CORPORATE FINANCE

Corporate Finance



Corporate Finance

Case

Mr. Andrew, Ms. Rose and Mr. Clegg are the only 3 directors of Reggae Ltd, a company incorporated in 2010 which makes hot sauces for use with barbecue food. Reggae Ltd's share capital is made up of 900 ordinary shares and 100 preference shares. The company's shareholding is split as follows:

each of the 3 directors holds 15 pc of the shares in the company;

5 pc of the shares are unissued;

8 pc are held by Rob,

10 pc by Marie,

9pc by John,

3pc by Tony,

10pc by Howard and

10pc by Melissa.

Melissa is the holder of preference shares which carry a right to 10 pc preference dividend and a prior right to return of capital on winding up. Howard has recently died and his widow is anxious to dispose of his 10pc shareholding in Reggae Ltd.

The articles of the company require a shareholder who wishes to sell to offer the shareholding to current shareholders who will buy them at a fair price. They also require the board to approve any new shareholder.

The company has been very successful and has just signed a contract to sell their line of sauces with a major UK supermarket. The three directors want to increase their shareholding so between them they hold 51 pc of the shares in Reggae Ltd. A significant minority of the shareholders are reluctant to allow the directors plan to go ahead.

Mr. Clegg was having drinks with a friend Sophie who he told about the new contract with the major UK supermarket. Sophie knows Howard's widow well and has started conversations with her to buy Howard's shareholding.

Discussion

This case is about “insider trading”. It occurred when one of the partners of the company, Mr. Clegg leaked out the inside information to one of his friends namely Sophie, under the effect of alcohol. Sophie used this information and started trying to obtain shares from a deceased partner's widow.

Currently in the UK is in full swing reform of corporate law. In 2006, a new Companies Act (Companies Act 2006) (hereinafter "the law of the World Bank"), which entered into force in parts in 2007-2008.

Pre-emptive rights of shareholders to buy shares

Shareholders are protected from dilution if they have preemptive rights, which enable the shareholders to protect their percentage ownership, right to dividends and voting power.  If a shareholder has preemptive rights, then that shareholder must be offered the opportunity to acquire a proportionate number of additional shares on the same terms and conditions any time that new shares are issued. However, in most states, shareholders do not have preemptive rights unless those rights have been granted in the articles of incorporation. A handful of states, including Minnesota, Missouri, South Carolina, and Washington, grant preemptive rights as a matter of law unless such rights are negated in the articles of incorporation.

Even when a shareholder does not have preemptive rights, a shareholder may still have a remedy based on breach of fiduciary duties or shareholder ...