You are a trainee solicitor working for Cooper & Co. Solicitors. You have been asked by your principal, Suzanne Cooper, to research and provide answers to a number of questions raised by her client, Meena Lalwani.
Meena is chairman and managing director of Kitchen Magic Ltd., which trades in specialty foodstuffs and culinary equipment. Her brother Anil and sister Rupa are the only other directors.
The profits of company have been falling for a number of years, and apparently the two non-director members of the company, Kapil and Ram Gupta, believe that Meena has ceased to be an effective manager. Last month, Kapil and Ram suggested to other shareholders that it was time to ask Meena to retire and to seek a replacement. They suggested that Ram’s son, Jayant (who is 30 and has just completed an MBA), would be ideal candidate. However, Anil rejected idea and said that Meena still had his complete confidence.
A company search shows the issued share capital (all £1 Ordinary shares) to be as follows:
Name No. of shares
Meena Lalwani 85,000
Anil Lalwani 85,000
Rupa Lalwani 42,500
Kapil Gupta 106,250
Ram Gupta 106,250
This year’s accounts were produced last week and profits had fallen again. Meena and her fellow directors are quite certain that the downturn in the company’s profits is due to the general economic climate, and not to any mismanagement.
Meena understands that Kapil and Ram plan to press the issue of the proposed introduction of Jayant as managing director of the company. The directors are not unaware of the benefits of having some young blood in the company, and maintaining the family involvement to the next generation, so they are prepared to agree to Jayant’s joining the company. However, Meena says there is no question of her stepping down as managing director, and Jayant, in her view, is far too young to be considered yet for a seat on the board.
A further proposal has been made by Kapil and Ram to alter the company’s articles to prevent shares passing outside the current membership. Meena is worried about the effect of any interference with the articles, and is inclined to resist it. She wants to pass down their shares to her children in due course, and believes Rupa (who has little day-to-day involvement in the company’s affairs) is planning to transfer her shares to her children in the next few years.
Write a memorandum to your principal, setting out what advice, in your view, she ought to give Meena on the following questions:
1. How likely it is that Kapil and Ram can bring about the changes they are proposing to the board of directors and what might Meena and Anil do to protect their position?
2. What are the advantages and disadvantages of the suggested amendment to the company’s articles, and how might the proposal be amended to protect our clients’ interests?
3. What other amendments to the company’s articles are advisable?
The key to 1 and 2 is to carefully go through the relevant law, explain it and then apply to the facts.
1. The facts suggest that some parties want to remove Meena and appoint Jayant.
What do you need to do to appoint Directors? How to remove them?
There are clear provisions in the Companies Act which deal with how you appoint and remove directors. Apply them to the facts - do the parties wanting to remove/appoint have the necessary board or shareholder votes?
2. Same here - what needs to happen to amend the Articles? Special Resolution. How do you pass a Special Resolution? 75% of the voting shares. Do Kapil and Ram have 75% of the shares? No they don't.
3. This is a bit more difficult. You could have provisions limiting the size of the board, who may be director and you could have supermajority provisions requiring a more stringent vote to appoint or remove directors. You could also have provisions restricting share transfers to non-family members. You may be able to come up with other ideas.
I can't over emphasise how important it is to look at the actual provisions of the Companies Act. Don't just read textbooks, you NEED to find the relevant Companies Act provisions - the answers are in the Act.
(Original post by jezzybella)
could anybody please give me any advantages for question 2... please thanks
One obvious advantage would be that the shares would remain amongst people who know each other - they wouldn't be going to strangers. If the shareholders are all friends and know each other, they may have similar objectives and aims, there's an increased likelihood that they will vote similarly on resolutions, or that they will be able to persuade each other to vote similarly.
If the shares go to new people who are all strangers, they may all vote differently and resolutions that some shareholders want to pass may be rejected by other shareholders.