Examination papers and Examiners’ reports 2007

Examination paper 2007

Zone B
Time allowed: THREE hours
Answer FOUR of the following EIGHT questions, including at least ONE
from Part A and at least TWO from Part B.

Part A
1 Discuss whether the company law reform process will really make much
difference to business.
2 Should company law pay more attention to ‘stakeholders’?
3 “The Combined Code has been a great success.”
Discuss.
4 “Small shareholders are not well protected by company law.”
Discuss.

Part B
5 Arad is the new managing director of Core Ltd, a company that operates
a recycling business. During Arad’s review of the business, he notices
that Core’s objects clause states:
The business of the company is to manufacture industrial paint.
On further enquiry, Arad discovers that over the past 50 years the
company has slowly moved away from paint manufacture but has never
changed its objects clause. He also discovers that the articles of
association specifically restrict the managing director from borrowing
amounts over £100,000.
Arad is very concerned about this, as he has just signed a loan
agreement with Leaf Bank for £500,000 to expand the business.
Discuss the implications of Arad’s discovery for the company and the
bank.
6 Wagner Ltd runs a number of cinemas. Two years ago David was given
a contract as a non-executive director of the company ‘for life’. Simon,
the owner of 75% of the shares in Wagner, was perfectly happy with this
arrangement. Six months ago David was approached by Puccini Plc to
work as a non-executive director for Puccini. Puccini is in competition
with Wagner. David accepted the appointment, without telling Wagner.
He was not given an employment contract by Puccini, but Puccini’s
articles say that any director removed from office is entitled to
compensation equal to three months salary.

7
Company law

At a recent social occasion, Simon told David that there was a rumour
that Puccini had been approached by Verdi who was offering to sell
Puccini a cinema for £101,000. Simon said that although the cinema
was in a very attractive location, the price seemed rather high.
Immediately thereafter, David contacted Verdi and agreed to purchase
the cinema for himself for £95,000. He has now resold it for £105,000.
When Wagner and Puccini discover the above, they each remove David
as a director, and they each seek to hold David liable for the profit made
on the purchase and sale of the cinema.
Advise David of any liability he might face to each of those companies,
and whether he will be entitled to any compensation from either
company as a result of his removal as a director.
7. Sam was dismissed as the managing director of Live Ltd in March 2007.
She has since begun legal proceedings claiming compensation from Live
arising from her dismissal. Live has not replied to any correspondence
relating to the claim. Sam has also discovered the following: that Live
has paid off its trade creditors and has ceased to trade; that MG Ltd,
Live’s parent company, has transferred Live’s remaining assets into MG;
and that MG is having financial difficulties.
Advise as to the effect of limited liability on Sam’s claim.
8 Mike holds 20% of the shares in Bera Ltd. Larry holds the remaining
80%. They along with Bera are the parties to a shareholders’ agreement
which provides that the authorised share capital of the company cannot
be increased without the agreement of all the parties to the
shareholders’ agreement. Article 156 of Bera’s articles of association also
provides for Mike to increase his votes by 500% on any resolution to
remove him from the board of directors.
Mike and Larry have a disagreement. The general meeting then passes a
resolution removing article 156 from the articles of association.
Thereafter Mike is removed from the board of directors. Mike also
learns that Bera intends to increase its authorised share capital.
Discuss within the context of the articles of association and the
shareholders’ agreement what Mike can do about his situation.