Could any law students help me with some of these facts please? (Sorry, it's long!)
Bridgeport Enterprises Ltd (BE) is a private company whose objects are unlimited. The majority shareholders are Donald, Henry and Joseph who formed the company from an existing partnership in 1996. The partnership business comprised of the manufacture of specialist valves for use in a number of fields from heating installations to oil extraction which the corporate business has continued to develop. Donald holds 26% of the company’s ordinary shares, and 55% of its issued preference shares. Donald also has 5000 management shares .Henry and Joseph each hold 25% of the ordinary shares. The remaining 24% of the ordinary shares are held as follows - each of the partners’ 3 wives holds 6% with the remaining 6% being held by a private investor Mr Cringe who holds the remaining 45% of the issued preference shares. Donald has been acting CEO of BE Ltd for the last six years though he has never been formally appointed. As part of the company’s long term strategy and effort to build up its capital, the company has not paid a dividend for the last 5 years.
BE’s articles of association include the following articles:
(1)Preference shares are entitled to a 5% cumulative dividend and a right to participate in surplus assets on a winding up.
(2)Preference shares shall be entitled to vote in general meeting when their dividends are 4 years in arrears. In such an event the preference shares carry 8 votes each. Otherwise preference shareholders are entitled to attend general meetings but not vote thereat. In class meetings of preference shares each share shall carry one vote only.
(3)The rights attached to any shares shall be deemed to be varied by the reduction of the capital paid up on such shares and by the creation of further shares ranking in any respect in priority thereto, but shall not (except as otherwise expressly provided by the foregoing provisions of this article or by the conditions of issue of such shares) be deemed to be varied by the creation or issue of further shares ranking pari passu therewith or subsequent thereto.
(4)Management shares shall carry 3 votes each in general meeting as long as
the holder of the management shares holds 50% of the preference shares. Should the preference shareholding fall below 50% the management shares have only 1 vote each.
(5)A member wishing to sell his shares must offer them to the directors who must purchase them at a reasonable price.
(6)Donald, Henry and Joseph shall each be a director of the company for a period of 25 years.
In 2002 BE Ltd incorporated three subsidiaries Felix Ltd (F Ltd), Exronid Ltd (E Ltd) and Cyclops Ltd (C Ltd). BE holds 76% of the shares in each subsidiary. Donald holds the remaining 24% in F Ltd, Henry the remaining 24% in E Ltd and Joseph the remaining 24% in C Ltd.
C Ltd is involved in the development of new valve related technology which is showing considerable promise. The objects of C Ltd are to develop and exploit new technologies related to valve and pressure control. Various new developments are well advanced but have not yet come to market. Mary, Joseph’s daughter who has a Phd in mechanical engineering is the acting managing director of C Ltd, though she has never been formerly appointed as such. There are three other directors, her brother Derek, and John (Henry’s son) and Samantha (Donald’s daughter). All have been appointed directors through appropriate procedures. Unfortunately, C Ltd is running out of capital and Mary approaches Mr Cringe with a view to obtaining further finance. Mr Cringe aware of the potential of these new developments is prepared to loan £1 million to C Ltd in return for a convertible debenture secured by a floating charge over all of C Ltd’s assets. At a board meeting of C Ltd in January 2015, attended by all of its directors, the borrowing and issue of the debenture is approved on the insistence of Mary. However, under the company’s articles of association the directors must inform the board of its holding company BE Ltd and obtain a special resolution. Neither requirement has been complied with. In February 2016, having incurred considerable expenditure and being unable to borrow from its bank C Ltd’s board grants Mr Cringe an option to purchase all of its assets for £250,000 or a sum equivalent to the company’s debts (excluding the monies owed under Mr Cringe’s convertible debenture) whichever is the greater. Had the board of C Ltd approached the holding company for a loan BE Ltd would have happily obliged because of the importance of C Ltd’s intellectual property to the holding company. When Joseph discovers these transactions he is furious and wishes to challenge their validity.
E Ltd is concerned with the development of green heating systems which have developed very well over the last 14 years and have made quite an impact on the market. Its board consists of Henry as its managing director and his two sons Leopold and George. All have been appointed in accordance with the company’s articles of association. In order to maximise returns from their revolutionary heating systems the board enters into an equity joint venture with Sanction Heating Inc. (SH Inc.) a US company which has specialist knowledge and experience in marketing and installing such systems and which wishes to break into the UK and European market.. The new joint venture company is called Hotsit Ltd (HS Ltd) and its shares are held 49% by E Ltd and 51% by SH Ltd. There is also a shareholders’ agreement between the two parties which includes clauses to the effect that the articles of association can only be changed by agreement between the parties and that the company (HS Ltd) will only borrow sums above £250,000 with the consent of both JV companies (E Ltd and SH Inc.). The board of HS Ltd comprises of Americans Zack and Jake appointed by SH Inc. and Henry and George appointed by E Ltd.
F Ltd carries on business as a manufacturer of specialist parts and plant supplementing the products of BE Ltd. Donald is the company’s managing director and there are three other directors. Keith is the director in charge of production, Reginald is the finance Director and Pearce is the human resources director. Partake Ltd offers F Ltd a long term contract to purchase its products at a reduced price. Keith fails to disclose that he been offered a payment of £50,000 payable into his Channel island’s bank account if the contract is approved and Reginald fails to disclose that he has been offered a directorship with Partake Ltd if the contract obtains board approval. The board of F Ltd subsequently approves the contract because Keith and Reginald persuade the board that it is in the long term interests of the company. In June 2013 Pearce helps his son Brian (who is F Ltd’s company secretary) and daughter Elizabeth to set up another company Bluebottle Ltd to carry on a business producing similar products to F Ltd and also helps Bluebottle Ltd to obtain subcontracts from F Ltd to produce some of their products under licence. Pearce also helps Bluebottle to poach key staff from F Ltd. Pearce and Brian had also given personal guarantees to Hotspur Bank in return for a loan of £1.2 million to Bluebottle Ltd. In October 2015 Hotspur Bank, preferring a corporate guarantee, informs Pearce and Brian that if they persuade F Ltd to give a corporate guarantee for the loans they will be relieved of liability under their personal guarantees which will be cancelled. At a board meeting of F Ltd in November 2015 the board of F Ltd agrees to give Hotspur Bank its guarantee for its loan to Bluebottle Ltd. Neither Pearce nor Brian informed the board that this would relieve them of their personal guarantee.
In January 2015 as part of its expansion plans BE Ltd borrows £6 million from Krakatoa Bank secured by a floating charge over its entire undertaking. Donald executes the debenture and charge on 5 January but files it away and forgets about the need to register the charge for 6 weeks. He then changes the date of the charge to 20 February and has the charge registered. The debenture also contains a negative pledge clause, an all monies clause and an automatic crystallisation clause on the giving notice of crystallisation by Krakatoa Bank. Another clause states that if the negative pledge clause is broken the floating charge shall automatically crystallise. One month later BE Ltd borrows a further £1.5 million from Drabant Bank secured by a fixed equitable charge over its book debts. Under the terms of this charge all book debts received are to be paid into a designated account at Drabant Bank. After deduction of interest payments the monies are paid into the operating account of BE Ltd at Krakatoa Bank.
In early November 2015 Gentec plc approaches the board of BE with a view to making a takeover offer for BE Ltd and its subsidiaries. Donald, who wishes to retire, is in favour of the offer but the other directors are not. Henry concerned about this development and advised by Zack, without consulting the board of E Ltd or the board of BE Ltd agrees to an alteration of the shareholder agreement between E Ltd and SH Inc. to the effect that if BE Ltd is taken over by Gentec plc and/or Henry is dismissed from the boards of BE Ltd or E Ltd then SH Inc is entitled to purchase E Ltd’s shares in the joint venture company HS Ltd for £100. On discovering this in January BE Ltd removes Henry from his directorship of E Ltd.
Also alarmed by these events Mr Cringe seeks to convert his debenture into share capital which would give him a simple majority in C Ltd. He also wishes to enforce his option with C Ltd.
At a hastily convened board meeting at which Donald is absent Henry and Joseph decide to issue themselves a large number of bonus preference shares ranking pari passu with the existing preference shares. This would have the effect of reducing Donald and Cringe’s holding of preference shares to much less than half of the total issued preference shares. Just over two weeks later, whilst Donald is away on holiday they hold a general meeting of the company at which they pass a resolution removing Donald from office. At this point Gentec plc withdraws its takeover offer.
Company Problem Question
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- 09-05-2016 18:55