Is Scheme A lawful and likely successful

Whether Scheme A is lawful and likely to succeed, and if not, whether it can be adapted to be so.

Jerico Marketing Limited (the Company) may, by ordinary resolution of the shareholders, remove Miss Scott before the expiration of her period of office [1] . This expressly applies notwithstanding anything to the contrary in the agreement between the Company and Miss Scott. [2] The resolution to remove Miss Scott as a director would require a special notice. On the receipt of the intended resolution to remove her, the Company must send a copy to her, who has then the right to make representations and have them notified to the members. If this is not done, the representation would need to be read out at the meeting. The obligation of the Company to circulate the representations or have them read at the meeting may be avoided an application to the court if it is satisfied that Miss Scott is abusing the right.

Although the Board can lawful dismiss Miss Scott it is doubtful if Mr Middleton and Mr Cameron can lawfully form a new company (NewCo) and sell the business of Jerico Marketing Limited to NewCo for the price of the then existing debts plus £1 and put Jerico Marketing Limited into voluntary liquidation. This is because as directors, they owe certain duties to the Company. [3] Although they are not trustees, they “occupy a fiduciary position toward the Company whose board they form." [4] A fiduciary is someone who acts for, or on behalf, of another person, in relationship of trust and confidence, which equity protects by imposing on the fiduciary a duty of loyalty. [5] These include the relationship of director to company. [6] Therefore, although both Mr Middleton and Mr Cameron are not trustees, they have trustee like responsibilities because they have the power and the duty to manage the Company’s business in the interests of the Company. [7] 

The core duty is to act in a way Mr Middleton and Mr Cameron consider, in good faith, would be mostly likely to promote the success of the company for the benefit of is members as a whole. [8] This duty is supplemented by the requirement for them to have regard, among others matters, the likely consequences of their decision in the long term, the need to foster the company’s business relationships with its customers, supplies and others; and the need to act fairly as between members of the Company. It is therefore unlikely that the Scheme of forming NewCo and sell the Company’s business to it for the price of the then existing debts plus £1 would succeed because is contrary to their duty of promoting the success of the Company for the benefits of its members as a whole including Miss Scott. It would be difficult for Mr Middleton and Mr Cameron to argue that in doing so, they have regard to the need to act fairly as between them and other members of the Company.

Whether Scheme B is lawful and likely to succeed, and if not, whether it can be adapted to be so.

As in Scheme A, the Company may, by ordinary resolution of the shareholders, remove Miss Scott before the expiration of her period of office regardless of the agreement between the Company and her. The only issue relates to the compulsory transfer of Miss Scott’s shares. The essential feature of registered companies is that their shares are transferable. There shares of a registered company are transferable by virtue of the statutory provision and there is no any need for any specific authority or permission to transfer to be stated in the company’s constitution. [9] Shares in a company are transferable in accordance with the company’s articles. [10] However, articles of most private companies like Jerico Marketing Limited restrict their members’ right to transfer their shares. The issue is whether it would be possible for Mr Middleton and Mr Cameron to alter the Articles of the Company by inserting the Special Article and apply it retrospectively to force Miss Scott to relinquish her shares.

Articles of the Company may be altered by special resolution. [11] A special resolution would require a 75% majority. Therefore, the Special Article can be inserted into the Company’s Articles to force Miss Scott to serve a transfer notice when she ceases to be employed by the Company. [12] However, there are limitations imposed on this power. The power to alter the articles must be exercised “bona fide for the benefit of the company as a whole." [13] In relation to compulsory transfer, although articles may be introduced into the company’s articles, the law on this area is not clear. There are no recent cases on this and the older cases are unclear.

In Brown v British Abrasive Wheel Co Ltd, [14] having failed to pursued the minority to sell, the majority proposed a special resolution adding to the articles a provision to the effect that any shareholder was bound to transfer his/her shares upon a request in writing of the holders of 90% of the shares. Although such provision could have been validly inserted in the original articles and although the good faith of the majority was not challenged, it was held that the addition of such a provision in order to enable the majority to expropriate the minority could not be for the benefit of the company as a whole but for the benefit of the majority. [15] 

However, in Sidebottom v Kershaw Leese & Co, [16] alteration of the articles to empower the directors to require any shareholder who competed with the company to sell his shares at fair value to the nominees of the directors was upheld on the basis that it was for the benefit of the company. In Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd, [17] it was held that a resolution imposing a new article empowering the majority to buy out any shareholder as they thought proper was invalid as being self-evidently wider than could be necessary in the interests of the company. All the above cases were decided using the benefit of the company test. However, in Shutterworth v Cox Brothers and Co (Maindenhead) Ltd, [18] the Court of Appeal criticised the Dafen Tinplate Co Ltd case as a wrong application of that test.

It is difficult to know whether Scheme B would be lawful and likely to succeed because the above case law is of limited value, being two first instance decisions which have been criticised by the Court of Appeal on the point of law, and a Court of Appeal decision which is of limited value since the facts were so clear-cut. In the recent case of Constable v Executive Connections Ltd, [19] the court indicated some uncertainty as to the boundaries of permissible alterations to allow for compulsory transfer. So far, all the previous decisions imply that a resolution adding to the articles a provision enabling the shares of a member to be compulsory transferred would be upheld if it was passed bona fide in the interests of the company. This would only not just be judged by Mr Middleton and Mr Cameron but also by the court. However, in Shuttleworth v Cox Bros Ltd, [20] the Court of Appeal held that it was for the members, and not the court, to determine whether the resolution is for the benefit of the company and that the court will intervene only if satisfied that Mr Middleton and Mr Cameron have acted in bad faith.

Can Miss Scot stop either scheme from going ahead (if lawful), whether by using her votes as Director and/or Shareholder or by applying to the Court?

There are a number of practical considerations which the Company must bear in mind before exercising the power of removing Miss Scott from her directorship. Apart from the issue of the amount of compensation payable to her for the termination of his appointment (which of course is being dealt with by the Instructing Solicitor’s Employment Department), exercise of the power may trigger a petition by Miss Scott alleging that Scheme A amounts to unfairly prejudicial conduct. [21] She would be able to apply to the court by petition for an order on the ground that the Company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to her or that the actual or proposed Scheme A is or would be so prejudicial. [22] 

For example, in Re Little Olympian Each-Ways Ltd (No 3), [23] the petitioner, Supreme Travel Ltd (Supreme) was a substantial but minority holder of preference shares in the company (Olympian). The Supreme’s controller had lost interest in Olympian due to its poor performance. He later died after which Olympian was unable to contact Supreme. The majority of the shares in Olympian came under the control of three new directors who improved it business greatly though it suffered from heavy debts. In restructuring, the directors transferred their shares to a new company (referred in the case as NewCo) which they controlled and then caused Olympian to sell to sell all its assets to NewCo for £1. Subsequently, they sold their shares to NewCo for £10 million. The court held that this was conduct prejudicial to the interests of Supreme, and NewCo was ordered to buy Supreme’s shares and to pay for them what Supreme would have got if the company has itself received the £10 million and then has been wounded up. The court held that the director acted negligent and in breach of trust when they sold the assets of Olympian for only £1 and their knowledge of this breach of trust would be attributed to NewCo because they were directors of NewCo and under a duty to inform it that the transaction was tainted by breach of trust.

Miss Scott can stop Scheme A by on the basis that the Company’s affairs would be conducted in a manner which unfairly prejudice to her interests. She would showi that the value of her shares in the Company would seriously be diminished or at least seriously be jeopardised by reason of the Scheme conducted by Mr Middleton and Mr Cameron. If Scheme A is viewed objectively, it would be unfair to Miss Scott whether or not Mr Middleton and Mr Cameron act in the conscious knowledge of unfairness to her or even in bad faith.

In her petition, Miss Scott could include just Mr Middleton and Mr Cameron at the relevant time but also, or alternatively, the NewCo, under the same directorship of Mr Middleton and Mr Cameron, to which the assets of the Company would be transferred at under value as part of the “hiving up" operation, thus depriving her of and further interests in those asserts. In those circumstances, the court could order NewCo, which would belong to Mr Middleton and Mr Cameron, must be deemed to have acted with knowledge of the directors’ prejudicial scheme towards Miss Scott, should be required to buy out her shares at a price proportionate to the value realised by the assets on their subsequent sale to a third party.

With regard to Scheme B, Miss Scott may have it set aside if he can show that Mr Middleton and Mr Cameron acted maliciously or fraudulently and not for the bona fide interests of the Company as whole. Even if, on objective grounds, the alteration would be justifiable as being for the benefit of the company, it will be tainted by bad motive of the Middleton and Mr Cameron. However, she might find it difficult to establish positive evidence of malice because an alteration directed at a particular individual and may involve the expropriation of that person’s shares does not, in itself, constitute a sufficient evidence of oppression. However, Miss Scott could still file a petition for relief of unfairly prejudicial conduct of the Company’s affairs requesting the court to order the Company not to insert the Special Article into the Company’s Articles. [24] This is because the court is empowered to “make such orders as it thinks fit for giving relief in respect of matters complained of." [25] These would include requiring the Company not to make any, or the specified, amendments in its articles without the leave of the court. [26] 

If Both Schemes are lawfully and likely to succeed, which one would Counsel recommend and why?

Counsel should recommend Scheme B. Although Scheme A would enable the dismissal of Miss Scott as a director, forming NewCo and sell the Company’s business to it for the price of the then existing debts plus £1 would be contrary to the duty of promoting the success of the Company for the benefits of its members as a whole. In deed, basing on Re Little Olympion Each-Ways Ltd (No 3), it would easier for the court to find that Mr Middleton and Mr Cameron have acted negligent and in breach of trust by selling the Company’s business to NewCo for the price of the existing debd plus £1. Their knowledge of this breach of trust would be attributed to NewCo because they would be directors of NewCo and under a duty to inform it that the transaction was tainted by breach of trust.

Scheme B is recommend because firstly the law on this area is still unclear. Secondly, so far all the previous decisions imply that a resolution inserting the Special Article to the Company’s Articles would be upheld if it is passed bona fide in the interests of the company. This would only not just be judged by Mr Middleton and Mr Cameron but also by the court. However, as the Court of Appeal stated, it is for the members, and not the court, to determine whether the resolution is for the benefit of the Company. The court will intervene only if satisfied that Mr Middleton and Mr Cameron have acted in bad faith.

Whether Counsel can see anything that instructing solicitors might have missed.

The Instructing Solicitors should have noted that the proposed Schemes might raise a derivative claim due to negligence, breach of duty or breach of trust by Mr Middleton and Mr Cameron, [27] and that they will not be able to vote at the members’ meeting to ratify their acts. [28] Also, Miss Scoot will have the right to enforce against Mr Middleton and Mr Cameron including objection to alter to the Articles and enforcing their duties as directors. The instructing Solicitors might have missed possibility of Miss Scott’s remedy to wind up the company as a result of the application of either scheme. If she is dissatisfied with the way the in which the Company is being run. [29] Although she will be unable to get the majority needed for a special resolution for voluntary winding up, she may ask the court to order that the Company be wounded up.