Smartness Logo Ltd was incorporated in November, 2010 with authorized share of 5,000,000, out of which 5000 has been issued representing a stated capital of GH¢5,000. The company’s two directors, Charway and Dela, each own 1000 shares. Theo, a local businessman, own 2,000 shares and the remaining 1,000 shares are owned by a number of local investors. Since Smartness Logo Ltd was incorporated, the company has run at a loss and has never made a profit. Theo believes that this is due to the directors’ poor management of the company. He also believes that, with new management, the company could be extremely profitable. Theo therefore starts buying from the local investors the shares that they hold in the company with a view to voting Charway and Dela out of office, as directors. Charway and Dela discover Theo’s plan, accordingly, they cause the company to issue 3,000 of the company’s unissued shares and offer to sell the shares to their friend, Gabrielle. However, Gabrielle cannot afford to pay for these shares in cash, she does, however, offer to give her car to Smartness Logo Ltd as part-payment for the allotment of shares. The car is only worth GH¢1,500 but Charway and Dela accept the car as partpayment providing that Gabrielle uses the voting rights attached to her shares to defeat any resolution that aims to remove Charway and Dela from office, as directors. The remaining consideration for the allotment of the shares to Gabrielle came in the form of payment of the sum of GH¢500 which sum of money, was a loan Gabrielle took from the company. Theo, realizing that his scheme to oust Charway and Dela has failed, wishes to sell his shares, but he cannot find a buyer. Charway tells Theo that the company will purchase the shares. By now, Theo has 2,500 shares and he agrees to sell them to Smartness Logo Ltd. The company purchases the shares and the shares are then duly cancelled. Having rid themselves of the troublesome Theo, Charway and Dela recommend that a dividend at the rate of GH¢2.00 per share be paid to the shareholders. Gabrielle agrees and among them, dividend is declared and paid. Discuss the validity of Charway and Dela’s actions.

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The actions of the directors in this scenario raise several questions relating to company law principles on share allotment, voting arrangements and distributions. This essay examines the validity of those actions, focusing on their potential breach of fiduciary duties and statutory requirements.

Issuance of Shares to Gabrielle

Directors generally hold power to allot shares, yet this authority must be exercised for a proper purpose and in the company’s best interests. Here, the allotment to Gabrielle appears driven primarily by the desire to secure voting support against removal. Such conduct may constitute an improper purpose, as directors should not use share issues to manipulate control outcomes. The part-payment arrangement, involving an overvalued asset and a company loan, further complicates matters. Consideration must be adequate and any loan may breach rules prohibiting financial assistance in certain contexts.

Company Purchase and Cancellation of Theo’s Shares

The repurchase from Theo followed by cancellation raises issues of capital maintenance. Companies typically face restrictions on acquiring their own shares to protect creditors. Where the transaction lacks proper funding from distributable profits or permissible capital, it risks being invalid. The directors’ motivation, aimed at eliminating opposition, also suggests a potential conflict of interest.

Declaration and Payment of Dividends

Dividends can only be paid from profits available for distribution. With the company consistently loss-making, any declaration and payment lacks lawful foundation. Directors approving such a step may incur personal liability for unlawful distribution.

In summary, Charway and Dela’s actions appear open to challenge on multiple grounds under principles of proper purpose, maintenance of capital and lawful distributions. The overall pattern points to self-interested conduct rather than genuine advancement of corporate interests.

References

Dignam, A. and Lowry, J. (2022) Company Law. 12th edn. Oxford: Oxford University Press.

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Smartness Logo Ltd was incorporated in November, 2010 with authorized share of 5,000,000, out of which 5000 has been issued representing a stated capital of GH¢5,000. The company’s two directors, Charway and Dela, each own 1000 shares. Theo, a local businessman, own 2,000 shares and the remaining 1,000 shares are owned by a number of local investors. Since Smartness Logo Ltd was incorporated, the company has run at a loss and has never made a profit. Theo believes that this is due to the directors’ poor management of the company. He also believes that, with new management, the company could be extremely profitable. Theo therefore starts buying from the local investors the shares that they hold in the company with a view to voting Charway and Dela out of office, as directors. Charway and Dela discover Theo’s plan, accordingly, they cause the company to issue 3,000 of the company’s unissued shares and offer to sell the shares to their friend, Gabrielle. However, Gabrielle cannot afford to pay for these shares in cash, she does, however, offer to give her car to Smartness Logo Ltd as part-payment for the allotment of shares. The car is only worth GH¢1,500 but Charway and Dela accept the car as partpayment providing that Gabrielle uses the voting rights attached to her shares to defeat any resolution that aims to remove Charway and Dela from office, as directors. The remaining consideration for the allotment of the shares to Gabrielle came in the form of payment of the sum of GH¢500 which sum of money, was a loan Gabrielle took from the company. Theo, realizing that his scheme to oust Charway and Dela has failed, wishes to sell his shares, but he cannot find a buyer. Charway tells Theo that the company will purchase the shares. By now, Theo has 2,500 shares and he agrees to sell them to Smartness Logo Ltd. The company purchases the shares and the shares are then duly cancelled. Having rid themselves of the troublesome Theo, Charway and Dela recommend that a dividend at the rate of GH¢2.00 per share be paid to the shareholders. Gabrielle agrees and among them, dividend is declared and paid. Discuss the validity of Charway and Dela’s actions.

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