Opinion on company law:

(1) MARTIN GAVIN BAKER
(2) LUCY JANE KIRK

And

(1) JONATHAN FARICLOUGH
(2) HEATEHR PENNNY JONES
(3) KEITH PAUL BOSWELL
(4) LINKCHAIN PACKAGING LIMITED


OPINION

1. I am asked to advise Mr Baker and Mrs Kirk as regards the possible claims against the shareholders and directors of Linkchain Packaging Limited, and against the company itself. Mr Baker and Mrs Kirk had been in business together and set up a new company with Mr Fairclough, Mr Boswell and Mrs Jones, the first three defendants. The three defendants decided to merge their business, Bojofair Limited, with that of Mr Baker and Mrs Kirk. The new company, Linkchain, was formed around September 1999, and each member was allocated a 20% share. All 5 were appointed as directors, and profits were made each year form the conception of the company. However, in February 2003, Mr Baker and Mrs Kirk were removed from their office of director, through the voting of them off the board by the other members of the company. They have both been paid their salaries for a further 6 months past then. In addtion, at the same meeting, it was resolved that the share capital of the company would be increased to £10,000. 6,000 of the new shares have been issued to the remaining three directors of the company however, Mr Baker decided not to take up his shares as they were offered to him at a price of £20 each. It is unclear whether or not Mrs Kirk was made the same offer. I am asked to advise generally on the company law aspects of the case, any action that should be taken against the three remaining directors and the company itself, and the minimisation of costs in the resolving of any dispute.

2. Mr Baker and Mrs Kirk have a very strong case for bringing litigation under based on the directors breaching their fiduciary relationship to the company and also being unfairly prejudicial by committing a fraud on the minority shareholders through the dilution of their interests. However, this may prove both costly and lengthy. In my opinion, there are several possible outcome of this case, depending on the aims of Mr Baker and Mrs Kirk. The splitting of the company into its old forms, and the repayment of the loan of the defendants that was used to set up the company, with the purchase of their shares at a fair price is one. Another is that the same occurs but an order that the company be wound up is issued, and finally, an order for the compulsory sale of the other director's shares to Mr Baker and Mrs Kirk is a possibility.

The Removal of Mr Baker and Mrs Kirk as Directors
3. Under section 303 of the Companies Act and as per the case of Bushell v Faith, directors can be removed from their office by an ordinary resolution at a general meeting anytime subject to certain provisos. One of these provisos is that the provisions are subject to the information that is is contained within the articles of the company or the contract of employment; however both are silent on the matter. Special notice has to be given of any meeting that proposes to remove the director form the meeting, and this has been delivered 28 days in advance. In addition, each director must be heard at the meeting. These provisions would seem to have been adhered to, however, despite the articles of the company not forming a binding contract between the directors and the company, Mr Baker and Mrs Kirk have three causes of action, one on the service contract (which there seems to be) and the agreement between the directors, one on the basis that they have been unfairly prejudiced, and the other is to bring an action in their capacity as shareholders against the directors to enforce the companies rights against them.

The New Issue of shares
4. Under the principle of pre emptive rights a shareholder is entitled to protect his proportion of the total equity in a company by having the opportunity to subscribe to any new issue of shares. In addtion, this right is provided for by part 3 of the articles which acts as a contract between the company and the shareholders. The issuing of the shares at a premium over their nominal values is common place. However, under section 89(1) of the companies Act, the shares must be offered on the same terms and the same price to all members. Under section 90(6), if they are not taken up they cannot be offered on more favourable terms to the other members. Thus, if there is evidence that the shares were not offered to Mrs Kirk or that the shares were offered to the other members at a cheaper rate then there will be supporting evidence for the litigation to commence.

Action which will Minimise the Costs of Resolving Dispute
5. Mr Baker and Mrs Kirk have a very strong case, for the reasons that are outlined below. However, such procedures can often be lengthy and costly affairs. The quickest and cheapest way to resolve the matter would be to apply for a court order to call a general meeting. This is necessary as Mr Baker and Mrs Kirk no longer remain in the capacity of directors and so cannot call the meeting themselves. Under s371 of the Companies Act the Court can call a general meeting if for any reason it is impractible for one to be called in the usual manner. It is likely that such an application will be upheld.


6. At the meeting, Mr Baker and Mrs Kirk could call for them to be reinstated in the company, or given a settlement package that is in their favour, including the repayment of the loans and the purchase of shares above the offer that has been made. It should be stated in no uncertain terms that the ramifications of not coming to such an agreement could be that the company be would up, or a compulsory purchase order of either sides shares made, as well as the three directors being suspended and precluded form holding the office in the future by a disqualification order. In addtion, it is submitted that the carrying on of the business in its previous guise may be impossible in the light of the circumstances that have occurred. I would advise that a reasonable solution be sought, one solution may be to split up the two businesses and have them trading as entirely unconnected and separate concerns.

Splitting the Companies
7. Mr Baker and Mrs Kirk have the option of reforming their old company and trading under the goodwill that has been created by Linkchain. In essence they, under section 425 of The Companies Act, as in the case of Re Alabama, New Orleans, Texas and Pacific Junction Railway Company, could transfer some of the property in Linkchain to their new venture, whether it be monetary or fixed assets. They would have to agree with the remaining directors of Linkchain the amount that was due, and then apply to the court for such an order to be made to transfer the assets from the transferor company (Linkchaim) to the transferee company. In addtion under section 427(1) - (3) b the court can make an order to transfer securities and liabilities as well. This process would have the advantage of leaving Linkchan in business but also supplying Mr Baker and Mrs Jones with a company of their own from which to carry on business.

8. It is also advised that the past agreement between the parties is declared ended form such a date, as it precludes the setting up of a venture by any of the directors in competition. Instead a new agreement should be formulated that allows Mr Baker and Mrs Kirk to carry on the custom that they have built up in respect to a certain trading area of Linkchain, and that Linkchain be precluded form operating at all with those clients for 12 months.

An Action to Enforce the Company's rights
9. Should no compromise be reachable through the above, then litigation should be commenced. Under English Company Law, there is an elaborate set of restrictions and provisos that govern exactly when a shareholder can bring an action against the directors on behalf of the company. The rule in Foss v Harbottle precludes an action being brought to remedy a ratifiable wrong. The rule precludes actions that could be resolved by general meeting, however, as per the case of Edwards v Halliwell, the rule is circumvented where there has been something that can amount to a fraud on the minority.

10. In this case it is my view that there certainly is strong evidence to suggest that a fraud on the minority has been committed. There seems to be no reasoning behind the removal of Mr Baker and Mrs Kirk form the company. The company was making profits and these seem to have been rising. The directors have a fiduciary duty to act in the companies best interests and this would not seem to have been followed. Thus, Mr Baker and Mrs Kirk would bring an action on behalf of the company - not against it. There would certainly seem to be ulterior motives for the removal of the directors, and, as in the case of Burland v Earle, there is strong evidence of the directors attesting to appropriate advantages, money or property belonging to the company. As a precursor to any action it is also necessary to show that control over the company exists in the hands of the wrongdoers, (Prudential Assurance Co Ltd Newman Industries (no2)), and this it is submitted is certainly the case.


An Action to Enforce Personal Rights
11. In addtion, I advise that an action be brought under section 459 of the Companies Act on the basis that the acts of the alleged wrongdoers were unfairly prejudicial to Mr Baker and Mrs Kirk. As in the case of Re Bovey Hotel Ventures, it is necessary to show, not that the alleged wrongdoers knew that they were doing anything wrong, but only that the reasonable bystander would observing the consequences of their conduct would regard it as amounting to being unfairly prejudicial to the petitioners interests. It is submitted that the Court is likely to hold this so, despite the fact that an offer has been made on the loan and the shares, simply due to the fact that Mr Baker and Mrs Kirk relocated and sold up their old business, but also because of the large, and rising sums that the company seems to be making, there would seem no legitimate reason for their removal.

12. If unfair prejudice is held to be the case then there is wide range of remedies that may be applied to the case. Thus, under section 461(1) the court may hold that the company's affairs are to be regulated by the court, authorise civil proceedings to be brought on behalf of the company by people that the court sees fit, order the purchase of shares by any member of the company to any other member of the company as it sees fit, or indeed, order that the company be wound up. Thus Mr Baker and Mrs Kirk could apply to have the company sold to them and the other directors removed if they so wished.

13. Therefore, there is a strong likelihood that Mr Baker and Mrs Kirk will be able to bring a successful action against the defendants in this action (barring the company), and that they could move for compulsory purchase of their remaining shares, or the winding up of the company.


An Action Based on the Agreement
14. In addtion to the above stated. there is an express term within the agreement between the directors, under 6.2, that in the carrying out of the business of the company that the shareholders will use their best efforts consistent with their own best commercial interest and should a disagreement arise then they will try and negotiate in good faith. In addtion, under 13.2, the agreement that formed the company is stipulated to operate in fairness to all of them, and without detriment to the interests of any of them. It is advised that should litigation be commenced that an action for the breach of the agreement is also brought, as it likely to constitute a legally binding agreement on the parties and as such, the express obligations in it should be legally enforceable. In addtion, it will also be useful to show that the directors that remain have breached their obligations to the company and its other shareholders.

15. Also, under section 5, a service contract for directors is mentioned. If Mr Baker and Mrs Kirk were not aware of these then under section 381 they have aright to see them as these have to be available for inspection. I would therefore advise that the service contract is further analysed and passed on to myself, as it may prove that the parties are entitled to rather more in the way of damages or compensation arising from termination of the agreement then that which ahs been offered.

Next steps
16. I request that a proof of evidence of Mrs Kirk's position be set across to allow me to have to gain a fuller picture of her position in the case and the bearing on the scenario as whole. I would also advise that Mr Baker and Mrs Kirk send their contracts of employment to me. Further, a meeting should be requested by a Court Order, and then an advancement of the position can be made on the advice tendered.

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