Timothy and Winston are shareholders and directors of English Tutorial Limited,

Question

Timothy and Winston are shareholders and directors of English Tutorial Limited, which offers tutorials to students. Timothy holds 40% of the shares and Winston holds 60%.

Nancy and Mabel are teachers employed by English Tutorial Limited. Their employment contracts contain a clause restricting them from engaging in business in competition with English Tutorial Limited within three months after termination of services.

Nancy and Mabel have just resigned. Timothy is aware that there is a big drop of the number of students attending their classes. Timothy discovers that many students have switched to Innovative Tutorial Limited, a company run by Nancy and Mabel. The teaching materials used by Innovative Tutorial Limited look very similar to those used by English Tutorial Limited.

Timothy also learns from his friends that Nancy and Mabel persuaded the students to switch to Innovative Tutorial Limited as they offer a 20% discount on the normal tuition fee.

Timothy is aggrieved. He feels that English Tutorial Limited should take legal action against Innovative Tutorial Limited, Mabel and Nancy. However, Winston disagrees.

Required:
a Timothy and Winston have different views. Is the rule in Foss v Harbottle relevant to this, and if so, how? What is the rationale of the rule?

b Timothy wants to take legal action against Innovative Tutorial Limited, Mabel and Nancy, but Winston disagrees. Are there any provisions in the Companies Ordinance which enable Timothy to seek leave from the court to take such legal action on behalf of English Tutorial Limited? If so, please explain under what situations Timothy must rely on these provisions, and under what circumstances the court will give leave to Timothy.

c Assuming that later Timothy has discovered Winston has secretly shared the profit of Innovative Tutorial Limited. Timothy wishes to take legal action under section 724 of the Companies Ordinance on the grounds of Winston’s unfairly prejudicial conduct. Please explain generally what type of conduct the court will consider ‘unfairly prejudicial’ under section 724, and whether Winston’s conduct will be considered ‘unfairly prejudicial’.

Explanation / Answer

Answer a:

Timothy and Winston have different views. The rule in Foss v Harbottle relevant to this, because as per this rule if any derivative action, which can had adverse impact on the business, then this law is applicable. The rationale for this law is that the employment contract clause which restricts them to work in competitive business within three months posts their employment termination. The other rationale is that the teaching material used by the Innovative Tutorial Limited is similar to the English Tutorial Limited and they are offering 20% discount on the tuition fees compared to English Tutorial Limited.  

Answer b :

Timothy wants to take legal action against Innovative Tutorial Limited, Mabel and Nancy, but Winston disagrees. There are provisions in the Companies Ordinance which enable Timothy to seek leave from the court to take such legal action on behalf of English Tutorial Limited. Timothy can approach to court and seek the legal action approval against the Innovative Tutorials Limited. If the evidences provided by Timothy to court are relevant and suitable for the issue, then the court will provide permission to the Timothy and if the evidences are not relevant and suitable to the issues, then the court will not support the case.

Answer C :

Assuming later Timothy has discovered Winston has secretly shared the profit of Innovative Tutorial Limited. Timothy wishes to take legal action under section 724 of the Companies Ordinance on the grounds of Winston’s unfairly prejudicial conduct. Generally the type of conduct the court will consider ‘unfairly prejudicial’ under section 724, is the behavior shown by the Innovative Tutorial Limited as is unfair and non-ethical. The unfair and non-ethical behavior will lead to the court to consider it under unfairly prejudicial.

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