Principles of Modern Company Law and Business Law - Essay Example

Company law Scenario Introduction: The given scenario in which Higbert is to be advised raises several issues that concern him, notably that of his removal as Director. Although this is the most important issue, other aspects that need to be considered are the manner in which he is being sidelined while other Directors are acquiring bonuses, making trips and attempting to take decisions without his participation, despite the fact that upon incorporation, the company was founded on the basis that all the four Directors are equal stake holders in the Company. Additional issues that are raised are in reference to the purchase of a piece of land adjoining the highway which is being opposed by Higbert but which the other directors propose to go ahead with, in contravention of an agreement between the four Directors which specifies that a unanimous consent is required. The question of dismissal of there employees on grounds of redundancy must also be addressed. Relevant Legislation: An application of statute to the above scenario provides an indication that the following legislation may be relevant for the issues raised by this scenario: The Companies Act of 1985, with amendments made in 1993 and the latest Companies Bill to go into force in 2007, which has proposed changes in the Articles of incorporation and the enforcing of shareholder interests, the new provisions for remuneration for Directors (2002) and the Employment Rights Act of 1996 which also includes the relevant legislation dealing with dismissal of employee son grounds of redundancy. Issue no: 1: The question of marginalization of Higbert and his removal as Director: The Hippo Company has been incorporated in accordance with Articles in the Table A form. Incorporation therefore involves separation of ownership and control, it is the members who own the company and allot shares, which constitutes a delegation of the shares as spelt out under s.80 to s.96. The Companies Act sets out the provisions by which Companies are to be governed, including appointment of Directors, articles of incorporation, rights of shareholders and procedures for legal action. On this basis therefore, the four Directors of the Corporation are also the four primary shareholders in the Hippo Company, with each Director owning 25% of the share sin the Company. Hence, where the issue of marginalization of Higbert is concerned, he is placed in the position of a minority shareholder, since the others are working in tandem. The rule established in Foss v Harbottle1 provides minority protection in that an individual or group of minority shareholders can sue where a wrong arises that is ratifiable. However the terms where this minority protection will hold valid were spelt out in Edwards v Halliwell2 and a fraud should have been perpetrated on the minority3, if such protection is to hold good and the majority votes of the corporation are to be superseded. Berle and Means point out that with the growing size of corporations, ownership and management have been separated4 however companies are now so dominated by directors that their shareholders may be denied an effective say in the decisions of the Company. This is relevant in assessing the case of Higbert. While it cannot be contended that a fraud has been perpetrated on Herbert, there is little doubt that he is being marginalized and despite being an equal shareholder in the Company with the others, he is being denied benefits that are accruing to the others, notably in the bonus that has been claimed by the others and the New York trip. In the case of Kenyon Swansea Ltd5 where a dispute arose between Directors, an action was brought under Section 459 of the Companies Act which detailed minority oppression and past acts constituting unfair prejudice as grounds to contest the proposed removal of the Director. In this case, there was a proposal to alter the Articles of Association in order to allow for such removal and the Director who would have been so removed was able to successfully contest this action, especially on the grounds that he would be denied profits which were rightfully his. This will apply in the case of Higbert as well, since he can legitimately claim that he is being denied benefits that are owing to him since they are being provided to other Directors. In the context of whether the action of the other Directors is prejudicial to Higbert’s interests, it may be noted that it can be demonstrated that he is the victim of unfair treatment and that his interests in the Company are being prejudiced. Therefore, Higbert can certainly bring action in the Courts against the other Directors on the basis that his interests are being prejudiced and on this basis, he can also contest his removal as Director. In another case6 where a company existed on a quasi partnership basis, just like Hippos, a Director who has been dismissed was still able to claim the profits that were due to him by virtue of his position as a shareholder. Therefore Higbert is entitled to payment of a bonus amount of 20,000 pounds as was paid to other Directors. Moreover, a Director who is also a shareholder in the corporation cannot be easily removed unless it can be proved that he was in violation of his fiduciary duties to the Company in some aspect. A Director of a company does not have to be a natural person7 however, it is mandatory for directors to always act in the best interests of the Company8 with their decisions to be conditioned by their own judgment of what they consider to be best at the time the decision is made.9 While a Director may be removed at any time through his or her voluntary resignation, he/she can only be removed by the consensual action of the shareholders10. In case of the Hippos Company, the four Directors are themselves the shareholders of the company, so they can work together and pass a resolution to remove Higbert as a Director. But this will in no way lessen Higbert’s chances in a court of law, to contest the dismissal if it cannot be proved that he violated his fiduciary duty as a Director. Unless there are good reasons supporting such a dismissal, it may be deemed to be prejudicial to Higbert’s interests, particularly if such action is brought by Higbert under Section 459 of the Companies Act. In the execution of his duties, it is inevitable that a Director will face a conflict of interests, but he is required to be self regulated by a strong code of ethics in his dealings. In the case of directors in Turquand v Marshall, the Court held that it “could not interfere with the discretion exercised by them [Directors]”.11 In the case of Re Dunham and Co, the Court found that the director has been guilty of “considerable negligence” yet held that he had not breached his duty of diligence and care.12 However the duty of skill of a Director was best laid out by Romer J in the Re City Equitable Fire Insurance Co Ltd13 where he stated that while a Director was expected to exercise a certain level of skill and diligence that an ordinary reasonable man would apply under the circumstances, this did not mean that he was required to demonstrate a level of skill that was not commensurate with his experience. The standard of care a Director is expected to exhibit will be in accordance with the level of his experience and qualifications, for example in the case Dorchester Finance Co, a higher standard of care was expected from the Directors because they were accountants.14 Similarly in the case of Re D’Jan of London, Hoffman J clarified the duty of care required from Directors by applying an objective test with a subjective element15, which was that of standard diligence in a person possessing a level of skills and experience that could reasonably be expected from another person in the same position, to which the director’s own special skills and experience could be added.16 Therefore, applying this in the case of Higbert, it may be noted that he has been performing his duties quite capably in his capacity of marketing Director and has even proposed a new marketing strategy at the last Board meeting, along the lines of “every garden deserves a hippo.” Therefore, he cannot be held liable for any fiduciary breach of his duties, especially since he is not the one who has been receiving bonuses or any kind of extra benefits deriving from his position as Director. 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 fact that the directors of Hippos do not pay dividends, which would entitle every one of the four shareholders to an equal share in the profits but instead they have chosen distribute it among three of themselves as directors remuneration (bonuses) may be violative of the Companies Act, since the Directors are accountable to the Company for any profits they have made by virtue of the advantages of their fiduciary position.17 Purchase of land: One of the areas in which the Companies Bill has made changes is in spelling out the statutory duties of directors which have hitherto been covered through case law on the basis of equity and common law as detailed above. Under the new statutory statement, Companies may take up new business opportunities if the Board of Directors authorizes such actions, however it clarifies that such authorization should be provided by unconflicted directors. Thus, applying this to the case of Hippos, where the Directors wish to avail of a new business opportunity through the purchase of land adjoining the highway, it may be noted that the authorization does not go uncontested or unconflicted, since it is only three of the Directors who are in favor of purchasing the land and not all. During the period of drafting out the Articles of Incorporation of the Company, one of the addendums is the agreement that all the four Directors have signed which specifically states that “land may be bought for the business only with the unanimous agreement of the four shareholders.” However, in the case of purchase of the land next to the A14 trunk road, the proposal is being contested by Higbert. Therefore, it is unlikely that the purchase of the land can actually go through without Higbert providing his consent along with the others, in accordance with the specific terms laid out in the agreement between the four directors on purchase of land. This practice of unanimity in the decisions on land purchases has been operational for 15 years while the company was in business and therefore, in the event that this issue should be disputed in the Courts, the Courts are likely to apply the earlier precedents in terms of operations of the Company, as it makes its decision. Since the practice of unanimity in land purchases has held good for 15 years, the Courts may question the fairness in the other directors going against the established trend unless compelling reason can be demonstrated by Harry and the others for the purchase of land. The Chairman and Managing Director Harry is proposing to call a meeting to remove Higbert as Director and to vote on the purchase of the land. Therefore, this is a case of a serious dispute between the directors of the Company. In the case of Pang Yong Hock v PKS Contracts Services18 where there was a disagreement between Directors and the use of Section 216 (3) (a) of the Companies was sought in order to bring action by the Company against Directors, the Court clarified that the legislative intent behind providing relief for minority shareholders was to ensure that justice could be done to a Company without undue hampering of the Directors’ efforts while also answering genuine aggrieved interest. Therefore, the question that must be considered in this aspect is whether the proposal of the other Directors to remove Higbert is substantiated by conduct that is in bad faith on his part or whether he is unduly hampering the functioning of the Company. In this context, it may be noted that the company has been functioning adequately for 15 years and therefore, the current incident where Higbert is refusing to give his consent for purchase of a piece of land will not render him liable for dismissal, especially since he is the one who is being marginalized through deprivation of benefits that other directors are enjoying. The dismissal of the employees at the Coton office: In a situation where the director’s duty to the company conflicts with his personal interests, then any contract that arises in such a situation may be annulled by the Company.19 Justice Plowman in the case of Parke v Daily News Ltd20 held that the primary duty of the directors of a corporation is to their shareholders, superseding their duty to their employees. However, this does not mean that the interests of the employees who are being dismissed should be ignored, rather the question that arises is whether sich dismissals are justified in the interests of the Company? In the case of Mills v Mills, Latham CJ stated that a director must act “bonafide for the benefit of the company.”21 The duties of the director to the company are set out under in the Companies Act, which imposes a duty upon the directors to look out for the interests of the company and its employees as well as its shareholders22. Moreover, the Companies Act of 1985 provides an extensive definition of those who may be classified as directors and “connected persons’23 and these person/s are required to disclose information to shareholders and acquire their authorization in the form of expression of approval through a resolution passed in a general body meeting of the Company, as far as “substantial property transactions” are concerned., which includes all transactions for a value greater than 2000 pounds and bad investments in property can also result in such purchases being annulled .24 This is of relevance where the dismissal of the employees are concerned, because it serves to establish that the Company is in a sufficiently healthy condition from a financial point of view, especially since three of the Directors have availed of a sizable bonus and propose to invest a large sum of money on purchasing a piece of property near a highway. However, the reason that is being cited by the Company for dismissal of the three employees at the Coton office on grounds of redundancy is to “save costs”. This is in opposition to the other moves of the Company mentioned above which appear geared towards additional spending. The Employment Rights Act does provide for redundancy as a good and fair reason for dismissal and a Company will not be held liable for unfair dismissal of an employee if it is able to satisfy the three stage procedure that was set out in the case of Safeway v Burrell25, later corroborated in the case of Murray & Anor v Foyle Meats.26 According to this test, the employer needs to demonstrate that such dismissals are being mooted because the kind of work being performed by such employees has diminished and therefore the need for these employees has been removed. If an employer is unable to satisfactorily demonstrate this and dismisses employees on grounds of redundancy, it may be accused of unfair dismissal.27 Conclusions: On the basis of the above, it may therefore be noted that the Hippos Company could beheld liable for unfair dismissal of the employees at Coton office, since its work in marketing has not diminished and it is in fact planning to acquire new lands. In respect of the matter of Higbert, it may be concluded that he has an excellent chance to contest the bonuses that have been paid and demand his fair share. Moreover, he also has a good chance of winning a suit filed under Section 459 of the Companies Act for prejudicial treatment being meted out to him in the matter of his proposed dismissal. Bibliography Books/Journal Articles: * Berle, Adolf A and Means, Gardiner C, 1968. The Modern Corporation and Private Property Harvest, USA, 1968 (Revised ed). * Davies, Paul L and Gower, LCB, 1997. Gower’s Principles of Modern Company Law 6th edition, Sweet & Maxwell * Farrar, J.H, Hannigan, B.M, 1998. Farrars Company Law, London Edinburgh and Dublin: Butterworths, * 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 Legislation: * Companies Act of 1985 * Companies Act of 1993 * Directors Remuneration regulations of 2002 * Employment Rights Act of 1996 * Insolvency Act Cases: * Brown v British Abrasive Wheel Co (1919) 1 Ch. 290 * Clemens v Clemens Brothers (1976) 2 All ER 268 * Dorchester Finance Co Ltd v. Stebbing [1989] BCLC 498 * Edwards v Halliwell (1950) 2 All ER 1064 * Foss v Harbottle (1843) 2 Hare 461 * Hateley v Morris (2004) EWHC 252 (Ch) 1 BCLC 582; (2004) All ER (D) 105 (Feb) * Mills v Mills (1938) 60 CLR 150 at 158 * Mugford v Midland Bank plc (1997) IRLR 203 EAT * Murray & Anor v Foyle Meats (1999) IRLR 562 HL * Pang Yong Hock v PKS Contracts Services Pte Ltd (2004) SGCA 18; (2005) 2 LRC 72 * Parke v Daily News Ltd (1962) 1 Ch 927 * Philips v Boardman (1967) 2 AC 46 YB93.239; * Re DJan of London Ltd [1994] 1 BCLC 561 * Re Dunham and Co (1883) 25 Ch D 752 at 766 * Re City Equitable Fire Insurance Co Ltd (1925) 1 Ch 407 * Re Kenyon Swanson Ltd (1987) BCLC 514, 3 BCC 259 * Safeway v Burrell (1997) IRLR 200 EAT * Turquand v Marshall (1869) 4 Ch App 376 at 386 Read More