Company law 2019 PDF

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AC8102

NANYANG TECHNOLOGICAL UNIVERSITY

TERM 1 EXAMINATION 2018

AC8102 Company Law May 2018

Time Allowed: 2 hours

INSTRUCTIONS 1

This paper contains SIX(6) questions and comprises FIVE(5) pages.

2

Answer ALL the questions.

3

The number of marks allocated is shown at the end of each question.

4

Begin your answer to each part on a separate page of the answer book.

5

Answers will be graded for content and appropriate presentation.

6

This is an open book examination.

1

AC8102 Great Foods Case Edward is a capable man with many years of experience in the gourmet and organic foods business. Edward is married to Ellie, who is the sister of Alan and Bob. Alan and Bob saw potential in the wholesale and retail sale of gourmet and organic foods. They wanted Edward to be the Managing Director of the company they planned to set up because he is talented and they trusted him. After much persuasion, Edward agreed to participate in the company. The three men incorporated Great Foods Pte Ltd (“GF”). At the time of GF’s incorporation, Alan and Bob each held a 35% stake in GF while Edward held a 30% stake in GF. GF’s four directors were Alan, Bob, Edward and Ellie. Edward was the Managing Director while Alan, Bob and Ellie were nonexecutive directors of GF.

Question 1 It was intended that Edward should have a free hand in running the business although he remained accountable to the board and shareholders of GF for GF’s performance. GF’s constitution is largely modelled after the Model Constitution, except for regulation 97 of the Model Constitution which was removed and replaced with these two provisions at the time of GF’s incorporation: “Regulation 97A: As Managing Director, Edward will run GF without interference from Alan and Bob, and will be able to make strategic business decisions for GF without consulting Alan and Bob. Regulation 97B: Regulation 97A may not be altered except by a resolution passed by 80% of the members of GF.” Required Advise Alan and Bob on the procedures to be complied with if they wished to: (i)

remove regulations 97A and 97B from GF’s constitution; (10 marks)

(ii)

remove Edward as Managing Director and Director of GF. (10 marks)

You should in your answer, also state briefly who can convene the relevant meetings in order to carry out (i) and (ii). (TOTAL: 20 marks)

2

AC8102 Question 2 Alan’s son, Andy, graduated from university in 2017. Alan wanted to bring him into GF to learn the business and eventually to succeed Edward as Managing Director. When Alan raised the idea of Andy being a director of GF, Edward opposed it. The issue split the board into two camps, namely Alan and Bob on one side, Edward and Ellie on the other side. Nevertheless, Alan and Bob proceeded to elect Andy as a director. In addition, although GF was not in need of fresh capital, Alan, Bob and Andy hastily arranged for an issue of shares to existing shareholders (“the rights issue”) at a time when they knew Edward would find it difficult to come up with money to take up new shares in the company. After the rights issue, Edward’s stake in GF was reduced to 10%. Alan and Bob went on to delete regulation 97A from GF’s constitution. With regulation 97A removed, Alan, Bob and Andy started to actively interfere with Edward’s business decisions and consistently overruled him on everything in board meetings. Within six months after the removal of regulation 97A, Edward was removed as Managing Director and Director of GF. Required Discuss the TWO options available to Edward under the Companies Act to address the things Alan, Bob and Andy did to him and state the remedies he is likely to ask for. (20 marks) Question 3 Sometime in 2016, Edward had made a decision that GF should stop its wholesale business and focus on retail business because the retail business was a lot more profitable than the wholesale business. Edward had asked his finance manager, Fiona, to work out the return on assets from the wholesale and retail businesses. Fiona informed Edward that the return on assets were 20% for the retail business and 0.5% for the wholesale business. Edward just accepted the figures without question. It turned out that the wholesale business actually generated a return on assets of 5%. Based on the figures prepared by Fiona, Edward made the decision to wind down GF’s wholesale business. From the first time Alan broached the idea of bringing Andy in as director of GF, Edward knew he had to prepare for his exit from GF. After the trouble with Alan and Bob started and while he was still a Managing Director of GF, he did the following:

Note: Question 3 continues on page 4

3

AC8102 Question 3 (continued)

(1)

Edward incorporated a company, namely, Long Life Pte Ltd (“LL”) to engage in the same line of business as GF. LL’s sole director is Edward’s sister, Elaine. Edward owns 90% of the shares in LL while Elaine owns the remaining 10% of the shares in LL. Edward directs Elaine on what to do concerning every aspect of the business of LL. Edward did not tell anyone about his new business venture.

(2)

Edward passed on records of GF’s customers, such as their names, addresses, the items purchased and the price of the items purchased, to LL. LL contacted these customers to offers its services to them at competitive prices.

Required Discuss what duties Edward may have breached as a director of GF. (There is NO need to discuss the consequences of the breaches, if any.) (25 marks) Question 4 Assume instead that the relationship between Alan, Bob and Edward did not break down and the unfortunate events described in questions 1 to 3 did not take place. GF, being one of the first companies to enter into the gourmet and organic food business, was very profitable in its early years and as a result had significant sums of monies in its retained earnings. The board of GF had also wisely invested GF’s profits in several shophouses at choice locations to carry out its retail business. The properties are still carried on the company’s balance sheet at cost. The notes to accounts indicate, however, that the properties have appreciated substantially in value. More recently, because of increased competition from other entrants to the food business, GF is not as profitable as before, but is still able to pay out dividends. Alan and Bob remain optimistic about GF’s future and intend to bring in a new management team to bring the company forward. Edward, on the other hand, wishes to retire to spend time with his family. He wants the company to buy his 30% stake in GF and exit the company. Required State what type of share buy-back is appropriate. Based on the type of share buy-back you recommend, please outline briefly the procedural requirements and whether there are hurdles to be overcome in order for Edward to achieve his goal. (10 marks)

4

AC8102 Question 5 Assume instead that GF is now listed on the Singapore Exchange. Edward is a director and Chief Executive Officer of GF. His wife, Ellie, is no longer a director of GF. Subsequent to the public listing, Edward owned 6.96% of the shares in GF. Ellie has just told Edward that she has just acquired some shares in GF. Required Discuss Edward’s disclosure obligations as a director and as a shareholder of GF in relation to the acquisition of GF shares by his wife. Please include in your answer the significance of the quantity of shares acquired by his wife. (15 marks) Question 6 Assume instead that GF did poorly over the years and was eventually wound up by the court in March 2018. The liquidator discovered that in 2014, GF had sold one of its properties in Singapore to Excel Pte Ltd (“Excel”) at a price of $5 million. The property was sold at a time when GF was consolidating its assets. The liquidator learnt that a similar property in the same vicinity was transacted at $5.8 m at around the same time as the sale to Excel. Two directors of GF also served on Excel’s board. Required Advise the liquidator on whether he/she can invalidate the sale of the property to Excel. (10 marks)

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