Law Essay Example: The Loan to the Directors and Family Member

Published: 2022-03-23
Law Essay Example: The Loan to the Directors and Family Member
Type of paper:  Essay
Categories:  Business law
Pages: 5
Wordcount: 1126 words
10 min read

The loan to the directors and family member

Steve, John, Ellen, and League are all directors of Big City Football Club. They are no way the three members of the same family can act out on their own and decide to give themselves loans when Mr. League has not allowed them to do so. Even though they are the dorminat shareholders o the foot club, they are not allowed to act beyond their powers (CA2006s. 171). They are only allowed to exercise authorities for the purpose for which they are conferring. If the constitution of the company provides for the directors to be given loans by the company, it is okay for them acquire these loans, but at the same time, the directors need to act in a way they consider to be of good faith and is most likely to be of the company's benefit. Their action ought to ensure the success of the company for the benefit of all the members as a whole (CA2006s. 172). The family action to take up does not in any way favors the success of the company as the terms of the loans are unfavorable. A company is not to offer credit to the director of the same company or any of the holding company. Also, since Mr. Steve was the director of his other company which he had taken the loan for, before taking the credits, the transaction must have been approved by a decision of the members of the holding company (Stearns & Mizruchil, 1993. P 603-608).

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Airing out opinion

(CA2006s.173) Provides the duty to exercise independent judgment. Mr. League noticed the actions of the directors were limiting the function of BCFC. He tried to share his opinion and concern with other members who brushed him off saying that it is standard legal practice and there is nothing to worry about (Bernstein, 2015. P 13)

The lease agreement

Leasing BCFC's field to Stadium Management Ltd was not a beneficial move to the company. Also, Mr. Steve Goal who is the chairman of the board in BCFC was also a majority shareholder in Stadium Management Ltd. As the chairman of the board, he had a duty to avoid a situation in which he has a direct or indirect conflict of interest, or his action may cause conflict with the interest of the company. He has exploited the opportunity o the bad financial performance of BCFC over the years and wants to benefit from the money the club would be using to lease the football field. The duty could not have been infringed if the situation could not reasonably be regarded as possibly to arise to conflict of interest (CA2006s. 175). In section (CA2006s. 177), it provides for directors a duty to declare the interest in a proposed deal. This means that Mr. Steve Goal who is directly interested in the proposed transaction with his other company should have reported the nature and extent of his interest to the other directors. Mr. Steve Goal had committed an offense of failing to report his interest. Declining to report meant that he had committed a crime and was liable to conviction on the grounds of the indictment to a fine not exceeding the statutory maximum (CA2006s. 183). Steve is a breach of his contract.

Calling for a meeting

Immediately Mr, League discovered that they were a conflict on interested in the selling of the club's field, he called for a meeting. Section (CA2006s. 307) provides that he had a choice of notifying other members of the company of an assembly using either a hardcopy form, electronic form or utilizing website. The notice of the meeting must have been sent to every member of the company and every director (CA2006s. 310). This meant that the failure of other members to avail themselves to the meeting was an act of ignorance and not miscommunication.

Illegitimate payments to the manager of BCFC's youth team

The manager of BCFC's youth team has been receiving illegal payment to identify young talented players and also introducing them to agents who may represent them in the future. The manager is in breach of his duty not to receive benefits from third parties. He was receiving the payment because the role he played in the youth team (CA2006s 176).

Selling shares

Mr. League has been looking or a buyer of his shares, but he has been unsuccessful. To avoid this, he should look at several factors. One of them is holding period; for him to sell his share, he must have kept them or a particular time before selling them. I the company is a reporting company then he has to full the Exchange Act of 1934 and hold on to them for six months (Benston, 1973. P132). He should also look at the public information, and if the financial statement of BCFC is publicly available, then, people may be reluctant to buy because of the declining success of the club (Efendi, Srivastava, & Swanson, 2007. P667). The trading volume formula which says that you can only sell equity securities higher than 1% of the outstanding shares of the same class that is sold. The process may also be unsuccessful because of filling a notice proposed sale with the secretary. This especially applies if the amount exceeds $50,000 in any three months (Richardson & Teoh, 2004 P885).

Claims and remedies: what can League do?

Being a director of the football club, League can seek judicial assistance as the other directors provided Steve Goal (who is the director of BCFC and at the same time the director of its holding companies), funds to meet his financial expenditures incurred. This requires an investigation by the authority and regulatory legal enhancers. He may also file a petition in the court of law because the company's affairs were conducted in a manner that was unfairly prejudicial to his interest as a member. The court may decide for Mr. Steve together with his other family member to pay the loans they owe the club.



Companies Act 2006

Exchange Act 1934

Secondary Sources

Stearns, L.B. and Mizruchi, M.S., 1993. Board composition and corporate financing: The impact of financial institution representation on borrowing. Academy of management Journal, 36(3), pp.603-618.

Bernstein, M.H., 2015. Regulating business by independent commission. Princeton University Press.

Efendi, J., Srivastava, A. and Swanson, E.P., 2007. Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of financial economics, 85(3), pp.667-708.

Benston, G.J., 1973. Required disclosure and the stock market: An evaluation of the Securities Exchange Act of 1934. The American Economic Review, pp.132-155.

Richardson, S., Teoh, S.H. and Wysocki, P.D., 2004. The walkdown to beatable analyst forecasts: The role of equity issuance and insider trading incentives. Contemporary accounting research, 21(4), pp.885-924.

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