INTRODUCTION

The case at hand is concerned with the issue of acquisition of Target Limited, a subsidiary of
Crops ‘R’ US Limited (“Crops”). For the acquisition, Harvest Limited (Harvest) needs finance to
acquire Target Limited and for the same reason it is considering two options. First option
suggests offering 3m pounds to Crops in cash from Harvest’s retained profits and the rest
through 50 Preference A shares. Second option suggests issuance of Preference B shares to
Megan Davies who would provide 7m pounds alongside the 3m retained profits of Harvest in
return for 40 Preference B shares. It is necessary to consider and elaborate the legal and financial
implications of both options.

OPTION ONE

Shares can be divided into classes and each class may have different rights 1. Option one suggests
that 3m be paid in cash to Crops and rest by way of Preference A shares to Crop. This option
would allow Harvest to retain control of the company and prevent dilution of the Ordinary shares
having nominal value and voting rights. The first option necessary allows Harvest to issue
preference shares to Crops with no voting rights which means that Crops would have no say in
the decisions of Harvest. This is necessary to consider as Crops is a rival of Harvest, and to give
voting rights to it would be harmful for Harvest. Option one seems plausible because it would
prevent dilution of ordinary shares2, however, harvest would need to pay preferential cumulative
dividend to crops. The Preference A share are cumulative and participating means that crops
would receive arrears in respect of those years when dividends were not declared 3. Crops would
also be entitled to a further dividend as the shares are participating equivalent to 1.5% on its
investment.

D and E are not happy with the option of offering preference shares to crops and they would vote
against it at the first opportunity they get. The board is made up of five members and the
decisions must be taken by majority on a quorum of three of the five directors. Since the chair
does not have a casting vote, only four people would be voting if a resolution is brought in
relation to issuance of shares to crops. The board in case of a special resolution would need 75%

1
Section 629, Companies Act 2006
2
Dignam, A, Lowry, J., ‘Company Law’ (2016) 9th edn, Oxford University Press
3
Webb v. Earle [1875] L.R 20 EQ 556
of the majority to pass the resolution4. In case of 4 members, 3 votes in favor of the resolution
are required and in under the present circumstances, the resolution would be defeated by D and
E. Furthermore, D and E want to secure a loan from Big Bank against 300 hectares of harvest’s
land. This would be a risky move on part of the company if it is unable to pay back the loan in
time. There is 4% interest rate and this could put harvest in a tough position in relation to its
overall finances. It would not be a good move strategically as it has the potential of setting the
company back rather than helping it achieve its long term goals. As directors of the company, all
director should act in the best interest of the company which would benefit it as a whole 5

OPTION TWO

Option two involves the allotment of preference B shares to Megan Davies with voting rights,
and 2%-of-profits dividends (participating and cumulative). Megan would provide 7m pounds in
return for 40 Preference B shares which mean that she would have voting rights along with the
preference treatment in terms of dividends. This may have an adverse affect on the voting
powers of the existing shareholders and they may even lose control of their company. Moreover,
it would not dilute the ordinary shares directly but would have a financial impact on the
shareholders. Megan would be entitled to cumulative dividends and any further dividends
according to the initial fixed rate. This could potentially lower the income of other ordinary
shareholders along with their voting rights in the company. This could prove to be a risky move,
especially if the company wants to retain complete control of its assets.

Since Megan is a CEO of a fruit distribution business, her expertise would be valuable for
Harvest. Instead of taking the more precarious approach, the company could take alternative
actions and benefit from her expertise and Megan could also gain a similar financial advantage
as envisaged by proposed shareholding. One such alternative could be a joint venture between
Harvest and Megan whereby each could benefit from the resources and expertise of each other.
The profits and losses of the joint venture could be shared between the parties as they would
agree as per the terms of joint venture or partnership agreement.

Megan is a fruit distributor and has expertise in the subject. Harvest could enter into consultancy
and advisory services with Megan where she could provide consultancy in relation to fruit
4
Section 283, Companies Act 2006
5
White v. Bristol Aero plane Co Ltd [1967] Ch 65
distribution in ways which would be most beneficial to harvest. The agreement may be tailored
according to the needs of both parties and this arrangement would also allow Megan to earn an
income similar to one envisaged by the shareholding.

PROCEDURE TO BE FOLLOWED

BOARD MEETING:

A board meeting is necessary step when issuing new shares. Board must convene to discuss and
authorize the issuance of both Preference A and B Shares. Furthermore, a resolution authorizing
the issuance of shares including the number of shares, issue price and other necessary
information must also be passed.

GENERAL MEETING:

A general meeting of shareholders must be held in both scenarios and the authorization of
shareholders is necessary to approve the issuance of shares. Prior to the general meeting, a notice
must be given to all shareholders of the board’s intention to issue new shares. Where the
shareholders have pre-emption rights, they must be given an opportunity to exercise those as
well. Moreover, a special resolution is required to be passed which would ultimately authorize
the issuance of shares. The special resolution must be passed by no less than 75% of the majority
votes as per section 283 of the Companies Act, 2006.

To provide a fuller analysis of the current scenario, the current financial position of Harvest Ltd,
cash flow and income statement would be helpful. Any existing debts of harvest along with the
interest rate, any conflict of interest in proposed transactions, financial position of target and its
profitability, and the financial position and terms and conditions of Megan’s offer would help
provide a better analysis of the situation.

CONCLUSION

While considering both options, the board should take into account the financial implications of
both offers. The interest rate, repayment terms and overall costs of the loan should also be
considered carefully. Dilution of ordinary shares, and the potential return on investment on
shares issued to Megan need to be considered carefully as well.
Wordcount (1170)

BIBLIOGRAPHY

PRIMARY SOURCES
Companies Act, 2006

White v. Bristol Aero plane Co Ltd [1967] Ch 65

Webb v. Earle [1875] L.R 20 EQ 556

SECONDARY SOURCES

Dignam, A, Lowry, J., ‘Company Law’ (2016) 9th edn, Oxford University Press