Fiduciary Duties immy is the CEO of News Corp. His son, Johnny, runs Television
ID: 2576181 • Letter: F
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Fiduciary Duties immy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggests that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transaction, but due to clever forgeries, the board does not discover the radical inflation of the corporation. Jimmy never discloses his relationship with Johnny. The sale goes through, and it is shortly discovered that Television Inc., is practically worthless. .A shareholder sues alleging that Jimmy violated his fiduciary duty of loyalty. Additionally, the shareholder claims that the directors violated their fiduciary duties of care . Is the shareholder correct? The requirements below must be met for your paper to be accepted and graded: . Write between 500 750 words (approximately 2 3 pages) using Microsoft Word. Attempt APA style, see example below. Use font size 12 and 1" margins. Include cover page and reference page. At least 60% of your paper must be original content/writing. ·No more than 40% of your content/information may come from references ferences from outside the course material, preferably from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the two reference requirement. Reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) must be identified in the paper and listed on a reference page.Reference material (data, dates, graphs, quotes, paraphrased v es, etc.) must comeExplanation / Answer
Directors’ Fiduciary Duty of Care
THE PROBLEM
Jimmy is the CEO of News Corp. His son, Johnny, runs Television Inc. One day Jimmy suggested that Johnny sell Television Inc. to News Corp. Jimmy and Johnny work together to radically inflate the value of Television Inc. Jimmy brings a proposal to the Board of Directors to buy Television Inc. for $500 million dollars even though the corporation is only worth $2 million. The board of directors diligently examines the transactions, but due to clever forgeries, the board does not discover the inflation. Jimmy never discloses his relationship with Johnny. The sale goes through and it is shortly discovered that Television Inc.is practically worthless.
Primarily, we must analyse the problem from Common Law perspective. There is very little evidence in the days of yore, vis a vis the Company law precedents of the country in particular to be able to come to a conclusion whether the fiduciary duty of care has been violated. In fact there is no hard and fast rule but there are a collection of case laws currently, regarding the violation of duties of Directors. It is obvious that from the point of common law the said persons had perpetrated to commit a forgery and thus was a civil law violation. Nonetheless reverting to UK Company Law and American texts on Company Law one could surmise that there are two basic tenets of duty here: duty of care and duty of loyalty.
Referencing to British Company Law there is sufficient evidence to prove that the act of the father and son in this situation, “ganging together” to cheat the rest of shareholders.
If we apply the judgement in Foss vs Harbottle the following are the conclusions:
1. Ultra vires and illegality
The directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be ultra vires the company, or illegal. s 39 Companies Act 2006 for the rules on corporate capacity Smith v Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237, 252-59 (per O'Brien LC and Holmes LJ) for the illegality point
2. Actions requiring a special majority
If some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed. Edwards v Halliwell [1950] 2 All ER 1064
3. Invasion of individual rights
Edwards v Halliwell [1950] 2 All ER 1064
4. "Frauds on the minority" Atwool v Merryweather (1867) LR 5 EQ 464n, per Page Wood VC Gambotto v WCP Limited (1995) 182 CLR 432 (Aus) Daniels v daniels (1978)
What we observe in these particular circumstance is “Fraud” in the context of derivative action meaning “abuse of power whereby the directors or majority, who are in control of the company, secure a benefit at the expense of the company” (...and see Greenhalgh v Arderne Cinemas Ltd for an example of what was not a fraud on the minority)
Foss vs Harbottle
Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company". The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester and, according to the report, "enclosing and planting the same in an ornamental and park-like manner, and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or otherwise disposing thereof".This became Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the company.[1] The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed.
The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.
We observe the judgment as follows: Wigram VC dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the "proper plaintiff rule" is that a wrong done to the company may be vindicated by the company alone. Secondly, the "majority rule principle" states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere (legal term).The rule in Foss v Harbottle, is that the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done. No wrong has been done to the company or the association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no reason why the company or association itself should not sue. It is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.
The cases falling within the general ambit of the rule are subject to certain exceptions. It has been noted in the course of argument that in cases where the act complained of is wholly ultra vires the company or association, the rule has no application because there is no question of the transaction being confirmed by any majority. It has been further pointed out that where what has been done amounts to what is generally called in these cases, a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a Minority Shareholder's action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance would never reach the court because the wrongdoers themselves being in control, would not allow the company to sue. Those exceptions are not directly in point in this case, but they show, especially the last one, that the rule is not an inflexible rule and it will be relaxed where necessary in the interests of justice.
The exception noted by Romer J. in Cotter v National Union of Seamen. He pointed out that the rule did not prevent an individual member from suing if the matter in respect of which he was suing was one which could validly be done or sanctioned, not by a simple majority of the members of the company or association, but only by some special majority, as, for instance, in the case of a limited company under the Companies Act, a special resolution duly passed as such. As Romer J. pointed out, the reason for that exception is clear, because otherwise, if the rule were applied in its full rigour, a company, which, by its directors, had broken its own regulations by doing something without a special resolution which could only be done validly by a special resolution could assert that it alone was the proper plaintiff in any consequent action and the effect would be to allow a company acting in breach of its articles to do de facto by ordinary resolution that which according to its own regulations could only be done by special resolution. That exception exactly fits the present case inasmuch as here the act complained of is something which could only have been validly done, not by a simple majority, but by a two thirds majority obtained by ballot vote. In my judgment, therefore, the reliance on the rule in Foss v Harbottle in the present case may be regarded as misconceived on that ground alone.
References
Singapore, 4 April 2001 ( Stanford Law School, Singapore)
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