Question4 (Total:35marks)
Answerquestions4(a)and4(b)havingregardtothefactsgivenintheCase below.
CASE: JEB Pte Ltd
Jacob,EdwardandBellwenttouniversitytogether.Immediatelyaftergraduation, they set up a partnership to run a business providing information technology solutions. As the business grew, the three partners decided to ‘convert’ their partnershipintoacompany,JEBPteLtd,witheachofthembeingappointedas directorandeachhavinganequalnumberofsharesinthecompany.Theirrightto eitherremainasdirectorsofthecompanyortoappointadirectortositintheirplace ontheJEBPteLtdboardwasentrenchedin thecompany’sarticlesofassociationas wellasprovidedforinashareholders’agreementwhichthey allsigned.Thearticles also provided that no new directors could be appointed without the unanimous consent of all the members of the company.
Subsequently,Jacobagreedtopumpmoremoneyintothecompanyasthethree wished to expand the business. Jacob now holds60%ofthesharesinthecompany with Edward and Bell holding 20% each.
Thecompanyhasnotdistributeddividends overtheyearsas thethreefriendshad ploughedbackprofitsintothecompanytogrowthecompany.JEBPteLtdisnow veryprofitableandhassignificantreserves andassets.Thethreeremainastheonly directors of the company and have executive contracts of employment with the company as well. Each has the same monthly salary.
Therelationshipbetweenthethreecontinuedtobeverygooduntiltwoyearsago whenEdwardandBellgotmarriedandspent less timeworking for the company. Despite Jacob’s protests, Edward and Bell had arranged for a huge bonus to be paid to allexecutivedirectorsthatyear.Jacobhad wantedthesamesumtobedeclaredas dividendsinsteadbutwasoutvotedbythe other two. The relationship between the three took a turn for the worse thereafter. Edward and Bell often made important decisions without consulting Jacob on the grounds that Jacob was “difficult to contact” as he was often overseas on the company’s business. The huge bonus payments to executive directors and non-declaration of dividends were repeated last year.EdwardandBellalsoarrangedformorebenefitstobegiven toalldirectors,and tookloansfromthecompanywhichtheyused tohelpfinancethepurchaseoftheir home. They intend to again arrange for huge bonusestobepaidtoalltheexecutive directors and not declare any dividends.
Question 4(a) Required
Explain,withappropriatereferencetotherelevantlegalprinciples,whyJacobmay not have been able to prevent Edward and Bell from
•not declaring any dividends; and
•payingthebonusesandprovidingthebenefitstoalldirectors(includingthe granting of the loans)
in spite of the fact that Jacob is the majority shareholder in JEB Pte Ltd.
(Youranswershouldincludeadiscussionofsections162and169oftheCompanies
Act in addition to all other matters which may be relevant.) (15 marks) Question 4(b)
Jacobisfedupwiththesituation.HehasofferedtobuyoverEdward’sandBell’s sharesinJEBPteLtdbuttheyhavebothrefusedtoselltheirsharestohimasthey want to continue investing in the company. Jacobisnowconsideringalloptions available to himto exit the company and to realize his investment in it for a fair value.
Required
Discussalltheoptionsavailable toJacobthat willallowhim tofullyexitfrom the companyandrealizehisinvestmentin thecompany.Wouldyouranswerbeany different if Jacob owned 77% of the shares in JEB Pte Ltd instead of only 60%?
(20 marks)