Question 4
Freya, Noah, Olivia and George are shareholders and directors of Smith Ltd, a leather jacket manufacturing company. Each of the shareholders holds 25% of the voting rights in the company. Freya issued a shareholder loan of £30,000 to Smith Ltd to supplement the company’s paid-up capital of £200,000. Because of her expertise in the leather jacket business, Freya was also nominated by the other shareholders and directors to serve as Smith Ltd’s Managing Director for life.
At the start of Smith Ltd’s business operations two years ago, George supplied leather worth £10,000 to the company but he has, to date, not been paid. Smith Ltd’s articles of association require that:
“(a) All matters concerning transactions with suppliers will be in the exclusive discretion of the board of directors”
(b) All debt obligations to Smith Ltd’s members ought to be fully paid off in no later than 12 months from the date of the loan agreement irrespective of any potential dispute(s).”
George has engaged the other shareholders and directors on several occasions about his payment without success. As Managing Director, Freya believes George is entitled to full payment for the leather he supplied, but Noah and Olivia disagree and argue that the leather George supplied was of very poor quality and could not be used to produce jackets of the standard normally associated with Smith Ltd.
To resolve the situation, Freya and George are proposing an amendment to the articles by which “the Managing Director has a casting vote in the event of a deadlock”. To help the proposal pass, Freya intends to use a clause in the articles which increases the weight of her voting rights to 50% where there is a disagreement between the shareholders.
Advise Smith Ltd and its shareholders and directors on their rights and obligations stemming from the company’s constitution, as well as for the feasibility of the proposed amendments.
(max. 1250 words)
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Smith Ltd is a company that is owned by four shareholders, Freya, Noah, Olivia, and George. Each of the shareholders holds 25% of the voting rights in the company. Freya issued a shareholder loan of £30,000 to Smith Ltd to supplement the company’s paid-up capital of £200,000. Freya was also nominated by the other shareholders and directors to serve as Smith Ltd’s Managing Director for life.
At the start of Smith Ltd’s business operations, George supplied leather worth £10,000 to the company but has not been paid. Smith Ltd’s articles of association require that all matters concerning transactions with suppliers will be in the exclusive discretion of the board of directors, and that all debt obligations to Smith Ltd’s members ought to be fully paid off in no later than 12 months from the date of the loan agreement, irrespective of any potential disputes.
George has engaged the other shareholders and directors on several occasions about his payment without success. As Managing Director, Freya believes George is entitled to full payment for the leather he supplied, but Noah and Olivia disagree and argue that the leather George supplied was of very poor quality and could not be used to produce jackets of the standard normally associated with Smith Ltd.
To resolve the situation, Freya and George are proposing an amendment to the articles by which “the Managing Director has a casting vote in the event of a deadlock.” To help the proposal pass, Freya intends to use a clause in the articles which increases the weight of her voting rights to 50% where there is a disagreement between the shareholders.
From the information provided, it is clear that the shareholders and directors of Smith Ltd have certain rights and obligations stemming from the company’s constitution. The first and foremost right of the shareholders is the right to vote on matters concerning the company. Each shareholder has 25% of the voting rights, and together they hold 100% of the voting rights. This means that in order for any resolution to be passed, it must have the support of at least 75% of the shareholders.
The articles of association of Smith Ltd also provide that all matters concerning transactions with suppliers will be in the exclusive discretion of the board of directors. This means that the board of directors has the power to make decisions regarding transactions with suppliers, and the shareholders have no say in this matter. Additionally, the articles of association also state that all debt obligations to Smith Ltd’s members ought to be fully paid off in no later than 12 months from the date of the loan agreement, irrespective of any potential disputes. This means that the company is obligated to pay off any debt to its members within 12 months, regardless of any disputes that may arise.
The proposed amendment to the articles of association, which gives the Managing Director a casting vote in the event of a deadlock, is feasible, but it would require the approval of at least 75% of the shareholders. This is because any amendment to the articles of association requires the approval of a majority of the shareholders. However, it should be noted that giving the Managing Director a casting vote in the event of a deadlock may not be in the best interest of the company, as it may lead to a concentration of power in the hands of the Managing Director and could potentially lead to conflicts of interest.
The proposed amendment to the articles of association which increases the weight of Freya’s voting rights to 50% where there is a disagreement between the shareholders, is not feasible. The articles of association do not provide for a clause that increases the weight of any shareholder’s voting rights. Additionally, any amendment to the articles of association that would give any shareholder more voting rights than the others would not be fair and may be considered as an abuse of power.
