THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALLS

UNIVERSITY OF LONDON LA3021 October

LLB
DIPLOMA IN THE COMMON LAW
BSc DEGREES WITH LAW

Company law

Wednesday 25 October 2017: 10.00 – 13.15

Candidates will have THREE HOURS AND FIFTEEN MINUTES in which to

answer the questions.

Candidates should answer FOUR of the following EIGHT questions, including

at least ONE from Part A and at least TWO from Part B.

Candidates should answer all parts of a question unless otherwise stated.

Permitted materials
Students are permitted to bring into the examination room the following
specified documents (this could include two editions of the same publication):
one copy of Blackstone’s Statutes on Company Law (OUP) or British
Companies Legislation (Sweet & Maxwell, previously published by CCH
editions) and one copy of each of the following: Companies Act 1985; Business
Names Act 1985; Companies Consolidation (Consequential Provisions) Act
1985; Companies (Tables A to F) Regulations 1985 (S.I. 1985 No. 805);
Insolvency Act 1986; Company Directors Disqualification Act 1986; Financial
Services Act 1986; Companies Act 1989; Companies (Single Member Private
Limited Companies) Regulations 1992 (S.I. 1992 No. 1699); Financial Services
and Markets Act 2000; Criminal Justice Act 1993; Insolvency Act 1994;
Insolvency (No 2) Act 1994.; Public Offers Of Securities Regulations 1995 (S.I.
1995 No. 1537); Companies Act 2006.

© University of London 2017

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PART A

1. ‘As a result of modern case law developments it has become almost

impossible for courts to lift the corporate veil to remedy perceived
injustices faced by claimants, especially when faced with complex
corporate group structures.’

Explain, giving reasons, whether you agree with this statement.

2. ‘The statutory unfair prejudice remedy, in sections 994-996 of the

Companies Act 2006, gives courts virtually unlimited discretion to grant
relief to aggrieved minority shareholders.’

Discuss.

3. ‘Although the Companies Act 2006 was originally intended to be

sensitive to the needs of small companies, in reality it is so complex and
burdensome that it will discourage many entrepreneurs from
incorporating their businesses in the UK.’

Discuss.

4. Critically assess the effectiveness of ONE of the following mechanisms

in improving standards of director accountability in public companies:

(a) The UK Corporate Governance Code and its ‘comply or explain’

enforcement method.

(b) The director’s duty of care, skill and diligence under section 174
of the Companies Act 2006.

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PART B

5. Keira, Lucy and Mehdi are the directors of Drylcorp plc, a well-known
company specialising in natural gas extraction. Drylcorp’s articles are in
the form of the Model Articles for Public Companies.

For many years, Drylcorp produced natural gas by hydraulic fracturing

(‘fracking’) at a number of sites in the north of England. Local residents
had long expressed concerns about the risk of local water supplies being
contaminated with the fluids which Drylcorp was using to carry out the
fracking process. Keira, Lucy and Mehdi were fully aware of these
concerns. However, under pressure to maintain the company’s high
share price, they decided to ignore them and continued with Drylcorp’s
fracking operations.

In early 2017, a Government investigation revealed that Drylcorp’s

operating practices were severely flawed, and had resulted in extensive
contamination of local water supplies. Drylcorp incurred severe financial
penalties for breach of environmental regulations, and was subject to
significant criticism by the media and environmental interest groups. As
a result, its share price fell sharply, inflicting significant losses on its
shareholders.

Keira, Lucy and Mehdi called a press conference to announce that

Drylcorp was suspending its fracking activities for the foreseeable future.
A few days later, the company was offered the opportunity to produce
gas by fracking at a new site in the United States. Without informing the
other directors, Keira acquired that opportunity for herself, and has since
been operating her own very successful fracking business there.

Advise Lucy and Mehdi, who are angered at Keira’s dealings and
concerned about any potential liability they may face for breach of duty.

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6. Hattie, a wealthy heiress, owns a London property development
company, Jointz Ltd, funded by her vast family wealth. Although she is
the sole shareholder and nominal ‘managing director’ of Jointz Ltd, she
takes only a limited role in the business. Its day to day affairs are instead
handled by Ian, whom Hattie initially hired as a junior office assistant.
However, Ian has steadily assumed more and more responsibilities in
Hattie’s absence, including purchasing new properties for the company.
To ‘reward’ Ian for his work Hattie appointed him a director of the
company, and gave him the title of ‘operations manager’. However, no
specific conversation ever took place concerning the proper scope of
Ian’s responsibilities.

Hattie spends most of her time socialising, but usually calls Ian briefly on
a Friday afternoon to get an update on any new property deals that he
is negotiating, which she always approves without question. Without
notice, Hattie decided to fly off to Ibiza for an extended six-month
vacation, and during this time had no contact with Ian. While Hattie was
abroad, Ian was approached by Ken, the owner of a block of four
apartments in East London, who offered him the block for £5 million as
an ‘immediate sale’. Since the property was close to London’s wealthy
financial district, Ian felt that the opportunity was too good to refuse. He
accepted Ken’s offer there and then, and swiftly proceeded to complete
the purchase on Jointz Ltd’s behalf. It has since transpired that the
apartments are situated in the notorious Grimville estate, a crime-ridden
neighbourhood, where individual apartments do not sell easily and are
difficult to rent out.

Hattie has recently returned from Ibiza and is furious at Ian for
purchasing the apartment block. She seeks your advice on any steps
she may take to challenge the validity of the transaction, and whether
Ian may have breached any of his duties.

How, if at all, would your answer differ if the company’s articles said that
any transaction over £1 million had to be approved by Hattie?

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7. Ayla, Bella and Chuck are the directors of Doodles Ltd, which sells art
materials. Each director has a 25% shareholding in the company. The
remaining 25% of the company’s shares are held by a number of small-
scale investors who have no interest or involvement whatsoever in the
business. Each share in the company ordinarily carries one vote.

Doodles Ltd’s articles are in the form of the Model Articles for Private
Companies, except for the following two additional provisions:

Article 7A provides that any decision involving the acquisition or

disposal of the company’s property requires the unanimous
approval of Ayla, Bella and Chuck;

Article 7B provides that, on a shareholder resolution to remove

Ayla, Bella or Chuck from their position as a director, that
person’s shares shall carry four votes each in respect of the
resolution in question.

Ayla and Bella have recently attended a short course on financial

economics at an American business school. Inspired by what they have
learned, they now wish to sell Doodles Ltd’s shop premises to an
investment fund as part of a ‘sale and lease-back’ agreement, which will
generate immediate cash to fund an increase in shareholder dividends.
Chuck fears that this move will de-stabilise Doodles Ltd’s business and
also make the company more financially vulnerable in the long run. He
has told Ayla and Bella that he will use his powers under the articles to
stop them from putting their plan into effect.

In response, Ayla and Bella have threatened to remove Chuck as a

director if he refuses to support their plans. They claim that Articles 7A
and 7B are unenforceable, and that – if necessary – they will also take
steps to remove these two provisions from Doodles Ltd’s articles.

Advise Chuck. (DO NOT consider whether Chuck could bring

proceedings under section 994 Companies Act 2006 or under section
122(1)(g) Insolvency Act 1986.)

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8. Diego and Eden are the directors of Blues Ltd (‘Blues’), a professional
football club. Blues’ articles are in the form of the Model Articles for
Private Companies, and there is only one class of (ordinary) shares in
the company.

Blues’ shares are owned by a consortium of international investors, who

have become disillusioned with the company due to its high cost base
and low turnover. Although not actively seeking to sell the company, the
shareholders have indicated an interest in selling their shares ‘should
the right offer arise’.

Diego and Eden have recently been approached by two outside parties,
who are each keen independently to launch a takeover bid for Blues.
The first prospective bidder is FreshFoods plc, a large supermarket
chain. It has offered to purchase all Blues’ share capital for £1 per share.
If the bid is successful, FreshFoods says it will demolish Blues’ existing
London stadium and redevelop the site as a supermarket. Freshfoods
will then build a new stadium for Blues in a rural area of England several
hundred miles from London. It will also rename the club ‘FreshFoods
FC’.

The second prospective bidder is Gregori, a foreign oil magnate who is

keen to purchase an English football club for personal rather than purely
business reasons. Gregori is only willing to pay 75p per share, although
he has undertaken to preserve Blues’ existing stadium and name and to
invest significant new funds to expand its seating capacity.

Diego and Eden are extremely reluctant to support FreshFoods’ bid, and
would much prefer to deal with Gregori. However, Blues’ major
shareholders have indicated a strong preference for the more lucrative
FreshFoods bid.

At the same time, to avert a serious injury crisis in its playing squad,
Blues’ urgently needs to purchase new players. Diego and Eden are
therefore considering raising a significant amount of new equity capital
for Blues. To this end, they have already held discussions with Gregori
with a view to Blues allotting to him a large block of new, ordinary,
shares.

Advise Diego and Eden as to what (if any) course of action they may
legitimately take here.

END OF PAPER

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