Commlaw 7012 Business And Corporations Assessment Answers

Answer:

Issue 1

The first issue in this case is to determine the rights of the minority shareholders so that the threat posed by them to director’s can be analyzed. In addition the issue is also to decide how to prevent the resolution which is predicted.

Rules

Section 994 of the Companies Act 2006 any member of an incorporated organization have the power to apply before the court for a petition for any order under this section on grounds like

• That the dealings of the company have been or are being carried out in such a way that it is prejudicial unfairly to the interest of the shareholders in general or in some part related to the shareholders.
• That an act or omission which is proposed or actually done would be or is unfairly prejudicial to the shareholders

The rulings of this section are also imposed on such individuals who are not actual members of the company but who have been transferred or provided with shares in the company through legal rules applicable to the shareholders of the company (Chiu 2016)

Interpretation of s 994 provides four primary issues namely who has the authority to make a complaint against whom, what is the specific meaning of companies affairs, when is an act or omission prejudicial or unfair and what is the interest of a member.

Section 112 of the CA provides that persons can only bring an action against the company if they are the members of the company. In the case of Re London School of Electronics Ltd [1986] Ch 211 it had been provided by the court that it is very important to determine the honorability of the claim and what relief has to be granted.

Section 260-264 of the CA allows a shareholder to bring a derivative claim for the benefits of the company on its behalf. The claim has to be a claim which is vested in the company and involves, default, negligence, breach of trust or breach of duty by a director. In order to continue the claim the permission of the court has to be acquired by the claimant. The court may deny permitting such derivate claim if it comes to the conclusion that the claim is not in the best interest of the company and the act reported about is within the scope of the power of the company.

The legal remedy which the minority shareholders may want from the court is usually that the shares of the minority shareholders are ordered by the court to be purchased by the company at a particular price. However if the legal remedy which is wanted by the minority shareholders is not the purchase of shares by the majority, the sensible use of derivative claims in relation to section 260 is taken in most cases.

The minority shareholders have the right to ask the court to make the company call a general meeting and when the shares of the minority are more than 10% they have the authority to get the accounts of the company audited at the cost of the company (Guillén and Capron 2016).

According to section 168 of the CA an ordinary resolution can be passed by the shareholders for the removal of the directors at a general meeting. This can be done by a special notice to appoint someone instead of the directors as provided by section 312 of the CA. a notice of intention has to be provided 28 days before such resolution to be effective. An ordinary resolution in an AGM can only be passed through the vote of the majority. The voting may be in form of shares voted through poll, by proxy or in person.

It was provided in case of Roberts v Gill & Co Solicitors [2010] UKSC 22 that minority shareholders may bring a derivative claim when they are able to show a prima facie case.

Application

The issue which the company is facing with respect to the sale of a business to the another company which is opposed by the minority shareholders. The shareholders feel that the sale made by the company is undervalued and thus account to the breach of directors duties to act in the best interest of the company.

The issue is a fairly serious issue as the CA provides various rights to the minority shareholders in order to protect them against any oppression by the majority. In such circumstances the minority shareholders may bring two types of actions against the directors of the company. The directors can be sued in the court of law as any member of the company has the right to report against it. However the court in such cases only analyzes the legality of the decision and not whether such decision is beneficial to the business or not. Thus, in case the actions of the directors are valid in accordance to the CA or the constitution of the company than the directors is generally not liable for the braches.

Another claim which can be brought by the minority shareholders is that of unfair prejudicial treatment. In such case the court generally would order that the shares of the minority shareholders be bought by the other majority shareholders at a price provided by the court.

However, if the shareholders do not want their shares to be purchased they can opt for a derivative action against the company but only if they have a prima facie case which is not prominent in the given situation.

An ordinary resolution is enough at the AGM to remove a direct form their post. However the directors can only be removed if the resolution is passed by the majority. In the given situation to avoid bad reputation the directors of the company may purchase the shares of the minority shareholders so that they do not have the power to initiate an ordinary resolution. Even though the resolution may not get passed it may cause loss of goodwill for the board and in such situation it is best for the board to solve the issue with the minority shareholders through dispute resolution processes.

Conclusion:

The minority shareholders may bring a claim against the directors for breach of duties, unfair prejudicial and derivative action.

Issue 2

The issue in this part is to analyzed the differences in the legal provisions of UK with United States, Germany and Japan with respect to

1. Director’s duties
2. Independent audit requirements
3. Executive remuneration setting

Directors Duties

The principles behind the formation of the duties of the directors of the company are taken from the fact that the creditors and stakeholders of the company have to be protected against the powers of the directors. The directors have been vested to manage the affairs of the company which is owned by the shareholders and through the virtue of their position have such knowledge and authority which they can easily use to gain personal benefits at the cost of the company. Thus the legal duties which are imposed on the directors are essential for the proper functioning of the corporate organization system (Kraakman, Armour and Davies 2017).

In UK the directors are imposed with both common law and statutory duties provided by the CA through section 171-177. These duties are to act within powers, promote companies success, use independent judgment, exercising reasonable skill, diligence and care, avoiding conflict of interest, not accepting benefits from third parties and disclose any personal interest in proposed arrangement or transactions. In the US however the business judgment rules prevails which means that the plaintiff has to provide that the actions of the directors have breached the fiduciary duty of good faith, due care and loyalty and if not the plaintiff is not entitled to any relief (Hannigan 2015). If such is not the case the plaintiff has to show that the action where of such a nature that it was a total waste which means that the transaction was of such nature that no reasonable business person would indulge in it. In Germany as per Sec. 43, Para. 1 GmbHG the directors must pursue the business purpose, properly manage the company, not take advantage of the position , be loyal to the company and not disclose confidential information of the company. However in Germany the directors have an additional duty of keeping the shareholders informed about relevant matters of the companies affairs. The managing director has the duty to call the members to inspect the annual accounts of the company. In Japan the board of directors has the obligation to terminate any director who is considered to be unfit for the position. In addition they have the duty of care towards the company, fiduciary duty to act as a prudent manager, duty of supervision of the matters referred to boards and also the other directors and the duty to initiate an internal control system (Roach 2016).

Independent audit requirements

It is the duty of the company which is constituted by its members or shareholders to provide the information related to their financial position to the members and for this purpose an annual audit of the financial position of the company has to be carried out and submitted to the company’s house. All registered companies in the UK have to have an audit unless they are exempted from it. The auditors of the company have to be a person who is independent and not associated to the company such as an employee’s partner. In UK a company can be exempted from audit if they meet any two of the following three criteria. The company has an annual turnover of less than 6.5 Million, The company has assets of a value not exceeding 3.26 Million and the company has less than 50 employees. In US the audit requirements are provided in 31 U.S. Code § 7502. The section states that every non federal entity which has a total value of federal award more than $300,000 or any amount where the adjustments are not made below $30000 in a fiscal year must have a single audit or a program specific audit done by an independent auditor (Bourne 2016). In Germany independent audit is compulsory for all organizations which undergo sales of more than EUR 500000 or having a net profit of more than EUR 500000 in accordance to the accounting standards of Germany. Recording expenses and income on cash basis accounting is permitted for small businesses. In Japan unlike other countries the companies are required to have two different audits which are Audits required under Companies Act and audits required under Financial Instruments and Exchanges Act. Companies under Financial Instruments and Exchanges Act include those which are listed on Japanese stock market and under companies act companies having a capital of more than 500 million yen and liabilities of more than 20 billion (Nicholas 2015).

Executive remuneration setting

One of the major sources of dispute between the directors and the shareholders is the amount of remuneration to be paid to the directors. As the company is controlled by the directors they may make rules favoring large remuneration o be paid to them. Thus each juridical has initiated a set of rules for controlling the remunerations to be paid to the directors. No statutory limit is imposed on the remuneration of directors in UK. However companies which are listed in the UK has to abide by UK corporate governance code where the companies have to explain any failure to abide by guidance and principals on level of directors remuneration. It is further provided that directors should have no role to play in setting their own remuneration. In the US also there is no fix rules related to the compensation of executives but the payment standards are supervised by the U.S Securities and Exchange Commission (French et al. 2014). In response to the criticism that Germany does not have disclosure requirements related to executive remuneration as compared to the UK and US the Corporate Governance Code (Corporate Governance Kodex) have been initiated setting new disclosure requirements. According to the code the remuneration of the members including pensions, survivors benefits severance pay has to be disclosed. In Japan Guidelines on Executive Compensation 2013 set out guiding principles which are to be considered by the companies to set executive compensations. It also requires all companies to have a compensation committee (Kono 2016).

Issue 3

The issue in this section is to identify the key features of Corporate Social responsibility so that the company can attain funding from the European Union.

A high degree of relevance has been acquired by the concept of CSR as the world is shrinking because of globalization. CSR is a concept related to the management of the companies through which environment and social concerns are integrated by the companies in their business interactions and operations along with the stakeholders. According to the European Commission CSR refers to the responsibility which a company undertakes in relation to the impact of their operations on the society. It is believed by the European Commission that CSR is significant for competitiveness, innovation and sustainability of the organizations belonging to the EU economy. The concept introduces the advantages of risk management, access to capital, consumer relationships, Human Resource Management and cost saving. As discussed above the EC has described CSR as the duty of organizations towards the society with respect to the impact of their operations. CSR should be led by companies. A supporting role can be provided by the public authorities in form of smart combination of voluntary regulations wherever required. Thus CSR can be initiated by following the law and ethical, environmental, social, human rights and consumer integration into business operations and strategy. According to the EU the use of CSR makes the companies more innovative and sustainable and provides for an increased sustainable economy (Tai and Chuang 2014). A set of values are provided by CSR through the help of which an enhanced cohesive society can be created towards sustainable economic systems. The primary features of CSR are as follows:

Environmental Sustainability: One of the key features of CSR is environmental sustainability. When the advent of the go green polices around the world the most used CSR feature by the companies is environmental sustainability. The process includes waste management, recycling renewable energy use, utilization of reusable resources, water management, digital technology use and development of buildings through the use of Leadership in Energy and Environmental Design (LEED) standards.

Community Involvement: the process involve providing financial support to local charities, local events sponsoring, providing employment to people of a specific community, community volunteerism support, providing support to economic growth of a community and indulging in fair trade practices. Community involvement also enhances the reputation of the organization in the locality as the people realize that the organization is concerned about their needs.

Ethical Marketing Practice: indulging in ethical marketing practices is also one of the key features of CSR. Companies are placing their values on the clients and respecting their rights. A company under the provisions of CSR must never try to make false and misleading advertisements to induce the consumers. Not indulging in any unethical marketing practices enhances the values of the company along with organization culture. Companies not indulging in deceptive and misleading marketing practices can be considered as ethical companies in the market. The company must have in place a code of conduct to guide the employees and the executives to base their functions. The summary of the code should be available to all the working members of the company.

Human resources: A CSR initiative includes good practices in employee retention and recruitment especially when it comes to the market of graduate students. The CSR policies of the organization are mostly considered by potential recruiters during interviews and a comprehensive policy being in place provides significant advantages. Abiding by good practices when it comes to the human resources include following the employment law of the country along with the code of conduct for human resources managers. The practices also enhances the perception of the employees towards the company and they are always motivated to work for the betterment of the company (Pedersen 2015).

Risk management: Risk management is one of the prime aspects of CSR. Risk management includes identification of risks and then properly addressing them. Risk management is also includes crisis management which deals with the polices managing the after effects of a crisis or accident. Risk management can be initiated by laying a solid foundation of the management within the organization also with oversight (McWilliams 2014).

Board structure: CSR also involves structuring the board in such a way so to add value to the organization. This includes having a nomination committee within the organization and ensuring its independent functioning. The process also involves succession planning, continuing professional development, evaluation of performance and recruitment processes. The board under a company having CSR should have a diverse board having different skill set for the best function of the company. The directors in addition must always abide by the provisions of the directors duties which are imposed on them through common law and statutory provisions.

Corporate reporting: In order to properly incorporate CSR a company must take corporate reporting very seriously. The board has to have audit committee to ensure that no financial irregularities or misappropriation takes place related to the accounts of the company and the directors do not get involved in bringing any financial detriment to the stakeholders, shareholders and creditors. It is also the duty of the management to make timely discourses about the company to all its stakeholders. The rights of the shareholders have to be always respected by the board of directors even when it comes to minority shareholders (Preuss 2013).

Remuneration: The remuneration polices under CSR has to be set responsibly. All employees have the right to be remunerated properly and not to be exploited. In addition limitations and accountability in relation to the remuneration of the directors also have to be increased so that the directors do not charge an unfair remuneration for their functions (Cheng, Ioannou and Serafeim 2014).

Thus these are the few key features of CSR which Westlands Engineering PLC must consider in order to gain from the EU funding program.

References:

31 U.S. Code § 7502

Bourne, N., 2016. Bourne on company law. Routledge.

Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23.

Chiu, I.H.Y., 2016, April. European Shareholder Rights Directive proposals: a critical analysis in mapping with the UK Stewardship Code?. In ERA Forum(Vol. 17, No. 1, pp. 31-44). Springer Berlin Heidelberg.

Companies Act 2006

Financial Instruments and Exchanges Act

French, D., Mayson, S., Mayson, S.W. and Ryan, C., 2014. Mayson, French & Ryan on company law. Oxford University Press, USA.

Guillén, M.F. and Capron, L., 2016. State capacity, minority shareholder protections, and stock market development. Administrative Science Quarterly, 61(1), pp.125-160.

Hannigan, B., 2015. Company law. Oxford University Press, USA.

Hudson, A., 2017. Understanding Company Law. Taylor & Francis.

Kono, T., 2016. Strategy and structure of Japanese enterprises. Routledge.

Kraakman, R., Armour, J. and Davies, P., 2017. The anatomy of corporate law: a comparative and functional approach. Oxford University Press.

Matsui, T., 2015. Legal Aspects About the Interaction Between Companies Law and the Law of Succession in Japan. In Company Law and the Law of Succession (pp. 305-323). Springer International Publishing.

McWilliams, A., 2014. Economics of Corporate Social Responsibility. Edward Elgar Publishing.

Nicholas, T., 2015. The Organization of Enterprise in Japan. The Journal of Economic History, 75(2), pp.333-363.

Pedersen, E.R.G. ed., 2015. Corporate social responsibility. Sage.

Preuss, L., 2013. Corporate social responsibility. In Encyclopedia of corporate social responsibility (pp. 579-587). Springer Berlin Heidelberg.

Re London School of Electronics Ltd [1986] Ch

Roach, L., 2016. Company Law. Oxford University Press.

Roberts v Gill & Co Solicitors [2010] UKSC 22

Salib, J., Sun, D., Wu, J., Wen, X. and Huang, C.C., 2015. Corporate Social Responsibility.

Suliman, A.M., Al-Khatib, H.T. and Thomas, S.E., 2016. Corporate Social Responsibility. Corporate Social Performance: Reflecting on the Past and Investing in the Future, p.15.

Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.

Wirth, G., 2016. Corporate Law in Germany. CH Beck Verlag.