The Fawlty Towers Hotel Group - Essay Example

Introduction As per the details given the Fawlty towers hotel group is a private owned business. The shares are owned by four individuals of the samefamily. They are not responsible to anybody, unless if they have any debts on the guarantee of the company. If they have any thing like that they are answerable to those persons, organizations, banks who/which financed the partners of the company /for the company. As those details were not mentioned in the conditions given, it was supposed that the company of Basil is not having any encumbrances regarding financial transactions. As no partner of the company is holding 51% of the shares in the company any decision should taken by majority. If all the three other than basil are on one side then it will be the majority. If Basil gets support of any on of the remaining three, then these two can be termed as majority according to the shares they hold. Company Law Element 1: Now let us discuss about the possibilities of the transactions Basil want to do. He was holding 40% of the share in the company and wishes to retain as much capital as possible from it with out disturbing its financial structure and security. This implies that he was not willing to retain his investment from the cash reserves of the company or by disposing the assets held by the company. Moreover he needs another person to support his decision of selling his shares. As his wife Sybil is holding 20% shares and was in support of his decision he gets majority of 60% share holding for the proposed disinvestment. Now the question lies in the manner the deal to be followed. There is no obstacle for the disinvestment of 15% of the shares as his wife is willing to buy them by paying half of the amount from her own savings and other by taking loan from the company or from the bank. Here also the practicality and legality lies between these two persons only. The company is a private owned firm, the buying of shares in that company involves the inquiry of encumbrances by the buyer. As the buyer is a partner of the company she must be aware of the financial status of the company. Despite being like that, still if there is a need to advice on that we have to consider, then it is the financial status of the company. It was mentioned that Sybil was planning to take loan from the company or from bank on the company guarantee. This proves that the company is having strong fundamentals, which involve sufficient cash reserves along with fixed and current assets dominating short term and long term liabilities. So the hurdles regarding financial matters were cleared. Sybil can acquire 15% of the shares from Basil with one half by her own savings and the other half by a loan from the company or from the Bank. The decision needs approval of share holders holding at least 51% of the company's shares. As both Basil and Sybil are together holding 60% of the shares it can be approved with no objections. (If objections are there from the other two partners, they cannot be considered as these two constitute the majority of the share holdings). Element 2: This element seems to face some obstacles in completing. Rose Mary wants to buy further 5% of the shares from Basil on a condition that in two years the company should buy all of her shares, which may amount to 25% of the total shares. This needs the approval of all the share holders of the company or a majority of them. Here again, Basil and Rosemary constitute majority share holding to take a decision. But Basil is keen on not disturbing the financial structure of the company. Within two years if the company is not having enough cash reserves ( as Rose Mary wants) to buy the Rose Mary's share, which constitutes 25% of the total value of the company (the holding of her if she buys further 5% from Basil's shares), the financial structure of the company will be disturbed and that was against the wish of Basil in case of his disinvestment. This may not be possible because after distributing the profits to the partners there may not be enough cash to buy the 25% of the Rosemary's shares as she wishes. This makes the company to sell some fixed assets which is against the will of Basil. Though Basil wishes to disinvest his amount from the company he may not agree for this proposal. So Rosemary's proposal requires the consent of the Basil. If he agrees to the proposal it may take shape as he and rosemary constitute 60% of the holding of the company. While analyzing the element 2 it was assumed that the transactions of Basil with Sybil and Rosemary were done simultaneously and before the transaction, Basil holds 40% share in the company. If the transaction between Basil and Rosemary takes place after the transaction between Basil and Sybil was over, then Basil was left with only 25% of the company's shares and if he wants to accept the proposal of Rosemary he needs support either from Sybil or Coriander, who can make his decision a majority. Now let us consider that Basil is not willing to sell 5% of the company's share to Rosemary out of 25% he holds. Here the execution of transaction depends on the support Rosemary gets from Sybil and Coriander. If she gets support from Sybil, the decision will be majority as they two constitute 55% of the company's share. If Sybil is not willing to the proposal then the support Rosemary gets from Coriander is of no use as it is not a majority decision as they both hold only 40% of the company's shares. If Basil wants to sell his shares to rosemary with out the consent of Sybil then the support of coriander is also necessary as Basil, Rosemary and coriander constitute 65% of the company's shares, which is a majority. Element 3: This element seems to have more obstacles either practically or legally. When practical problems are taken into consideration, the employees' share scheme with the remaining 20% of the shares Basil holds needs the support of Sybil or Rosemary. Though Basil was willing to the proposal he and coriander constitute only 40% share of the company which is not enough to take a policy decision. If Basil executes transactions all at a once, that is he holds 40% of shares the time of taking decision and for every proposal he just needs support of the share holder who proposed it. If this context is considered, he needs only support of coriander to create employees' share scheme, which benefits sincere employees. Basil wants that the financial structure of the company should not be disturbed due to his disinvestment. If the creation of employees' share scheme will not disturb the financial structure of the company, he should not have any objections regarding the deal. When other context is considered, that is by the time of dealing with coriander's proposal if Basil completed transactions of Sybil and Rosemary then he holds only 20% of the shares of the company and he and coriander do not have enough majority to take a decision. They need support of either Sybil or Rosemary to execute the transaction. An important obstacle for the proposal involved in element 3 is not only from the board of the directors but also from the side of the employees as they are involved in the deal. This deal contains the clause that 20% of the Basil's shares must be transferred on the name of the employees. But Basil may not agree to this proposal as it disturbs the financial structure of the company if the money was paid to Basil from the company's reserves not from employees' kitty. But there is another way to transfer the 20% shares on the name of employees. It is to sell those 20% of the shares to the employees instead of transferring the share to them and thus by converting the company into a public limited. This increases the stake of employees in the company but it demands the payment from employees to buy the shares. Until now all the dealings can be dealt within the board of directors only, but this proposal seeks the employees consent also as they have to pay from their earnings or from savings to buy the shares. As Basil is not in agreement to disturb the financial structure of the company this proposal of collecting cash from the employees is compulsory to create an employees' share scheme. Now the scene involves two parties; board of directors comprising of Basil, Sybil, Rosemary and coriander on one side and the employees on other side. As it was not a public limited company the board of directors has full right to take a decision about the shares they want to sell and buy. But they cannot decide on the behalf of the employees as they have full right to spend the money and savings earned by them. This involves discussions between board of directors and the employees' representatives to make employees agree to buy the shares of the company. Some of the employees may be in agreement with the directors to buy the shares, but majority of them may not be in a position to agree with the board's decision as the employees mind set is to be risk free. They are the followers of the decisions taken but not the decision makers. So they try to avoid risk. To make them agree to buy the shares the board of directors must assure the representatives of the employees that the company distributes the profits to employees in a transparent manner and the employees are not made responsible for any loss incurred due to the decision taken by the board of directors as they constitute the majority. Generally employees want a risk free income. The share in the company gives share in the profit apart from the salary. They may fear that the company in order to decrease the benefits of the increments and allowances is planning to introduce the scheme. So the onus is on the board of directors to assure the employees that other salaried benefits are not affected by the creation of employees' share scheme. Another legal tangle involved in the process is that the selling (not transfer of shares) of shares to employees changes the status of the company from private entity to a public limited which will be responsible to all the shareholders. Moreover according to the pros and cons discussed above it seems to be a compulsion that employees share scheme needs employees' money to transfer (sell) shares to them. The company may not be in a position to just transfer the shares without a selling as it affects the financial structure of the company. So the proposal needs the majority decision from the side of board of directors to change the company from a private owned property to public limited, because after the proposals the number of non employee share holders are just 3 and employees holding the shares will be more in number though less in share holding. The proposal can only take shape after the four of the partners agree to change the company to a public limited. The legal problems regarding the proposals and elements mentioned in the task involve only practical problems as the company is having no encumbrances or loans to be paid. (They are not mentioned in the task given to analyze). So the majority decisions by the directors will play the major role in deciding the course of transactions. When all the elements are considered from the Basil's point of view he may have objections regarding the rosemary proposal only. The proposal involves the buying of 25% of the shares by the company within two years of Basil's disinvestment. This proposal may face resistance from Basil himself as he does not want to disturb the financial structure of the company. The buying of 25% of the shares within two years is financial burden for the company as Sybil's deal already involves taking loan from the company to buy 7.5% percent shares by her. If it is a loan from a bank on company's guarantee then the company may be in a position to mobilize funds to buy out Rosemary out of her share. But if Sybil takes loan from the company to buy 15% shares from Basil, the financial position of the company may not be in a position to mobilize cash for buying out 25% of shares within two years. References: The referencing was done in the following manner. Name of the author, year or date of publishing, title of publication, publisher, edition information if available, type of media, date retrieved, name of the website. 1. Bureau of Business line, Nov 2005, SCI employees seek shares at discount, Business Line, ,electronic, 26-08-06, http://www.thehindubusinessline.com/2005/11/18/stories/2005111803490100.htm 2. Special correspondent of The Hindu, 2006, Shares to be allotted to NLC employees, The Hindu, , electronic, 26-08-06, http://www.thehindu.com/2006/07/04/stories/2006070406970100.htm 3. Media Wiki, 2006, Owner ship, Wikipedia the free encyclopedia, , electronic, 26-08-06, http://en.wikipedia.org/wiki/Owner 4. Michael D. Seagal, 2006, Buying a Business, Michael D. Seagal Professional corporation, ,electronic, 26-08-06, http://www.mdsegal.ca/questions.htm Read More