In: Accounting
Nemo Seafood International Pty Ltd (“Nemo”) operates a seafood export and processing business. The directors of Nemo are Marlin and Dory. There are 2,500 issued shares in Nemo, the majority owned by Lake Harbour Pty Ltd, a company also owned and controlled by Marlin and Dory. The day-to-day operation and management of Nemo were undertaken by Marlin and Nemo’s operations manager, Nigel. Nigel is recommending that Nemo enter into a strategic alliance (merger) with its rival, Jacques Fish Markets (JFM). Under the terms of the merger: (a) Nemo is to issue Jacques, the owner of JFM, with 1,500 new shares, which will represent 3/8 (37.5%) of the total issued shares in the company. Jacques’ shares will carry superior rights with respect to voting, dividends and repayment of capital than the ordinary shares already held by Lake Harbour and the other shareholders. (b) In return, Jacques will transfer all of his shares in JFM to Nemo. (c) From its profit and loss account, JFM will pay a dividend to Nemo, but payable directly to Nemo’s shareholders.
Should the existing members of Nemo have any concerns with this proposal? Specifically, consider:
i) As Lake Harbour is the majority shareholder of Nemo, outline the extent to which it could influence the day-to-day management of Nemo.
ii) Is it legal for JSM to pay a dividend direct to Nemo’s shareholders?
iii) What power does Nemo have to issue new shares?
iv) Should members’ approval have been first obtained before the new shares in Nemo are issued to Jacques?
i)
Majority shareholder is a shareholder who possesses and controls the majority of a company's stock. Just those people who claim increasingly that 50 percent of an organization's offers can be a majority shareholder. By and large, a majority shareholder has more power than the majority of alternate shareholders joined. S/he additionally has the specialist to do things that different shareholders don't have, for example, supplanting a company's officers or governing body. Majority shareholder is usually found in privately owned businesses as opposed to open organizations.
In Crosby v. Shaft, 47 Ohio St. 3d 105 (Ohio 1989), the court held that "Majority shareholders have a guardian obligation to minority shareholders. A majority shareholder has a guardian obligation not to abuse his capacity by advancing his own advantages to the detriment of corporate interests." The court additionally saw that "Majority or controlling shareholders rupture the trustee obligation to minority shareholders when control of the nearby company is used to keep the minority from having an equivalent open door in the enterprise."
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Be that as it may, the court in Smith v. N.C. Engine Speedway, Inc., 1997 NCBC 5 (NCBC 1997), saw that, "Shareholders, including majority shareholders, don't owe guardian commitments to different shareholders when offering their own stock in an enterprise. Shareholders have a privilege to control and vote their offers to their greatest advantage. They are constrained just by any guardian obligation owed to different investors. It isn't shocking that their thought processes might be for individual benefit, or dictated by impulse or fancy, insofar as they damage no obligation owed different shareholders. The proprietor of corporate stock may discard his offers as he sees fit. In offering their stock, investors essentially represent themselves and not as trustees for different investors.
Based on the above discussion, Lake harbour can change the board of directors and control the management through the board but can not interfere with the day to day management of Nemo.
ii)
From the above discussion, it is clear that the owners of the share can transfer their share to whoever they want. But paying dividends directly to the shareholders of another company is not legal, as it is the BOD which has to decide the amount, nature and payment of dividends and JSM being an outsider can not make such decision.
iii)
As Nemo can issue new shares through special resolution passed in the general meeting of the board of directors.
iv)
There is no need for the members' approval for issuing shares. It is the board of directors who can issue shares through resolution. If the constitution of the company allows that. If it doesnt then members approval becomes mandatory.