Advising on Investment Proposals/New Company

Question 1

Advising on removal of a director

Answer 1

• Shareholders have the power to remove a company director by ordinary resolution
• Special notice: 28 days
• Cannot be by written resolution
• Directors who are shareholders are allowed to vote in their capacity as shareholder

How shareholders pass an ordinary resolution:
- Balance of power in the proposed company structure (for the client)
- Show of hands vs poll vote
- Who can block / pass a resolution

Question 2

Strengthen the position of a director

Answer 2

• Long fixed term service contract (if terminated early, directors entitled to damages)
• Weighted voting rights on a resolution to remove director (for director who is also a shareholder): Bushell v Faith clause
• Shareholders’ Agreement providing that the directors will not be removed, nor appoint further directors (unanimous voting to remove)

Question 3

Alternative proposals for investment structures

Answer 3

• Loan of part / all the investment monies
• Adjustment of the balance of shares (e.g., if the other party holds less than 25% of voting shares, they cannot block SR)
• Adjustment of the rights attached to shares

Shareholder decision making:
- Set out both passing and blocking resolutions

Question 4

Advantages / disadvantages for any alternative suggestions

Answer 4

Considerations:
- Extent of investment being offered (e.g., if substantial investment, investors likely to want sufficient return and right to vote in decision making)
- How soon a return is expected (both from the investors, and how soon the company is likely to make profits)
- Importance of income/capital return
- Continuing involvement in investors of the company
- Control of destination of company’s profits

Will likely be given an indication of both parties’ priorities and concerns regarding these - reference these explicitly when weighing up these considerations in analysis (client-tailored advice)

Question 5

Advising on the most flexible, appropriate alternative investment strategy

Answer 5

Likely to be a mix of debt and equity finance
- Take shares and also make a loan
- Gives initial shareholders (owners of the company) greater control

When considering shareholders’ control in a company:
- Advise on balance of shares: suggest negotiating that the other party holds less than 25% of ordinary votes, which means they could not block special resolutions

Question 6

Negotiation considerations

Answer 6

• Proposal which is attractive to both parties and takes into account their concerns
• Weigh up different options
• Advise which is most appropriate
• Consider the bargaining strength / position of each party: is one party in a stronger/weaker position?
• Has the client indicated what they do not want to do / what they do not want to concede on?
• Offer various proposals depending on what the client’s main priorities are (objectives / priorities / parameters