Q1. Harry is the managing director of Acme plc, a large pharmaceutical company. In recent years the company has enjoyed record levels of profitability. It is generally recognised that the company’s success is due to Harry’s acumen. In the past twelve months the following events have occurred:
a) Harry is paid £1 million consultation fee for successfully guiding Acme plc through a take-over of Xon Ltd., a competing business. This payment was agreed by a special committee of the board constituted to advise the main board on mergers and acquisitions. The main board has never approved the payment.
b) Harry forms a private company, Drugco Ltd., which processes raw materials for use in pharmaceuticals. Harry places large orders with Drugco Ltd. without informing Acme Plc of his interest in Drugco Ltd.
c) Harry is approached by Bluesquare Inc., a large U.S. pharmaceutical company. Bluesquare intends to establish a drug manufacturing plant in England, and wishes to set up a joint venture with Acme plc. Harry convinces Bluesquare Inc that Drugco Ltd would be a better partner for the venture.
Acme plc has recently been taken over by Xtacy plc. The details of the events outlined above have now come to the notice of the board of Xtacy. They wish to pursue any claims they may have against Harry.
Advise the board of Xtacy plc.
Q.2 Rodney and Dell run a successful wholesaling partnership, specialising in high quality designer clothing. They decide to expand the business but need additional capital to finance their plans. Knowing that their mutual friend, Rachel, has just inherited a substantial sum of money they persuade her to invest £50,000 in a joint venture with them. They incorporate a new company, Trendywear Ltd., with the issued shares taken in three equal parts by Rodney, Dell and Rachel respectively. The understanding between them is that the new company will take over and expand the wholesaling business; that Rodney and Dell will work full time in the business; that all three will be members of the board of directors and that the company’s profits will be distributed in three equal shares by way of directors’ remuneration.
Trendywear Ltd. is run in accordance with this understanding for three years. The company is profitable, but not on the scale anticipated by Rodney and Dell. They decide, without consulting Rachel, that the company should acquire a number of retail outlets in shopping malls from which to operate shops. The scheme involved a large capital expenditure. Rachel is informed that for an indefinite period the company, because of the debt-servicing burden that the expansion scheme involves, will only be able to pay a fixed salary to Rodney and Dell in return for their full time services and that Rachel must forego profit in favour of capital growth of her investment. They also vote Rachel off the board. Rachel asks to be bought out. Rodney and Dell refuse, informing her that all company resources are needed for the expansion.