Business and corporate laws are those laws that govern the businesses transactions especially in companies. The laws cover various aspects of the business including the formation, mergers and acquisitions, contracts, litigation, commercial leasing and consumer protection. In essence, the business law is concerned with definition of rights and responsibilities for commercial transactions. With this definition in mind, we can be able to identify the legal solution to various cases.
In respect to case one where shareholder A fails to come to a consensus with shareholder B during the negotiations process after shareholder A sells his shares to B who later sold the shares to another person at a higher value. A feels that B breached the contract by conducting business behind his back and that he should be responsible for that. This is due to the argument that all along when they were entering into contract of the sale of shares to B, shareholder B had a secret dealing with another dealer who was planning to purchase the shares at a higher value than the amount he was transacting the shares of A with. This action therefore made A to seek legal action against B for he saw that shareholder B has betrayed him a great deal after them working together for a long duration.
The principle in contention here is the limits of the notion of fiduciary duties in insider trading. According to the rule in case of Percival v. Wright where the plaintiff wished to sell his shares in the company and the chairman of the board of directors arranged for the purchase of the same for a valuation of 1210 pounds per share. In the process, the chairman of the board of directors was in return negotiating for the sale of the same shares belonging to the plaintiff to another company for a higher value than that which was to be paid to the plaintiff. Though no offer was made and the transaction was aborted after the plaintiff discovered of the negotiations underway, the court was not satisfied that the board was intending to sell the shares. When the plaintiff brought this case to action against the directors so as the sale of his shares would be set aside for non-disclosure, it was held that;
‘Directors hold a fiduciary position as trustees for the individual shareholders. As the directors owed no duty to the shareholders, the chairman had no duty to disclose the subject negotiations to the shareholders. A contrary view would place directors in a most invidious position where they could be forced to prematurely disclose matters which might well be against the best interests of the company’ (Cassidy, J., 2006, pp. 218)
It is evident that the plaintiff and in this case shareholder A is not capable of being compensated given that the dealing was fair. This is due to the fact they had reached an agreement with shareholder B concerning the value at which they will transact the shares. In addition, the plaintiff has got no business in being aware of the negotiation that the defendant will be having with other companies interested in the shares given that he is in the process of moving out of the company.
In this respect, the plaintiff should reverence the decision of shareholder B who is at liberty of doing with the new shares as it please him. Furthermore, the fact that shareholder A was not informed of the undergoing negotiation of shareholder B with the other company does not give the plaintiff any right of claim. He should be contended with the move of B for if he wanted to sell the shares at a higher price, he could have looked for other interested customers apart from selling his shares to B. thus, there’s no need for him to be furious towards B on either grounds in reference to the ruling of Percival v. Wright case by the court.
In another case of two plaintiffs; Alice and Emma against their director Dean of Why So Cheap Clothing Pty Ltd that deals with garment. Given that Alice and Emma were not in a position of running their company due to lack of managerial skills, they appointed Dean their partner to assist in the management activity of the business. After this had happened Dean managed the company in the way he felt good to him leaving Alice and Emma without any information of how the business is going on.
To make matters worse, they were not offered with dividends and the financial matters were withheld from them to a point that they could not be aware of what was going in the business. On the other hand, Dean was using the company’s products for his own good until the company went into insolvency upon which it incurred more debts which forced the company to go into liquidation.
When the Shark Traders Services pursued them to recover their debt from them all, the two sisters saw as if it was the responsibility of Dean to be accountable for the debts but not all of them. In respect to the corporation act, all the directors and shareholders are responsible for the debt and should therefore pay the creditors their dues. In their views, Alice and Emma consider this to be unfair on their side given that all dealings were done behind their back by Dean who was managing the company.
They claim that although they did not put their decision on paper, still oral contract is enforceable and that Dean should be liable to Shark Traders Services. On the other hand, the creditors’ claims that they are aware of their role as directors and given that they is not written agreement showing that them as shareholders are not the ones managing the company, then they must be liable.
The principle in contention here is that of breach of duty and ignorance. In a rule of Read v. Astoria Garage (Streametham) Ltd, -(1952) it was held that:- there is no need for record anywhere of any terms on which the plaintiff was appointed managing directors beyond the minute of resolution and that all should therefore be responsible of the fault done by the managing director acting on their behalf. In this case, it was rather argued for the plaintiff Mr. Harold by Jenkins L. J. that;
‘Notwithstanding the provisions of article 68, there was a contract between the plaintiff and the defendant company in the nature of a contract of general hiring – a plain contract of employment, one of the terms of which was the plaintiff’s employment should not be determined by the defendant company except by reasonable notice. In judgment, the judge was clearly right to assert that the terms of the plaintiff’s appointment were not as such to entitle him to any notice in the event of the company choosing under article 68 to resolve in general meeting that his tenure of office as managing director be determined’ (Sealy & Worthington, 2006, pp.261).
In reference to this judgment, all the shareholders are obliged to the debt owed to the creditors and the burden should not be left on Dean alone given that he was managing a company belonging to all of them. However, Dean in his position manipulated the resources of the company to his advantage. First, he did not make the issue of payment of dividends formal instead he used to pay Alice and Emma in form of salary. Furthermore, in his position he transferred made garments to his wife’s shop for free which were made in the company. This led to greater losses to the company and in the long run, the company was insolvent for capital was being transferred from the company to his business in secret. As an advice, they are in a good position of suing Dean for his misconduct in the management of the company.
They have the right as directors to be informed of what is going on even if they do not participate in the daily management of the company as directors but by virtue of them being shareholders. To protect themselves against the activities of Dean, they will have to write down and sign the contract in future for its presence would have excused them from being liable to the misconduct of others in future.
The last case is of Trevor v. Naomi where they are directors of Impressive Electronics Pty Ltd and also shareholders along with Julia who is not a director. Trevor enters into secret dealing with Rosie the landlady so as to fulfill his desires at the expense of the company, thereby wasting much of the company’s resources on personal issues. Furthermore, Naomi writes the debt of his boyfriend worth $10,000 audio-visual equipment which was obtained on credit from the company. Julia, on realizing these behaviors of her fellow shareholders is disappointed in them and chose to seek legal action in order to recover the monies in the dealings given that they have all refused to pay for the same. Both Naomi and Trevor did not observe the business ethics and therefore they opted to please their own desires with the companies’ wealth.
The principle in contention here is that of majority rule and whether Julia should be exempted of this. In accordance with the course of assurance, the clause requires that one party covers the other party in the circumstance of occurrence of certain expenses. In this case, Julia should be indemnified and both Trevor and Naomi should pay for the breach of contract. By them incurring other expenses which were not in accordance with the dealing of the business, they therefore breach the contract which must be paid for through indemnification. Directors are charged to exercise their powers for the right purpose of the company through the necessary skills and diligence.
In essence, they should help a company to avoid losses and once the directors of this company are found breaching their mandate, they should be held responsible for their actions. This is due to the fact they do not perform their duty diligently where the conflict of interest presented itself. In this case, after Julia taking the legal action against Trevor and Naomi, they could make to pour out all their personal gains arising from conducting the business.
Given that the defaults conducted were in the knowledge of the two directors, they are supposed to be taken action. Julia should involve the investigating officers in the investigation and this will make it not to be held liable for the violation or rather breach of any provision of the companies act for company law norms must be observed. In the rule of a case of Foss v. Harbottle dealing with the purchase of land for use as a pleasure park, the plaintiff, Foss and Turton who were shareholders of The Victoria Park Company allege the defendants had defrauded the company in various ways and these behaviors of the defendant made the plaintiff to seek court intervention in order to make the defendant make up for the losses he had made to the company.
It was however rather held that, given the company’s board of directors were still present and exercising their duties, they were also in capacity to call for a general meeting of the company. There was therefore nothing that would have prevented the company from obtaining redress in its corporate character and the action by plaintiffs could not be sustained (Slorachi & Ellis, 2007, pp. 93, Tomasic, Bottomley & McQueen, 2002, pp.402).
From this ruling of Vice Chancellor Wigram, it is clear that the two directors who used their positions not for the benefit of the company but instead for their own greed must pay for their actions. The directors are called upon to protect the image of and the financial position of the company. Any dealings outside their positive implication of the company like for self – interests should not be tolerated and those responsible for the breach should pay for their conducts. In his ruling judge Atkin, L.J. concludes that ‘the directors whether collectively or singly have no actual authority to steal the company’s goods’ (Cassidy, 2006, pp. 302).
In conclusion, the corporate law or company law offers some guidance in business dealings which ensures that the performance of companies is exemplary. This is mostly achieved by ensuring that the key movers and managers of companies are skilled directors who have the interest of the company at heart and are not after their own selfish interests. Those who breach the contract are made liable for their actions thus fostering honesty and integrity in management.
References
Cassidy, J., Concise Corporations Law, 5th Edition, 2006: Federation Press, Annandale.
Sealy, L. and Worthington, S, Cases and Materials in Company Law, 8th Edition, 2007: Oxford University Press, Melbourne.
Slorach, J. S., and Ellis, J. G., Business Law 2007-2008, 15th Edition, 2007: Oxford University Press, Melbourne.
Tomasic R., Bottomley, S. and McQueen, R., Corporations Law in Australia, 2nd Edition 2002: Federation Press, Annandale.