Company Law

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This is the sample case law with the suggested solution, hopefully it will help you in underrstanding how to answer case law

Qns:

Konozz Publishers Limited hereinafter referred to as the company, is a private limited company with articles in the standard form, as amended by the following special article 10 which provides:

‘In the event of there being a resolution before a general meeting to dismiss a director, that director’s share shall carry 3 times the normal number of votes’.

The company has issued 10,000 shares, which are held as to 2,000 each by the three directors, Alphy, Inno and Lizzy.

The remaining 4,000 are distributed amongst ten shareholders. alphy and Inno have become disturbed by the fact that recently Lizzy has a new boyfriend who is a member of a Fascist Political Party, and the concerned that Lizzy might not be able to support the progressive publishing policies of the company in the future.

They consult you to consider whether Lizzy might be dismissed as a director, telling you they are likely to be able to command the support of all the other shareholders (apart, obviously, from Lizzy).

Advise Alphy and Inno as to what course or courses of action they should follow.

Suggested Solution

The problem raises the following legal issues: weighted voting rights and the principle established by the Bushell v Faith case and section 168 CA 2006 plus the 28 day rule.

The Companies Act 2006 allows a company to remove a director from its board by means of moving an ordinary resolution of the company in general meeting. However the company has a special article 10 provision which creates weighted voting rights on a motion to remove a director. Such a provision was recognised by the House of Lords in Bushell v Faith (1970) AC 1099. At first sight article 10 would appear to contravene the principle that a director is always removable by ordinary resolution; but in Bushell v Faith the court said that such a clause merely affected the way in which votes were counted on such a resolution, and therefore the likelihood of its being passed-did not infringe the rule that such a resolution would be effective if passed.

Although the facts in Bushell v Faith involved the courts finding for the existence of a quasi-partnership, the principle should apply equally to the company in question.

An examination of shareholder in the company reveals the following information. There are 10,000 issued shares, of which Lizzy holds 2,000. Inno and Alphy expect to be able to obtain the support of all the other shareholders, which will be a total of 8,000.  This will out vote Lizzy’s 6,000 (2,000 x3) which will be available to under article 10, should her fellow directors try to move a section 168 ordinary resolution. However, on the current figures her fellow directors should be able to successfully move such a resolution.

The only way in Lizzy would be protected from a section 168 CA 2006 resolution would be to change the special article 10 provision so that it provided for 5 votes per share. This would provide her with 10,000 votes to the 8,000 available to the other shareholders. If this was the case she could clearly defeat any resolution. However, a change to the company constitution would require majority support.

Provided Alphy and Inno give Lizzy give  the company 28 days notice of the calling of an extra-ordinary general meeting of the company, at which they propose to move an ordinary resolution under section 168 CA. 2006 it would seem that there is little Lizzy can do to prevent her removal. However, section 168 CA 2006 provides that she is entitled to substantial compensation for loss of office.

Further, Lizzy may have a fixed term service contract for more than 5 years. If this is the case such a document will have been approved by the company in general meeting. Here such a contract will provide for substantial compensation to be paid to Lizzy should it be brought to early termination.

Alphy and Inno should therefore consider whether they can afford to dismiss Lizzy from her job as a director.           

Having reviewed the law above there is little to suggest that Alphy and Inno would be unsuccessful if they tried to remove Lizzy