Gowers Principles of Modern Company Law - Essay Example

Company Law Scenario: In the scenario provided, there are two separate aspects that must be taken into consideration: (a) Incorporation of Hippos Ltd as a corporation with the standard Articles of Association (Table A articles) (b) The separate agreement between the four directors of the Company in reference to purchases of land. The major legal issues that are raised in this case are governed by the Companies Act of 1985 and 1993. The Directors Remuneration regulations of 2002 may need to be considered, as also reforms being proposed under the New Companies Bill that will come into force in 2007. Additional legislation to be taken into account also includes the Employment Rights Act of 1996. The following are the issues to be considered: (a) Bonuses to directors while excluding Higbert (b) Purchase of a piece of land without Higbert’s mandatory consent (c) Proposed removal of Higbert as Director (d) Staff redundancy Bonuses and trip to New York: The first aspect that must be taken into account is that the four Directors are also the four major shareholders in Hippos Ltd, with each Director owning 25% of the shares. Therefore, allowing bonuses to the other Directors and marginalizing Higbert may be construed to be conduct that is prejudicial to Higbert’s interests. In this context, the case of Foss v Harbottle1 will be relevant, since it allows for the protection of minority shareholders within a Company and allows them to file suit against unfair conduct and a compromising of their interests. For example, in the case of Burland v Earle2 the issue under consideration was the allegation of the minority shareholders that fraud was being perpetrated on them, and those responsible for the fraud were the ones in control of the company. While Higbert may not be able to contest the manner in which he is being marginalized on the basis of fraud, he can certainly bring suit against the other Directors who are in control of the Company for conduct that is unfair to his interests as a shareholder and Director of the Company. In his position as a minority shareholder, Higbert can consider bringing a suit against the other three Directors under Section 459 of the Companies Act of 1985, requesting the Court to pass an order decreeing that the affairs of the Company “are being conducted or have been conducted in a manner which is unfairly prejudicial to its members generally or of some part of its members.”2 Higbert also satisfies the conditions necessary for a person to file under Section 459, i.e, (a) he is one of the shareholders affected by the prejudicial conduct and (b) action under Section 459 can also be taken for proposed unfair conduct. Section 459 of the Companies Act of 1985 was invoked in the following cases: Re R.A. Noble and Sons (Clothing Ltd)3 – in this case, the Company was founded as a quasi partnership, along similar lines as Hippos Ltd where the partners were also shareholders. One shareholder sued and won under Section 459, because he was excluded from the management. In effect, maginalizing Higbert also amounts to partial exclusion from the management of the Company and therefore this case may be successfully applied in Higbert’s case.. Other cases enforced by the Courts under Section 459 are Re Sam Weller and Sons Ltd4 where the Company’s failure to pay higher dividends to its shareholders was deemed to be prejudicial conduct. In the case of Scottish Cooperative Wholesale Society Ltd v Meyer5 the Company was owned by SCWS, Meyer and another, however SCWS held the majority of the shares. In connection with the operations of subsidiary enterprise, SCWS decided to divert control of the subsidiary operations to itself by making use of its majority voting shares, however the Courts held this to be unfair, prejudicial conduct. It may be noted that by marginalizing Higbert and his role in the operations of the Company, the other three Directors are performing in a similar manner as SCWS was found to act – appropriating to themselves the right to make decisions and take action without consulting Higbert by making use of their majority voting shares when combined. Therefore, this case could also apply and be relevant in the Courts arriving at a determination that Herbert has been treated unfairly and must be compensated. Furthermore, Section 317 of the Companies Act of 1985 also places on directors a statutory duty to reveal any interest, profit or financial advantage accruing to them by virtue of their position. The bonus amount of 20,000 pounds that each of the three Directors has appropriated could be contested under the new regulations that have been passed on remunerations for Directors of a Company and could be deemed to be a violation of their strict fiduciary obligation not to profit from their relationship with the Company.6 An attempt has been made to introduce increased regulation of Director incomes through the Directors Remuneration Report Regulations 2002. While existing listing rules already call for the listing of Director remuneration, this has now been made a statutory requirement under the amended Section 234 B of the Companies Act, with a new Schedule 7A that sets out detailed information that is to be included in the Directors Remuneration report.7 Closing of “coton’ sales office: Bearing in mind the fact that the Company proposes to close its Coton sales office in order to ‘save costs’ the fact that they have appropriated bonuses for themselves could be held to be further detrimental to the interests of other shareholders - namely Higbert -and may be contested on this basis. When the Company is trying to “save costs” is it justified for the Directors to claim bonuses for themselves? On this ground, Herbert may have an excellent chance to contest the bonuses that other Directors have received and the prejudicial nature of conduct meted out to him. Three staff members are being dismissed at the Coton office on grounds of compulsory redundancy. An employee who is dismissed shall be deemed to be dismissed for redundancy if the requirements of the business for the particular kind of work performed by the employee have ceased to exist.8 The Employment Rights Act also provides for redundancy as one of the fair reasons for dismissal.9 The test for redundancy was first set out by the Courts in the case of Safeway v Burrell10, wherein a three stage procedure was set out as follows: (a) was the employee dismissed? (b) whether the organization’s requirement for employees to carry out such work had diminished and (c) whether such diminution of work is the reason for dismissal. The House of Lords later confirmed this three way test in the case of Murray & Anor v Foyle Meats.11 Applying these criteria, it may be noted that the dismissal of the three employees on the grounds of redundancy may fail on one important count – the dimunition of work. It may be noted that Hippos Ltd is actually in the process of planning new acquisitions of land and the business continues to flourish and grow. Therefore it appears unlikely that a dimunition of the sales work that is being performed at the Coton office is actually the case, hence the employees may be able to contest their dismissal as being an unfair one. Furthermore, section 195(1) of the Trade Union and labor relations Consultation Act (1992) spells out the fact that dismissals due to redundancy are categorized as being “for a reason not related to the individual concerned.” It is possible that the three employees may be members of a Trade or workers Union of some kind, and although their number is only three, the reasons meted out for dismissal on grounds of redundancy must be fair and applicable, which does not appear to be the case with Hippos.An employer is required to consult with employees before their dismissal on grounds of redundancy. In the event that an employer fails to consult and inform employees about proposed dismissals on redundancy grounds, then this could hold them liable for claims of unfair dismissal, and this is what occurred in the case of Mugford v Milford Bank plc.12 A Company also needs to be extremely careful in its selection of employees for proposed dismissal. There are certain conditions under which a dismissal under redundancy will be automatically deemed to be unfair and may be liable for action. Some of these conditions are (a) redundancy is the primary reason for dismissal (b) while one employee is being dismissed on claims of redundancy, other employees in equivalent occupations are not being dismissed (c) the reason for redundancy is for reasons of maternity, pregnancy, dependant care. These are laid out under the Maternity and Parental leave Regulations 1999.13 Lastly, the employee’s membership or non membership in a Union cannot constitute grounds for dismissal under redundancy,14 just as trade recognition or de-recognition cannot constitute similar grounds for dismissal and will be deemed to be unfair.15 Moreover, if the mandatory consultation is not carried out by the employers, the Courts can also choose to grant a protective award of up to 90 days of gross pay for every employee that is affected, as was the case in Smith and Another v Cherry Lewis Ltd.16 Therefore, all these aspects must be taken into consideration by Hippos Ltd where the issue of dismissal of employee son grounds of redundancy is concerned. In view of the healthy financial position of the Company, such dismissals could be contested as unfair dismissal by the employees. Purchase of land without consent: In this instance, the separate agreement that has been drawn up between the four Directors will be called into play. It may be noted that this is in the nature of an agreement /contract between the four Directors and therefore its provisions may be fully enforceable in a Court of law, under all remedies provided under the law of contract. The agreement drawn up between the four Directors specifically states that no land is to be purchased without the “unanimous agreement of the four shareholders”. Since Higbert is opposed to this purchase, therefore it may be a violation and breach of contract if the other three shareholders try to override the terms of the contract and hold a meeting among themselves to go against the terms specifically set out.17 At the time the agreement between the four Directors was framed, the requirement of unanimity was seen to be necessary in purchase decisions and there exists no subsequent document or agreement which indicates that there has been any change formally effected in this position. Therefore, it will be this written document that will stand in a Court of law, since it clearly spells out the mandatory condition required for a purchase of land. Therefore, since the terms of this contract specifically require unanimity, the land adjoining the Trunk 14 road cannot be purchased with Higbert’s consent. In the event the other Directors purchase the land in contravention to the terms set out, they will be liable for breach of contract. Therefore Higbert may be able to contest the intent of the other three Directors to marginalize him and attempt to purchase the land without unanimous consent of all four directors. Dismissal of Higbert as director: A Director of a company does not have to be a natural person18 and directors are expected to act in the best interests of the Company.19 The decisions of the Directors are to be conditioned by their own judgment of what they consider to be best at the time the decision is made.20 Therefore, the question that arises is whether the other three Directors are justified in making the decision to secure the dismissal of Higbert as a Director, in view of the hindering of the Company’s goals and objectives, which are being supported by the other three Directors. In this context, the best way for the other three directors to secure a dismissal of Higbert would be by finding some grounds to require him to resign. A Director can resign any time, but he/she can only be removed by the shareholders.21 However, the question of whether Higbert’s actions could be deemed serious enough to require his resignation is in question. Higbert has the right to disagree with the decisions of the other shareholders and requiring him to resign on this basis may be unfair and prejudicial to his interests. In this case, it is the four directors who are the primary shareholders therefore the other three Directors do have the right to join together and vote for the removal of Higbert as Director. However, adequate reasons must be provided in support of such a removal and the nature of the Director’s failure to perform his duty must be sufficiently serious. For instance, the Director is considered as an agent and trustee of the Company under the law and therefore subject to the same standards of loyalty and good faith in his duties as that expected from trustees22 with a fiduciary duty to the shareholders.23 Therefore, if Higbert violates his fiduciary duty, he could be liable for removal. Lord Cranworth highlighted the unethical issue of being involved in transactions where there is a conflict of interest, such as that which exists in this case; “And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.”24 However, it may be argued that Higbert has in no way violated his fiduciary duties and is not liable to be dismissed or required to resign on these grounds.In the case of Re Kenyon Swansea Ltd, a petition was moved by one of the Directors under Section 459 of the Companies Act of 1985, claiming unfair prejudicial conduct and contesting his removal as a Director through the alteration of the Articles of the Company. The other directors moved to have the application quashed on the grounds that it did not show reasonable cause of action, however the Courts struck it down on the basis that removal of the Director could indeed constitute prejudicial action. Therefore this may be applied in the case of Higbert and his removal can be contested on the basis, as being a prejudicial act liable for action under Section 459 of the Companies Act of 1985. Conclusions: On the basis of the above, it may be noted that Higbert has excellent grounds to bring a cause of action against the other Directors for unfair or prejudicial conduct under Section 459 of the Companies Act. In his capacity as a minority shareholder, he can also contest his dismissal on the same grounds. Moreover, under the provisions of the Companies Bill that is proposed to be introduced in 2007, it will now be easier for minority shareholders to bring action against the directors of a corporation for fraud or compromising of their interests and the Courts will be required to entertain such actions. Therefore, Higbert’s position against the other Directors is strengthened by the new provisions that will soon come into place. However, it must also be noted that if the other Directors can demonstrate a sufficient cause of action to show that Higbert’s disagreements with the Company policy are proving to be detrimental to the Company’s interests or seriously compromising them, he can be removed through a majority vote of the shareholders who are the directors in this case. But in view of the fact that it is the other Directors who appear to be guilty to a higher degree of conduct that is not in the fiduciary interest of the Company, i.e, by allowing themselves bonuses and by compromising the interests of employees by seeking dismissals on grounds of redundancy, their motion to dismiss Higbert may not hold good. Moreover, the purchase of land is in direct violation of the terms of the agreement between the four Directors, an agreement which has not been superseded, and therefore it is unlikely that they will be able to push through the purchase of the land despite Higbert’s objections. His proposed dismissal may also be held to be in violation of the Companies Act, since adequate cause of action for such removal cannot be adequately demonstrated. Bibliography Books/Journals: * Davies, Paul L and Gower, LCB, 1997. Gower’s Principles of Modern Company Law 6th edition, Sweet & Maxwell * Goulding P, 1999. Cavendish Publishing Ltd, 2nd edition * Shutkever, Carol and Smith, Martin. The Directors Remuneration report Regulations 2002. [online] available at: http://www.mondaq.co.uk/i_article.asp_Q_articleid_E_19791 * Thal, SA, 1998. The inequality of bargaining power doctrine: The problem of defining contractual fairness 8 Oxford Journal of legal Studies 17 Legislation: * Companies Act of 1985 * Companies Act of 1993 * Companies Bill [online] available at: http://www.dti.gov.uk/files/file33125.doc * Directors Remuneration regulations of 2002 * Employment Rights Act of 1996 * Maternity and Parental leave Regulations 1999 * Trade Union and labor relations Consultation Act (1992) Cases: * Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 (HL) * Burland v Earle (1902) AC 83 at p 93) * Cook v Deeks (1916) 1 AC 554; Regal (Hastings) v Gulliver (1967) 2 AC 134 * Foss v Harbottle (1843) 2 Hare 461 * Great Eastern Railway Co. v. Turner (1872) 8 Ch App 149 * Mugford v Midland Bank plc (1997) IRLR 203 EAT * Murray & Anor v Foyle Meats (1999) IRLR 562 HL * Re Lands Allotment Co [1894] 1 Ch 616 * Re Sam Weller and Sons Ltd (1990) Ch 682 * Re R.A. Noble and Sons (Clothing Ltd) (1983) BCLC 273 * Safeway v Burrell (1997) IRLR 200 EAT * Scottish Cooperative Wholesale Society Ltd v Meyer (1959) AC 324 * Sealy, C.F, 1967, The Director as Trustee CLJ 83 * Smith and Another v Cherry Lewis Ltd (2005) IRLR 86, EAT Read More