Mobile Technology Ltd Legal Issue

Question: Write an essay certain legal issues arise related with Mobile Technology Ltd. (MTL) Answer: On the basis of the facts that have been mentioned above, certain legal issues arise related with Mobile Technology Ltd. (MTL). The first issue is that the majority shareholders of the company, James and Jenny Lee holding 60% shares of the corporation wanted that the companys management should be conducted in a way that is more advantageous to them. In case the directors of the company, Harry, Minh and Jackson do not follow their wishes, they threatened to take over the management of MTL. Similarly, other issue is related with minority oppression as a minority shareholder of the company, Martin Lu is concern regarding the way, the directors of MTL are draining its assets. In this regard, Martin wants that extraordinary general meeting of the shareholders should be called but the directors are not willing. Another issue is related with a clause present in the constitution of MTL according to which, the business of the company will be restricted to manufacture, sale and purchase of pla sma TVs and DVD players. But now the directors want that the companys business should be changed to the manufacturing and distribution of smart phones and I Pods as the directors think that the TV and DVD market has become stagnated. In the same way, another issue that arises on the basis of the given facts is that the directors of the company are planning to set up another company and they're going to sell the TV business to the new corporation that is owned and controlled by them. The Corporations Act, 2001 has provided far-reaching remedies in case the minority shareholders of the company have to face oppressive conduct. In this regard, the law requires that the director should use their powers and manage the corporation, considering the interests of the shareholders as a whole.But it is possible that the majority shareholders may expect or even demand that the corporation should be managed in such a way that is more favorable for the majority even if it proves to be harmful for others. Generally the minority shareholders lacked the ability to have an impact on the undertakings of the corporation, still it is vital that the directors act fairly and take care that their decisions endorse the interests of the corporation as a whole and all its shareholders and not only the majority shareholders. In case the directors were unsuccessful in it, they can be held in breach of their statutory duties and similarly, they also risk being engaged in oppressive conduct. In such a case, far-reaching remedies may be available against the directors that can have a significant impact on the company. The Corporations Act has also prescribe certain duties for the directors which mention that they should not use their position improperly and act in good faith and in the best interests of the company. These duties have been prescribed by the Corporations Act and also by the common law. Usually the term minority oppression denotes the conduct falling within the purview of section 232. This section provides extensive powers to the courts to provide relief to the shareholders in case the conduct of the affairs of the company, including any actual or proposed act, can be described as being contrary to the interests of the shareholders of the company as a whole or if it is oppressive, unfairly prejudicial or discriminatory against a shareholder or shareholders. In this way, the target of section 232 is the conduct due to which the minority shareholders of the company may have to face some commercial unfairness. This section has been drafted extensively and as a result, there are no defined limits placed on what may be considered as the offending conduct. In this case, the offending conduct can be the conduct of the company, or its directors or the other shareholders. For this purpose, conduct is evaluated by the courts by applying an objective test that is based on cons idering if the conduct will be considered as unfair by any reasonable commercial bystander. However it needs to be mentioned that in this regard it is not enough if a shareholder has been prejudiced or discriminated against. There should also be an element of unfairness that extends beyond a mere disadvantage. In practice, generally a question arises when a minority shareholder is subjected to unfairness or prejudiced due to the abuse of majority power or control on the corporation. The actions taken in bad faith are more likely to be treated as oppressive by the courts. However conduct can be considered oppressive even if it was undertaken lawfully and in good faith if such conduct proves to be disadvantageous or creates the burden on the minority that would be treated as beyond fair and reasonable by any commercial bystander. Such a conduct may take place even if all the members of the company have been treated equally. Some of the examples of the conduct stated by the courts as being oppressive, unfairly prejudicial or discriminatory can be given as follows. Therefore, such conduct includes the issue of shares, mainly for weakening the voting rights of the majority; nonpayment of dividend to the shareholders or making excessive payments to the directors when such decisions cannot be justified objectively due to the circumstances of the corporation; insistently declining to call the meetings in order to avert involvement by the minority shareholders; applying the funds of the company for the benefit of certain shareholders and not all the shareholders and excluding a director who represents a shareholder, from the management of the company. In most of the cases in which minority oppression has been alleged in the courts, unlisted private corporations are involved instead of the public entities. The cause behind this situation can be that in case of a listed corporation the disgruntled shareholders c an sell their shares but on the other hand, in case of a private company, there is generally no market for the shares owned by the minority shareholders. Generally it has been seen that in case of minority oppression, one shareholder or director is kept out of the management of the company or the company conducts the capital raising or share buyback due to which the equity of the minority is diluted. Other instances include the cases where the minority shareholders are not receiving any dividend or cannot sell their shares and their capitalist dog in the company indefinitely while the company is being run for the advantage of others, like significant salaries being paid to the management. Therefore under these circumstances, litigation appears to be the only way available to the minority shareholders to extract their capital. It also needs to be mentioned at this point that generally in case of minority oppression, there is also a breach of duties by the directors of the company, particularly the range of duties that have been mentioned in section 181 to 183, Corporations Act. In this regard, these duties of the directors can be briefly described as the duty of the directors to act in the best interests of the company (section 181); not exercising their powers for achieving an advantage (section 181) and not misusing the information received by the directors for achieving a personal advantage (section 183). Therefore in view of the statutory duty of the directors to exercise their powers in good faith and in the best interests of the company, it is necessary that the directors should act in best interests of the company, or the best interests of all the shareholders of the company as a general body. But in practice of ideas possible that the shareholders may have different or competing interests and as a result, sometimes it becomes very difficult on nearly impossible for the directors to act in a particular way so that everyone in the company can be satisfied. There are many decisions taken by the board of the company that may have very little or no direct impact on the individual shareholders but there are certain steps like share buybacks, situating capital raisings or the appointment/removal of the directors, that we have a direct impact on the interests of the individual shareholders. As a result, any acts of the directors in which the interests of one set of the shareholders have been preferred as compared to the shareholders as a whole, can be considered as a breach of their duties by the directors and it may also fall within the purview of oppressive conduct as mentioned in section 232. In this regard, section 232 provides that the courts have discretion to provide a wide range of remedies in order to protect the minority shareholders from the effect of oppressive conduct. Therefore the court may order that one or more shareholders purchase the shares owned by the minority, at a price that has been determined by the court; that the minority shares are purchased by the company; the appointment of a receiver and manager; a particular act should be done by a person or that the company may be wound up. However, it has been generally seen that the shareholders want that their shares should be purchased by the company or the other shareholders or in other words, a buyout ordered by the court at a price that has been decided by the court. According to the broad principle, the courts are required to grant the remedy in such a case that is least intrusive and therefore, generally the courts tried to avoid the remedy of winding up a solvent company. But when the court has ord ered a buyback and the majority shareholders of the company are unable to pay the price that has been fixed by the court, the court may order the winding up of the company. Similarly, the director shareholders who are held to be involved in oppressive conduct and the breach of their duties risk of being ordered that they should buy the shares belonging to the minority at the price decided by the court. In the present case, James and Jenny Lee are the majority shareholders of MTL and they jointly hold 60% shares in the company. They want to have a more significant role in managing the company and also advised the directors of MTL that the business strategy of the company should be changed and more attention should be paid to the wishes of the majority shareholders. In case the directors do not follow their wishes, they also threatened to take over the management of the company. But in view of the above mentioned discussion, it is clear that the directors of MTL should manage the affairs of the company, keeping in view the interests of all the shareholders of the company and not just the majority shareholders like James and Jenny Lee. On the other hand, a minority shareholder, Martin Lu who holds 5% shares in the company is concerned that the decisions taken by the directors of MTL will drain the assets of the company. In this regard, Martin wants that an extraordinary general meetin g of the shareholders of MTL should be called for the purpose of discussing these concerns but the board of MTL is reluctant to call such a meeting. This conduct of the directors of MTL can be described as oppressive conduct and as a result, the remedies that have been provided to the minority shareholders in case of oppressive conduct may be available to Martin Lu. The shareholders of MTL also want that the business of the company should be changed to smart phones and iPods but it needs to be noted that there is a clause present in the constitution of MTL according to which, the business of the company has been restricted to the manufacture of television and DVD players. Therefore, any change in the business of the company can be introduced only after a resolution has been passed by the majority shareholders of the company. The decision taken by the directors of MTL to establish another company, Stan Mobile Pty Ltd and sell the television business of MTL to this company can also be treated as a breach of directors' duties as these duties require that the director should not take a personal advantage through the decisions taken by them. Bibliography Crosling G M, Murphy H M, How to Study Business Law 4th Edition, Butterworths, 2009 Harris, J. Hargovan, A. Adams, M. 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