member wishes to transfer his/her shares, he or she shall offer them to the directores who will take them at a fair price. Hence, Jennifer's first points of contact if she wants to sell her shares are the company directors. A member's shares in a company are transferable personal property. In a private company, however, there are some restrictions on transfer of shares. This restriction is normally implemented to refuse to register transfer of shares to a person of whom the directors do not approve. This is, of course, if the member has not offered her shares for sale to the existing members of the company (Shareholders' Statutory Pre-emption Rights). According to the articles of association of the company, in case Jennifer wishes to transfer her shares, she shall offer them to the directors who will take them at a fair price. Hence, there appears to be no reason why Sam and Paul have refused to buy Jennifer's shares. Normally, the majority shareholders work hard to build value and increase net worth. One of the quick ways to do this is to buy off minority shareholders. To have a minority shareholder who is not working hard means the majority shareholder's efforts benefit the minority shareholder which in this case is Jennifer. Also, Sam and Paul must be concerned about having more money in the business which translates to holding more shares in the business (Mary Hanson). It does appear that Sam and Paul are unduly harsh on Jennifer. Sam and Paul are running the company like partners rather than a private limited company with bona fide shareholders. Many small companies are regarded by law as "quasi partnerships." They are small partnerships of a limited number of individuals which although operating as a limited company, are in practical terms run as if they were a partnership firm. In such situation, the courts are more willing to give additional rights to minority shareholders in those companies (Shareholder Disputes). This appears to be a case where shareholder's personal rights are infringed. In such circumstances, a minority shareholder may sue the directors on behalf of the company, as otherwise no remedy would be available (A summary of the law on minority shareholder protection). In case Sam and Paul are steadfast in their refusal to accommodate Jennifer, she could take the matter to court. Prima facie, she will win the case. She may even receive the costs for filing the litigation. The articles of association make provision for transfer of shares to the directors. Sam and Paul have no authentic reason to refuse or block the sale of her shares by Jennifer. As per the provisions of the Articles of Association, Jennifer will have to refer the matter to arbitration. In all probability, she will get justice right at the arbitration level. Sources: A summary of the law on minority shareholder protection, http://www.companylawclub.co.uk/topics/faq170.htm Ayrshire Web Design, Information Technology Consultation; http://www.ahbsolutions.co.uk/ Classification of Costs as Product or Period Costs under Absorption and Variable Costing, http://www.pages.drexel.edu/'cpa22/Acct331/331HOCH9.pdf Companies Act 2006, ukpga_20060046_en.pdf Consultancy in Information Technology, http://www.rites.com/lookup/compsv.html Deore Consultancy Services, http://www.edeore.com/ ITC - The Information Technology Consultancy, http://www.theitconsultancy.com/webdesign.htm Mary Hanson, The Minority Shareholder, http://www.bizadvisor.com/Minority.htm Private Limited Companies, http://www.desktoplawyer.co.uk/dt/browse/law/index.cfm'fs=lgs&sid=75890 Rights of a Shareholder, http://www.shareholderrights.co.uk/rights_frameset.htm Robert Half Technology, www.roberthalftechnology.com/ Shareholder Disputes, http://www.shareholderrights.co.uk/disputes_nf.htm Shareholders' Statutory Pre-emption Rights, http://www.formacompany.ie/shareholders/pre-emption-rights.html Read More