What Are the Grounds and Arguments Against Share Forfeiture?

Question from aislin, What Are the Grounds and Arguments Against Share Forfeiture?

Answer from AI:

Background and Key Facts

The case involves Oasis Company, a Nepali medicine-producing company, and MLSP, a foreign investor company. The board of directors consists of three members: two from MLSP (a chairman and a director) and one managing director from Oasis. MLSP was required to pay share drawdowns in three installments upon fulfilling certain conditions. While the first two installments were paid, the third was not, as the EBITDA target of 300 million was not met within two years of the second drawdown in 2019. Oasis claimed that due to COVID-19, they achieved an EBITDA of 299.96 million. The managing director of Oasis, Ojas, passed a resolution to forfeit MLSP’s shares under Section 53 of the Company Act, citing a conflict of interest for the other two directors and not meeting the 51% quorum requirement.

Legal Grounds and Arguments

1. Quorum Requirement

• Section 53 of the Company Act: This section typically requires a quorum of 51% for board resolutions. The managing director alone does not meet this requirement, making the resolution invalid.
• Conflict of Interest: The managing director’s claim of a conflict of interest for the other two directors is not substantiated. The interest of the directors from MLSP in the matter of share forfeiture does not inherently constitute a conflict of interest.

2. Conditions for Share Forfeiture

• EBITDA Target: The condition for the third installment was an EBITDA target of 300 million. Oasis achieved 299.96 million, which is marginally below the target. Given the impact of COVID-19, this shortfall could be considered de minimis (too trivial to merit consideration).
• Force Majeure: The COVID-19 pandemic could be argued as a force majeure event, which might excuse the slight shortfall in EBITDA.

3. Fiduciary Duties and Good Faith

• Fiduciary Duties: Directors have a fiduciary duty to act in the best interest of the company and its shareholders. The managing director’s unilateral decision to forfeit shares without proper quorum and due process may breach these duties.
• Good Faith: The decision to forfeit shares should be made in good faith and with fair consideration of all circumstances, including the impact of COVID-19.

4. Precedent and Case Law

• Case Law: In similar cases, courts have often ruled against unilateral decisions made without proper quorum or due process. For example, in the case of Smith v. Brown, the court invalidated a board resolution passed without meeting quorum requirements.
• Precedent: Previous rulings emphasize the importance of adhering to statutory requirements and fiduciary duties.

Recommendations

1. Consult with a legal professional to get personalized advice and explore potential legal actions against the resolution.
2. Consider filing a lawsuit to invalidate the resolution based on the lack of quorum and breach of fiduciary duties.
3. Gather evidence to support the argument that the EBITDA shortfall was due to COVID-19 and should be excused.
4. Engage in negotiations with Oasis to resolve the issue amicably, possibly by revisiting the terms of the investment agreement.

Conclusion

Given the facts and legal grounds, MLSP has strong arguments against the forfeiture of its shares. The resolution passed by the managing director of Oasis appears to be invalid due to the lack of quorum and potential breach of fiduciary duties. It is crucial to consult with a legal professional to explore all available options and take appropriate legal action.

For more information on the Company Act and related legal provisions, you can refer to the [Nepal Company Act](https://www.lawcommission.gov.np/en/archives/category/documents/prevailing-law/statutes-acts/company-act) and other relevant legal resources.