#19680 - 8 Questions And Tutorials - Company Law

QUESTIONS

1. Realale Ltd, formed in 2010, runs a chain of pubs specialising in real ales. Its constitution says that any contract for over 500,000 must be agreed by all the directors of the company. Last month, the board agreed to purchase a hotel for 700,000 from Simon. Joan, one of the company’s directors, was absent from the board meeting which agreed to the purchase. Contracts were exchanged yesterday to purchase the hotel.

Advise the board in each of the following alternative situations:

a) Joan, who also owns 10% of the company’s shares, disagrees with the purchase of the hotel. She wants to stop the company completing the purchase, and wants her fellow directors sued for their conduct. Enforcement of the articles

Would your answer differ if Simon were married to one of Realale’s directors? Interested party, breaches a fiduciary duty.

b) Simon has just told Realale’s board that he’s been offered 1 million for the hotel by Mr Gazumper. He says he’s not going to complete the sale to Realale, and is not bound to do so because the contract was void due to the board’s lack of authority. The contract has not been signed; can promissory estoppel be used?

2. Z Co Ltd has model articles. Mary formed the company many years ago, and still owns 75% of its shares. Majority shareholder The company recently received a very generous offer to buy an old factory which the company owns but no longer uses. The board decided to accept the offer. However, Mary objected, saying the factory had enormous sentimental value to her – being where she first started the business. Sound commercial reason? Should it nevertheless follow the majority shareholder? (Shareholder value) She immediately passed a special resolution instructing the board to abandon the sale. The board have told Mary they will ignore this resolution. Ignoring the majority rule? Mary is uncertain whether contracts have been exchanged to sell the factory. No disclosure.

Advise Mary.

3. Simon is about to buy 10% of the shares in X Ltd. Simon wants to ensure that X’s directors cannot enter any contract for over 100,000 without S’s consent. Is there any point S insisting on a restriction to this effect being put in the company’s articles? Would S be able to enforce such a restriction?

SECTION 3: TUTORIAL SHEETS

TUTORIAL 1

CHOICE OF LEGAL FORM AND PIERCING THE VEIL

This tutorial covers Topic 1. So, please do all the Essential Reading from there. Then, do as much further reading as you can manage

1. Alice Brick, an experienced building project manager, was recently made redundant. She wants to set up in business herself as a property developer. She has calculated that she will need about 500,000 to launch the business. She is prepared to use 300,000 of her own capital, and her bank will lend up to 100,000 provided it receives 'adequate security'.

Her friend, Edna, is also willing to invest up to 100,000 'if the terms are right'. Edna wants to be sure her investment will be safe, easily recoverable, and that she will receive a good income. She also wants some say in the running of the business, rather than being merely a ‘sleeping partner’.

i. Advise Alice as to the different legal forms through which she might choose to run her business. Which would you advise her to choose, and why?

ii. Given her ‘wish list’, should Edna invest her money as share capital or as a loan.

iii. Alice’s bank is demanding a ‘floating charge’. Explain what this is.

iv. Alice has seen some offices which are available to rent, but which, she fears, will be "snapped up" very quickly. What would the legal position be if she agreed to rent the premises immediately, before the company is incorporated? What can be done to get around any problems here?

2. a) Joanna is a hugely rich merchant banker, owning, in her own name, five valuable properties. She is married to Simon but is almost certain she will divorce him in 2022, as soon as she finds a window in her diary to do so. To limit the financial settlement Simon may secure from her, she transfers her London properties to Standby Ltd, a company she formed many years earlier but which has never traded. She makes clear the properties are transferred absolutely, and are not held on trust for her. She has given the single share, issued by Standby, to David, her lawyer, to hold on trust for Joanna’s brother.

You are consulted by Simon in late 2021. He asks whether, if Joanna does begin divorce proceedings, he will be able to pierce the corporate veil in order to treat the five properties as still belonging to Joanna. Advise him.

b) The ‘Pandora Papers’ leaks have focused attention on the use of companies to hide the property and financial dealings of the powerful and the wealthy. See eg:

https://www.bbc.co.uk/news/uk-58792393

Do you think this use of companies has anything to do with ‘veil piercing’.

3. a) Should shareholders be liable for the torts of their companies? Why/why not?

b) You are consulted by the board of Brutish Petroleum Plc, the parent of a multinational group of companies involved in oil extraction and processing. Brutish has assets exceeding 100 billion, and itself employs several thousand employees. They are mainly involved in administering the affairs of the whole corporate group, but the parent company still itself owns and operates two drilling sites in the North Sea. Those aside, all other operations are pursued through subsidiary companies.

One such subsidiary, NigerOil Ltd, operates in Nigeria, drilling for oil. Brutish’s board is aware that NigerOil’s health and safety, and environmental, practices are appalling. It fears there is a high risk that some major disaster may occur that will injur many employees, many neighbours of its drilling operations, and cause serious environmental damage.

Brutish’s board seeks your advice on what steps to take to protect the group assets should a disaster occur. They tell you that NigerOil has a lot of assets of its own, and one director, appointed by Brutish.

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REMEMBER: YOU MUST SUBMIT AT LEAST ONE FORMATIVE ESSAY.

2000 words max. Submission: (probably: 12.00 noon, Friday, 25th November, 2022 – tbc).

Answer BOTH Part (a) AND Part (b):

Pilate Ltd is a wholly owned subsidiary of Holdings Plc. Pilate owned a factory in London, in which it made adhesives. Neighbours of the factory complained about the noise caused by the factory. In 2015, Pilate entered into an agreement with the Local Authority in which Pilate agreed not to operate this factory during the night for 10 years. The contract specified that if Pilate broke the agreement, it would pay damages of 1 million.

In 2016, Pilate transferred its London factory to Solvents Ltd, another company wholly owned by Holdings Plc. Solvents took over the business of making adhesives there. Immediately thereafter, Solvents began to operate the factory at night, much to the annoyance of local residents and the Local Authority. It continues to do so. Solvents has two directors, Alice and Beatrice. They are also both directors of Holdings.

In late 2016, Alice became concerned about Solvent’s health and safety practices. At the next board meeting of Holdings, Alice raised this issue. However, the Chairperson of the meeting said this was nothing to do with Holdings, and any concerns must be discussed only at Solvent’s board. In February 2017, there was a large chemical leak at Solvent’s factory. This affected a number of houses surrounding the factory, badly injuring their occupants. Some of those occupants work at the factory. Alice has told those injured that Solvents is in financial difficulties, has no insurance cover for accidents, and no money to compensate them for their injuries.

a) Advise Holdings whether it might face any liability to those injured by the chemical leak;

AND

(b) Advise Holdings, Pilate and Solvents whether they would face any liability to the Local Authority for running the factory at night.

TUTORIAL 2

CONTROLLING MANAGEMENT: THE DUTIES OF DIRECTORS

This tutorial covers the material from Topic 3. So, please do all the Essential Reading from that Topic. Also, do as much further reading as you can manage, but especially look at:

• A.Keay, ‘The Authorising of Directors’ Conflicts of Interest: Getting a Balance? (2012) 12 J of Corp Law Studies 129

• D Kershaw, ‘Lost in Translation: Corporate Opportunities in Comparative Perspective’ (2005) Oxford Journal of Legal Studies 603.

1. In 2012, Theresa formed Bikers Ltd, which makes bicycles. Theresa owns 49% of the shares in the company. Initially, Theresa ran the company alone. However, following a major health scare in 2016, she resigned as a director, and appointed Martin, her 16 year old son, and Anna as directors. Theresa still attends some board meetings ‘to keep an eye on things’, and also sometimes makes clear to Martin and Anna some of the decisions she expects them to take.

In August 2017, Anna was on holiday. One night, in the hotel bar, she began talking to another guest, Janet. Janet told Anna that she (Janet) had invented a revolutionary new design of bicycle, and was looking for a company to buy her invention from her. At Bikers’ next board meeting, Anna’s proposed that Bikers should purchase Janet’s invention. The board spent 5 minutes discussing the proposal. Theresa, who was present, said she thought it was a bad idea, since the invention was untested (which was not in fact true) and buying it would be too risky. Martin didn’t really understand the discussion, but...