Question One – Director’s Duties 25 marks

Application Question (ILAC)

Cite any relevant common law principles, case law, and sections of the Companies Act 1993

Required
A shareholder of ABC Ltd believes that there has been a breach of duty or duties on the
part of ABC Ltd's directors and wishes to make the directors accountable. In ILAC
format, explain whether you consider that he has a case.

Ans.

Issues

1. In 2021 the directors became very concerned about the risk exposure of the seven companies
under their directorship and so, they decided to recommend to the shareholders of those
companies that they also sell their assets to Urban. A letter, signed by Mr. Paws, put a
proposal to the investors in the seven companies that Urban purchased all of the properties
owned by the seven companies. The letter stated, "The independent directors strongly
recommend that investors accept this proposal and vote for it." And the reasons supporting the
proposal:

(a) improve investor returns;

(b) the redeemable shares would provide increased liquidity for investors;
(c) exposure to a more diversified portfolio of properties; and

2. Urban was to pay a combination of cash (to the value of each individual company's debt) to the
seven companies for the properties they owned. Urban would also offer irredeemable and
redeemable preference shares in Urban to the shareholders of the seven companies. ABC
Ltd's directors have appointed Sly Valuers to conduct a valuation of ABC Ltd's asset and
valued it at $53m.

Accompanying the letter signed by Mr. Paws to ABC Ltd's shareholders are:

(a) notice of a special general meeting of ABC Ltd to be held one month later;
(b) valuation report of ABC Ltd's assets;
(c) timetable, which included details of investor briefings around the country (the road shows), a
notice that settlement of the property would take place 12 days after the meeting if
shareholders approved the proposal; and
(d) a report from independent experts who have evaluated the proposal.

3. ABC Ltd's directors worked with Worthy Ltd and Urban to progress the proposal. Although the
directors of ABC Ltd had indicated that it was for the shareholders in ABC Ltd to decide
 whether to accept Urban's proposal, the directors had accessed the results of the proxy votes
before the meeting. They approached those shareholders who opposed the proposal with an
offer to purchase their shareholding.

The meeting approved the proposal, and Mr. Paw signed the documents for the transfer of ABC
Ltd's property to Urban.

Subsequently, the shareholders of ABC Ltd discovered that there were a range of options available
to the shareholders, namely,

(a) accepting the proposal; or

(b) retaining the property and continuing to operate the business; or
(c) keeping the property and running the company with a higher level of debt to allow a greater
return on capital to the investors; or
(d) rejecting the proposal and selling the property on the open market.

None of these options were discussed at meetings of the directors or put to the shareholders of
ABC Ltd.

4. Mr. Paws had interests in two of the other six companies involved in the proposal, which
were likely to benefit if ABC Ltd accepted the Urban proposal. Mr. Paws was also a director
and substantial shareholder of Urban. Mr. Hedge and Mr. Smyth was also a substantial
shareholder in Urban, and Mr. Dasher was a shareholder in one only of the other six
companies involved in the proposal. The property, which ABC Ltd had owned, was valued
eighteen months later for the Urban Properties Ltd's annual report, where it stated to have
a value of $61.8m; another independent valuation assessed the property as worth $60m.

Law

Duties of directors: Directors are required by S131 of the Companies Act of 1993 to code in the
best benefit of the company. In order to pass the subjective in good faith criteria, directors must
believe that their actions will be in the business's best interests.

Application

A director performs his fiduciary duties and is required to behave in the best objectives of the
business and, not their own, according to the common law, which mandates that directors have
an obligation to avoid conflicts of interest. Without the business's consent through a decision of
stockholders in general meeting, they must not put themselves in a situation where there is an
actual or significant chance of a contradiction between a self-interest as well as their obligation
to conduct in the company's best interests.

The Companies Act's Section 140 a director is required to inform the board of the type and
scope of their interests as soon as they become aware that they have them and to take the
necessary steps to get those interests recorded in the company's affairs register.
Implementation: Mr. Paws, Mr. Hedge, Mr. Smythe, and Mr. Dasher serve as the company's
directors.

The directors supported the urban properties ltd proposal without taking into account any other
alternatives that a prudent director would have thought about in light of ABC's prospects as a
business. This is very probably a violation of Section 131 since it represents a failure to act in
the firm's best interests as a successful business, and because of the decision's nature, the
business is essentially being wound up.

It appears that the directors failed to uphold their obligation to act in the corporation's best
interests (s131). Two of the six firms were in danger, which was a major factor when it was
decided to merge ABC with the other six businesses. Given that Urban purchased the property
for $53 million and valued it at $61 million less than eighteen months later, it is clear that ABC
was not in danger and that the property was underestimated at the time of the sale to Urban.
This judgment does not seem to be in the greatest intentions of the company as the actual value
of the securities has not been recognized, and in these conditions the values of the firm
effectively coincide with the interests of the stockholders.

Section 133

The directors could have violated Section 133 since, although a merger is intended to boost
shareholders' capital liquidity, it instead seems to be done to grow Urban's investment portfolios.

Conclusion: There is proof that every director of ABC violated Sections 131, 140, the common
law obligation to prevent conflicts of interest, and perhaps Section 133. The shareholder's
lawsuit against them may very possibly be successful.