CASE STUDY ON BUSINESS LAW

QUESTION

Corporations and Business Associations Law Assignment (New Zealand)

Bill Hobbit and his friend Monica Sauron have set up a tourism company called Banks Peninsula Volcanic Tours Ltd. The company provides helicopter flights over active volcanoes in New Zealand. Although Bill and Monica originally held 50% each of the shares in the company, three years ago they sold an interest in the company to Mordor Ltd. The money from the sale of shares to Mordor was used to buy a helicopter. Bill and Monica currently hold 30% each of the shares and Mordor Ltd has the remaining 40% of the shares. Bill, Monica and Graham (a nominee director for Mordor Ltd) are the three directors of the company.

The business is a great success.  The directors of Mordor Ltd are so pleased with the dividends they have received, the directors have now incorporated a new company called Banks Peninsula Volcanic Tours 2012 Ltd, which will also offer helicopter tours over volcanoes.  They asked Monica to be a shareholder and director of Banks Peninsula Volcanic Tours 2012 Ltd.  She accepted.

Bill is very upset.  He comes to you for advice and informs you that he cannot afford expensive legal proceedings against other parties. You reply that legal proceedings are rarely inexpensive, but that there may be some options which may cost less than others.

Required: Advise Bill as to all possible causes of legal action, taking into account what he has told you.

Important Note:

• The focus of your answer should be on what causes of action are available to Bill. Accordingly, for the purpose of this answer, you can assume that there have been breaches of directors’ duties, without discussing these breaches in detail.
• There are more than one issue with this problem, so you need to ensure that you identify and discuss multiple issues (and consequential causes of action) in your answer.
• You should use case law and statute to support your answer. It is recommended that you use legal problem solving method for this assessment

General Referencing Guidelines

Students should ensure that all authorities or quotes referred to in the body of your assignment, contain the specific page or pages of the authority from the quote or material referred to can be found.

SOLUTION

CORPORATIONS AND BUSINESS ASSOCIATION LAWS

Facts of the case:

Bill Hobbit (Bill) and Monica Sauron (Monica) start a new tourism company named Banks Peninsula Volcanic Tours Ltd., (Banks) which provides helicopters to fly over active volcanoes in New Zealand. Three years ago Bill and Monica the 50% of the shares of the company sold their shares to Mordor holding back 30% shares each making Bill, Monica and Mordor the directors of the company. With success in the business the directors of Mordor incorporated a new company called Banks Peninsula Volcanic Tours 2012 Ltd., (Banks 2012) which followed the same business as the prior and made Monica as its director and the shareholder.

Bill being one of the directors for banks is upset with the act of Monica and Mordor Company as they had opened a new company with the business relevant to Banks. Bill can take legal actions against the following issues.

Identified Issues:

The issues identified in the business are the breach of the fiduciary duties of the directors, germane business, opening a company without the consent of all the shareholders of the prior company.

It is very essential that all the directors of the company abide by the fiduciary duties as elaborated by the common law judges. Prior there were two basic fiduciary duties of the directors were identified being the duty of loyalty and duty to care but latter two more duties were added namely the duty to disclose and duty of extra care[1]. In the current case we find the duties of the director such as the duty of loyalty and duty of disclosure being breached. Every director is required to be loyal to the Company; he should be ready to work for the betterment of the company and not for their self-benefit. The easy way to prevent breaching of this duty is by not involving in transactions that affect the interest of the company, to say they should not involve themselves in the transactions which are self-dealing. In the current scenario we observe this duty being breached by the directors who are even the shareholders of the company. Thus, every director is required to be loyal to the company, apart from being loyal to the company they should also be ready to perform the duty of disclosure, it is of the duty of the directors to disclose all the facts to the other shareholders or directors of the company, they should not maintain any secrecy with the company and its directors in this case shareholders. These two duties are inter related to each other and they are to be very essentially performed by the directors of the company, but both these duties have been breached in the current case as per the given facts.

The second issue identified is incorporating a germane business that is relevant to the previous business; in the current scenario Mordor company had incorporated a new business with activities relevant to the prior one and made Monica its shareholder and director. For incorporation of a relevant activity it is essential for a company to take in the approval of its directors, in the given case the new company was incorporated without the consent of Bill and also it can be termed to be formed on competitive basis and for the benefits of Mordor Company. Not only incorporating a relevant activity companies they even had one of the directors of Banks become the director for the Banks 2012.

The third issue is inter-related with the issues mentioned above; this is related to disclosure of the fact of incorporating a new company and also that to with germane activities of the prior company. For a company to incorporate a new business it has to get a special resolution passed and all the minister who gives the permission checks the germane of the business and if it is yes to the germane activity, special resolution is not required whereas the companies require the approval of the directors and here Bill had no knowledge of the incorporation nor was he asked for approval. Also, to add up to this issue the company newly incorporated was based on the shares and dividends of the prior company, in short Mordor being the 60% shareholder of Banks has commenced new business with the same activity based on the dividends he received from Banks business.

Thus based on the above issue Bill can be advised to file a suit against Monica and Mordor Company for breach of fiduciary duties of a director and also for opening a new business with same activity and also using the same name with addition of ‘2012’, by this act the new company can be noted to be commenced on the goodwill of the prior company with the name used for the incorporation of the new company. Therefore, Bill can file suit and claim damages for breaching his trust by Monica and Mordor and also for commencing a germane company as a competitor for his company and also on the shares of his company. Here, as he is not in a position to spend more on legal purpose he can file his suite on the basis of breach of fiduciary duties for their self-benefit on the basis of cases defined in the memorandum of Arnold & Porter LLP[2].

REFERENCE:

• The Company Act
• Arnold & Porter LLP, Memorandum, James P. Joseph, Fiduciary Duties of a Director and Conflicts of Interest, Handout 1, May 8, 2006; http://www.cof.org/files/documents/education_collaborations/difficultboards/handout1.pdf

Professor Bernard S. Black, The Principal Fiduciary Duties of Boards of Directors, Presentation at Third Asian Roundtable on Corporate Governance, Stanford Law School,  Singapore, 4 April 2001, https://docs.google.com/viewer?a=v&q=cache:–PG3xydq4IJ:www.oecd.org/dataoecd/50/53/1872746.pdf+&hl=en&gl=in&pid=bl&srcid=ADGEEShFVEiAI4md2zq1ojrcuRIdlRgO4tFlDmX4zNuGDDa-_qGPncO8-FVmrGqSsMaMKhiiuaqghb9PsiKjkYQJVxBOg7t-Rx9YYg199BUXVXfaKOAOpRko7n9LB49dxJE84AhqZFWD&sig=AHIEtbS6lbKPlDA17wnQfSu3eSeMoA57TQ

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