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Five years ago kim liz and meg formed a company with kim and liz having 40% shares each and rest with meg.They were the only three directors. The object in their articles stated that they will deal in only environmental friendly product.
But kim and liz decided to enter into a contract with third party for a product which was not environmental friendly .Meg objected to this and stated that contract is not binding
Question
Will Meg be able to stop kim and liz from marketing such product?
Sir since this is very old Question it is theoretical based and is not in mcq form
Sir the answer stated that kim and liz may well seek to pass a special resolution and alter the object as they together hold 80 % shares and Meg will not be able to stop them.
But sir my problem is that Meg can still say that the other directors acted in breach of their duty of acting within power. And since the companies act also states that any DIRECTORS OR MEMBERS WHO ARE RELATED TO BREACH OF THEIR DUTY WILL NOT BE ALLOWED TO VOTE FOR THE RATIFICATION OF THE SAME.
Then shouldn’t meg be able to deny the ratification and hold the directors as in breach of their dutyRather than think about the difficulties of passing a special resolution to ratify the contract because the voting would be 0% against 20% (because neither Liz nor Kim would be aable to vote, step back a pace!
Let’s propose a special resolution to alter the Articles. Ah! Now we can pass a special resolution 80% against 20%
What Meg could do is complain to the Court on the grounds that Kim and Liz are altering the Articles for an improper purpose
Meg could appeal on the basis that she holds not less than 15% of the votes and she didn’t vote in favour of the resolution
HOWEVER!!! The Court is not likely to hear her plea favourably – the majority wishes to proceed down a particular path so why should the majority be prevented at the behest on a moaning minority?
Advice to Meg? Sell your shares to Kim and Liz and move on with your life!
OK?
Yeah sir i got the difficulties but can meg ,if she will pass ordinary resolution for ratification, deny the ratification and make director compensate for breach of their duty??
If she can’t stop a special resolution, why would Kim and Liz try the ratification route when it would be so much easier to alter the articles?
If you become involved in a company KNOWING that you are to be excluded from control (and, in Meg’s case, excluded also from negative control) then you can’t complain if that situation is continued
Lesson? Don’t get involved in a situation where you have no control!
OK?
No sir
I think i misrepresented my question
I am asking that
Kim and liz are in breach of their duty
So their act needs to be ratified or they can alter the articles
Now since only meg has the power to vote in ratification since the other members are involved in breach.
If Meg do not ratify it .They will still have to compensate for their breach though they can afterwards alter the articles
Right?No! Why try to ratify knowing that Meg will defeat your attempts? Move straight on to Article alteration.
Furthermore, Meg would need to propose separate resolutions to be passed by the members to the effect that Kim and, separately, Liz should be held liable to compensate.
Resolution 1 ‘ Following discussion, it is proposed that Kim should be held liable to compensate the company’ All those in favour? Meg 20% Against Liz 40%. Resolution fails.
Resolution 2 ‘ Following discussion, it is proposed that Liz should be held liable to compensate the company’ All those in favour? Meg 20% Against Kim 40%. Resolution fails.
Best advice for Meg is to sell her shares and move on … and don’t go into situations where you are denied any semplance of control (particularly in the context of private companies)
OK?
But sir meg can call for ordinary resolution or written resolution as she has 5% of voting rights
Required for calling general meeting
But since you said that separate resolution will be held for both kim and liz
That’s where the problem is right?Sir also
Why there should be separate resolution for acts of both director
Can’t they do only one resolution for acts of both?No – you can’t hold one director responsible for the actions of another.
That’s also the reason why, on the re-appointment of directors retiring by rotation, it’s necessary to have separate resolutions for each rather than a composite resolution for all
OK?
So for ratification of acts of directors
Every directors act should have a separate resolution
Right?If it’s a ratification of a director’s (or many directors’) ultra vires actions, then yes.
OK?
Thanks sir
I just admire the way you keep on answer questions even though some might be silly
Thanks for your help sirWhat do you mean “SOME might be silly”?
🙂 🙂
It’s really not a problem and, so far, none of them has been silly.
I’ve just seen the score that you achieved on the FA paper. Dare I say that I’m not surprised 🙂
Sir i really got this complete doubt except one
In bpp it is written that while voting for ratification for director’s act of breach of duty any member or director may not vote.
So i feel that meg can still call to ratify the breach of the act of directors and decide not to vote in favour of their act
And she can make them liable for breach of fiduciary duty
THOUGH afterwards the other two directors can pass a special resolution to alter the articles in their favour.
Kindly tell me if this is rightYou have written two sentences here that simply do not make sense!
1 “In bpp it is written that while voting for ratification for director’s act of breach of duty any member or director may not vote.”
I believe that the expression that you have (mis)quoted is either a) “… any member or director may CHOOSE not TO vote.” or
b) “In bpp it is written that while voting for ratification for director’s act of breach of duty any member or director ALLEGED TO BE IN BREACH may not vote”. That’s OK – that’s in line with what I have previously responded.
2 “So i feel that meg can still call to ratify the breach of the act of directors and decide not to vote in favour of their act”.
Why would Meg want to call a meeting to ratify a breach? IF I pursue your line of thought, the meeting would be held with the intention of ratifying with (according to your thinking) only Meg being able to vote. And then Meg not voting in favour of the proposed ratification.
OK, so then what happens? The alleged breach by the substantial majority is not ratified but that, in itself, does not render the other two directors liable.
Krrish, you have pursued this quite relentlessly and I really admire your tenacity. But we’re talking here about a law exam of questions with multiple choice answers for an accountancy qualification. Furthermore, I cannot imagine a question being set along the lines where your “what-if” scenaria would fit into the ACCA’s anticipated thinking.
This is from your opening post on this thread from February 18th – “Sir the answer stated that kim and liz may well seek to pass a special resolution and alter the object as they together hold 80 % shares and Meg will not be able to stop them.”
Accept it!
OK, so then what happens? The alleged breach by the substantial majority is not ratified but that, in itself, does not render the other two directors liable.
Sir if only meg is going to vote and she votes NOT to ratify the act
Then how the other director will not be liable
Won’t they be required to compensate for breach of fiduciary dutyWho are they fiduciarily liable to? The company as represented by the members! Each individual member? No, the members as a whole. 100%? No, the majority. Who is the majority? Liz and Kim
Sir the directors have a duty to company as a whole it is their duty to act within their powers which if they do not ,they are in breach of their fiduciary duty
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