Question

John, Lorna and Gabriel are shareholders and directors of Basically Nice Furniture Pty Ltd, which makes and sells pine furniture. The company has a total of 15,000 shares. John, the Managing Director, has 5,500 shares, Lorna (who is John's wife), the Secretary, has 2,500 shares. Gabriel, a mere Director, has 4,000 shares. The remaining 3000 shares are held in small amounts by 10 other members of the company. John runs the factory that produces the furniture. Lorna runs the front office and handles all administrative duties. Gabriel runs the sales department and is also in charge of marketing. Recently the company prepared a tender for a government department to supply a large number of desks, tables and chairs. The government accepted the tender and offered to enter into a contract with Basically Nice Furniture Pty Ltd. Gabriel was excited about the success of the tender and was very keen for the company to take on the contract. However, John and Lorna did not think it would be a good idea to accept the offer by the government department. Lorna organised a company meeting in order to vote on the pending offer. At the meeting, John and Lorna voted against the offer to supply desks to the government department. Gabriel voted to accept the offer. The other shareholders also voted to accept the offer by the government department. The resolution was passed by vote of the majority that the company would not accept the offer to provide desks, tables and chairs to the government department. Gabriel was very upset that such a valuable opportunity to increase the company’s profits was being “thrown away”. He vociferously objected to the outcome of the vote. Upon hearing his objection, John and Lorna passed a resolution to vote Gabriel off the board of Directors. He was quickly replaced by the company's accountant who holds 300 shares. A few days after the vote, John and Lorna formed a partnership which then contracted with the government department. The contract was exactly the same as the one offered to Basically Nice Furniture Pty Ltd and involved the suppling a large number of desks, tables and chairs. The operations of the partnership are conducted on the premises of Basically Nice Furniture Pty Ltd. Also, the labour involved in making the desks, tables and chairs for the partnership is being done by the employees of Basically Nice Furniture Pty Ltd. The directors of Basically Nice Furniture Pty Ltd (John and Lorna and the Accountant) have also decided to reduce dividends to other shareholders and to increase the payments to the directors. Gabriel is understandably very upset with these developments. He has been organising with the other shareholders to try and find a legal solution to this situation. Upon learning that Gabriel was “making trouble”, John and Lorna called for meeting. The resolution at the meeting was to force Gabriel to sell his shares in the company. Gabriel refused to sell his shares and protested the resolution. However, the Directors of the company passed the resolution (with a majority of the votes) to compulsorily acquire Gabriel’s shares. Consider whether:

(a) John and Lorna have breached any of their duties as directors of the company.

(b) The company is able bring an action against John and Lorna.

(c) Any remedies available to Gabriel for the compulsory acquisition of his shares.

Answer 1

(a) In the above case, John, Lorna and Gabriel are the directors of the company Basically Nice Furniture Pty Ltd. Their business is to sell furniture like tables, desks and chairs made of pine trees. John, Lorna and Gabriel holds major shares of the company 5500, 2500 and 4000 respectively. The remaining 3000 are hold by 10 other members of the company. The contract of selling furniture to government was brought down by the majority action. Being the directors of the company John and Lorna called in the meeting and resolution was made whether to accept the government contract or not. Being the directors, John and Lorna have full right over calling the meeting. Since the main duty of the director is to work for the wefare of the company and also the law permits that a person can hold 20 directorship at a time. So, John and Lorna had not breached any of the suties as director of the company.

(b) If the majority of the members of the company feels that John and Lorna are not performing their duties well, then they have full right to replace them with other deserving candidate. If any member of the organization feels that the act of John and Lorna is purely for personal grudges, they can challenge their directorship in the meeting. Since the duties of the director is to make rules and regulations for the benefit of the organization, if John and Lorna have misused their duties, they are entitled for punishment and company can take strict actions against them.

(c) In Compulsory acquisition of shares, the holder of majority shares has the right to compulsorily acquire the remaining shares of the company. This type of acquisition of shares can be stopped only if the majority peple in the organization object to it. If less then 10% of the shareholders object to it, the Compulsory Acquisition takes place. But if, atleast 10% shareholders object to it, the court of law gets the right to decide.

Note: The points are just opinions and may differ from person to person.