Bristol is a substantial shareholder in Chester-Perry Industries Ltd. A business competitor, Gun and Fames Pity Ltd, is selling in great volume a cookbook similar to one in respect of which Chester-Perry Industries holds the copyright. Bristol believes his company has incurred a substantial loss and his own shares have been reduced In value by $150,000. HIS solicitors believe an Infringement of copyright has occurred. Cycles and Pollock are the directors of Chester-Perry Industries Ltd. They state that they have decided not to litigate because they believe hat to take legal action for infringement of copyright is too expensive and risky.
Bristol is unsure whether the directors of Chester-Perry Industries have any interest in Gun and Fames Pity Ltd. On the general principles laid down Salmon's case, can Bristol sue Gun & Fames? Issue: Can Bristol sue Gun & Fames on behalf of Chester-Perry as a shareholder in Chester-Perry? Relevant law: Salomon. Application: The House of Lords in Salomon held that upon incorporation, a company beneficially becomes a separate legal entity even though its issued shares are owned by the same person Like In Salomon.
Similarly In this question, Chester-Perry Is a company that has been incorporated and therefore, is a separate legal entity from all its shareholders. In this case, according to Salomon, Bristol who is a shareholder of Chester- Perry cannot sue Gun & Fames on behalf of Chester-Perry as a company is separate from its shareholders. Conclusion: Bristol cannot sue Gun & Fames on behalf of Chester Perry due to the principle laid down in Salomon where upon incorporation Chester Perry is considered as a separate legal entity from all its shareholders, including Tutorial 2 Bristol.
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The Constitution of Big Hopes Pity. Ltd. Includes the following provisions: Rule XSL: On any Increase In capital the new shares must be offered to members In proportion to their excellent shares. John (an existing shareholder) is distressed when an allotment of a new issue is Issue: of What action can John take against Big Hopes for failing to allot new issue shares to him according to Rule xi of the Constitution? Relevant law: CA 2001. Application: s. 140(1)(a) states that a constitution of a company is a contract between the company and its company and its shareholders.
In this essence, both the shareholders are bind by the constitution. Must Big In this instance, Rule xi of Big Hopes' constitution states that new shares be offered to existing shareholders as per their existing shares. However, Hopes failed to allot new shares to John as according to his existing shares and have therefore breached its contractual obligation in the constitution under Conclusion: John can take an action against Big Hope under s. 140(1)(a) for breaching its to contractual obligation in its constitution for failing to allot the new shares John as per his existing shares.
Tutorial 3 Q.
John, Ring, George and Paul incorporate Big Hopes Pity Ltd for their property development business. Big Hopes Pity Ltd was empowered under a provision in its constitution to appoint a managing director. However, the company did not appoint managing director, executed a contract with Vincent for the purchase of a certain property. The market price for the property subsequently collapsed. The board of Big Hopes Pity Ltd, learning of the contract, expressed their disapproval to Paul and claimed that the company was not bound by the contract.
Vincent seeks your advice as to his legal position. Issue: Is the company bound by the contract with Vincent? Relevant law: Constructive notice, Turned, and s. 129(2)(a) and (b), s. 29(5) (6) CA 2001 , Actual authority and Apparent authority. Application: Under the old principle of constructive notice, the constitution of public companies are made available for public inspection and therefore, the public are deemed well aware of the limitations on the authority of the companies' principle will not apply here as Big Hopes is a private officers. This old company.
Furthermore, under the common law Turnaround's case, any outsiders with companies can assume that the persons with whom they are with have the authority to contract on behalf of the companies and all proceedings have been complied with. Dealing internal In this case, the constitution of Big Hopes states that a MD should be appointed but did not state that Paul has been properly appointed as the MD. Vincent can argue that he assume that Paul has been appointed as the as per the Turnaround's case and therefore, has the authority to contract on behalf of the company.
He also has no actual knowledge or suspicion that Vincent has not been properly appointed (Note: In test/exam, if there are any circumstances that arouse suspicion, argue using the case of Nonresident Developments). The principle of constructive notice has also been abolished by s. 130(1) of CA 2001. In dealing with companies, outsiders are entitled to make certain assumptions contained in s. 129 of ACACIA as per s. 128(1) of ACACIA. In this instance, Vincent can argue that he has been empowered by s. 128(1) to make certain s. 129 assumptions when contracting with Paul from Big Hopes. Reticular, he can assume under and that Paul has been properly appointed as the MD of Big Hopes and can therefore exercise all the customary duties of a MD which include entering into contracts on behalf of Hopes. In this essence, Vincent can assume that Paul has actual implied authority to enter into contracts on behalf of Big Hopes. Note: In test/exam, if question requires arguing on apparent/ostensible authority, use the case of Freeman Locker to support your argument). Vincent can also argue either s. 129(5) or depending on whether Big Hopes execute contracts by way of seal or without seal.
Either way, Vincent can argue that Paul has complied with all the internal proceedings when executing the contract with/without seal (e. G. Proper meeting, quorum, fixation of seal, witnessing of fixation et cetera) under either of these two sections. The exceptions under s. 128(4) CA 2001 will not apply to Vincent as he has ever known or suspected that Paul has not been properly appointed and the contract has not been properly executed. Conclusion:Big Hopes is bound by the contract with Vincent under both common law (as per Turnaround's case whereby entitled to make certain s. 29 assumptions again, there is no evidence suggesting any when dealing with Big Hopes and exceptions under s. 128(4) that will rebut the s. 129 assumptions made by Vincent.
Tutorial 4 Q.
Maria is keen to purchase shares in Action Ltd. , but is unable to raise sufficient funds to do so. It is suggested that the company lend Maria the sum of $50,000 to enable her to complete the purchase. The directors of Action Ltd. Seek your advice as to this proposal. Issue: Can Action Ltd lend Maria the sum of $50,000? Is this considered as financial assistance?
Relevant law: s. AAA(1) CA 2001, ASIA v Adler. Application: Under s. AAA(1), a company may only financially assist a person if it (a) does not materially prejudice the interests of its shareholders and affect its ability to pay its creditors, (b) must be approved by all shareholders, and (c) exempted by s. CHIC. Therefore, before Action Ltd lends the $50,000 to Maria, it must ensure that it has comply with all the requirements in s. AAA(1). Otherwise, Action Ltd will be breaching s. AAA(1) as per the case of ASIA v Adler. In ASIA v Adler, Mr. Adler the director in HI has utilized the money of HI to financially assist his personal company PEE to purchase the shares in HI when HI was already in financial difficulty and without the approval of the shareholders. The court deemed this to be a contravention of s. AAA(1). Requirements in s. AAA(1). Conclusion:Action Ltd can only financially assist Maria to purchase the shares of Action Ltd if it satisfied all the requirements in s. AAA(1). Otherwise, Action Ltd will be deemed to have contravened s. AAA(1) as per the case of ASIA v Adler.
Tutorial 5 Q.
An opportunity has arisen to purchase land for development at Christmas Hills. The shareholders of Central Developments Ltd. Passed a resolution that the company purchases the land. However, the directors have ignored the resolution and refuse to act on it. Are the directors bound to implement the shareholders' resolution? Issue: Are the directors of Central Developments bound by the shareholders' resolution to purchase the land at Christmas Hills? Relevant law: Separation of ownership and management powers, Automatic Self- Cleansing, John Shaw.
Application: Under the principle of separation of ownership and management powers, the management of the company is vested fully in the board of directors despite the shareholders owning the company. Therefore, the shareholders cannot pass resolutions instructing the directors on how to manage the company. According to the cases of Automatic Self-cleansing and John Shaw, the directors as long as acting within the management powers bequeathed on them by the company's constitution have absolute power in managing the company and the shareholders have no rights to interfere in this as per the company's constitution.
In this event, the directors of Central Developments can ignore the resolution of the shareholders to purchase the land at Christmas Hills because purchasing of land can be considered as a type of management power and only the Conclusion: The directors of Central Developments can ignore the resolution of the shareholders to purchase the land at Christmas Hills because the directors have absolute power to manage the company including whether to purchase the land as per the principle of separation of ownership and management powers and the cases of Automatic Self-cleansing and John Shaw.
Tutorial 6 IQ.
Seven Dwarves Ltd operates nursing homes. Its directors are Sleepy, Grumpy and Dopey. They hold 30% of the shares in the company. The directors allocate 1 million new shares to certain business associates. This has upset certain shareholders who claim that the placement was made with a view to preventing a future takeover offer being made. The directors claim that the allotment was made to raise cash required for the company's future needs. Advise the shareholders.
Issue: Advise the shareholders whether the directors have breached any of their director's duties by allocating 1 million new shares to certain business associates? Relevant law: s. 181 CA 2001 "proper purpose" (but for test), Whitehorse v Carlton, Howard Smith. Application: Under s. 181 CA 2001, directors must act in good faith, in the best interest of the shareholders and for a proper purpose. The shareholders in claimed that the directors have issued 1 million new shares to Seven Dwarves certain business associates to defeat a takeover and therefore, the issuing of these new shares is for an improper purpose.
To determine whether the issuing of new shares is for an improper purpose (I. E. To defeat a takeover), the but for test will be applied. But for to defeat a future takeover, will the directors issue the 1 million new shares? " (Note: Students must reason and argue on this question to reach an answer, either Yes/No). If the but for test reveals that no, if not to defeat a takeover, the directors will not issue the new shares, then obviously the reason for issuing shares is to defeat a takeover. He to prevent the wife from having majority control over the business and in the case of Howard Smith, whereby new shares were issued to prevent future takeover, the court ruled that the issuing of new shares in these cases was for improper purpose. Therefore, the directors have breached s. 181 because their purpose in issuing the 1 million new shares to certain business associates is to defeat a future takeover which is considered as improper as per the two cases discussed above. Conclusion: The directors of Seven Dwarves have breached s. 81 because they have issued cases new shares for an improper purpose (I. E. To defeat a takeover) as per the of Whitehorse v Carlton and Howard Smith.
(This question is not taken out from the tutorial questions but you can still use it as a reference for answering questions from this tutorial)
Sam and Pete are the erectors in BBC Pity Ltd. They have decided to use the 1 million dollars in the company's bank account to invest in the shares of DEAF Ltd after doing all the necessary research and making all the necessary inquiries by themselves from the Internet and financial Journals and magazines.
Six months after the investment, the World Financial Crisis occurs and DEAF Ltd goes into liquidation causing BBC Pity Ltd to lose its 1 million dollars investment. Do the shareholders of BBC Pity Ltd have a course of action against Sam and Pete? Issue: Do the shareholders of BBC have a course of action against Sam and Pete for asking an investment that caused the company to lose 1 million dollars? Relevant law: Old subjective common law standard, Re Cardiff Bank, Re City Equitable Fire Insurance, Daniels v Anderson (objective standard), s. 80(1) and s. 180(2) CA 2001. Application: Under the old common law, a subjective standard is applied to directors when exercising their duty of care towards their companies. In both the case of Re Cardiff Bank and Re City Equitable Fire Insurance, the subjective standard is applied whereby directors were only required to exercise duty of care as per their personal level f skill and experience. However, this approach has been overruled by the modern objective standard landmarks in the case of Daniels v Anderson.
In this case, all directors are expected to exercise a duty of care that any other reasonable directors will apply in the same position and circumstance and not according to their personal level of skill and experience. This standard is further illustrated in 180(1) CA 2001 which states that directors must exercise their power with degree of care that any reasonable directors would exercise in the same circumstances, position and responsibilities. In this event, if the shareholders of BBC are able to establish that any other Sam and Pete would be breaching their duty of care towards BBC under 180(1).
However, Sam and Pete will be able to raise the Business Judgment Rule Defense (BBC) in s. 180(2) CA 2001. In order for them to raise the BBC, they must satisfy four elements;
- They have made the business Judgment in good faith and for a proper purpose - there is no evidence that Sam and Pete have ill intentions when making the investment,
- They have no material personal interest in the business Judgment - again, there is no evidence that Sam and Pete have gained any benefits financial or non-financial wise from the investment,
- They have informed themselves of the subject matter of the business Judgment - there is evidence that Sam and Pete have done all the necessary research including online and from Journals and magazines,
- Any other reasonable person in the same position and circumstances would have made the same investment as they did after doing all the research - Sam and Pete must be able to prove so. If Sam and Pete are able to establish all the elements in s. 180(2), then they will be able to use the BBC to defend themselves from breaching s. 0(1).
The shareholders of BBC will have a course of action against Sam and Pete if they can prove that no reasonable director will invest the 1 million dollars in DEAF and therefore, in doing so, Sam and Pete have breached their duty of care to the company under s. 180(1). However, if Sam and Pete can establish all the elements under s. 180(2), then they will be able to use the BBC to defend themselves from breaching s. 180(1). Tutorial 8 (These questions are not taken out from the tutorial questions but you can a shareholder in EX. Pity Ltd.
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