The shares of Promotion Limited, a private company are held by members of three families, that is, the family of Mr. Karanja, Mr. Mutisya and Mr. Otieno.
Mr. Karanja and Mr. Mutisya hold 90% of the company’s shares. However, they feel that, the company is in need of further capital but due to the squabbles among the families, Mr. Otieno is not willing to inject additional funds so long as Mr. Karanja still holds any shares in the company. Further, Mr. Karanja and Mr. Mutisya have reasonable cause to believe and do in fact believe that the family of Mr. Otiengo is running their own business which is competing with that of Promotion Limited. It is known as a fact that Mr. Otieno is obtaining information as a member of Promotion Limited, which he is using to the benefit of his competing business.
To resolve the problems, Mr. Karanja and Mr. Mutisya propose to alter the company’s articles of association by adding two new articles. The first article will enable the shareholders of 90% of the company’s shares to compulsorily acquire the shares of the minority shareholder. The second one will require any shareholder who carries on competing business with company’s business to transfer his shares to the nominee of the directors.
Required:
i)State the restrictions imposed both by common law and statute law upon a company’s power to alter its articles of association. (14 marks)
ii)Discuss the validity of the proposed alteration (6 marks)
(Total: 20 marks)
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