Re: Legal Opinion regarding the changing of shareholding structure and direters; A/C Company 1 (COMPANY 1).
We refer to your letter dated January 28, 2007 on the above subject.
From perusal of your letter, it appears that Company 1 (“COMPANY 1”) vide their letter dated 9 August 2006 have informed Company 2 (“COMPANY 2”) that the board of directors of COMPANY 1 has decided to change the shareholding structure of COMPANY 1 – i.e. introduce a new director in the board in order to replace the outgoing director Ms. A. The details given by COMPANY 1 of their shareholding structure is as follows:
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In these circumstances, you have sought our legal opinion as to the impact the change of the shareholding structure will have on COMPANY 2 and whether the interests of COMPANY 2 will be protected by the replacement of the personal guarantee Mrs. A with the personal guarantee of Mrs. B, the proposed new director and personal guarantees from the proposed minor shareholders – Mr. C and Mr. D.
Clause 11.1.19 of the Facility Agreement states as follows:
“The Borrower covenants with the Lenders that, from the date hereof until all its liabilities under this Agreement have been discharged, the Borrower undertakes not to change the capital structure or management without informing the Lenders and Agent.”
In accordance with Clause 11.1.19, COMPANY 1 is entitled to change its capital structure or management, as long as COMPANY 1 informs the Lenders and Agent of such changes. COMPANY 1 vide their letter dated 9 August 2006 has informed COMPANY 2, the agent and the lenders of the change in the shareholding structure of COMPANY 1. Hence, COMPANY 1 is in compliance with Clause 11.1.19 of the Agreement. However, please check the Articles of Association of COMPANY 1 to see whether there is any restriction forbidding the transfer of shares to a minor.
Also note that section 27 A of the Bank Companies Act 1991 also applies in this present scenario. According to this section, the resignation of a Director of a debtor-company shall not be effective and she cannot transfer or sell her shares without the consent of the Board of Directors of the loan giving bank or financial institution. As such, the resignation of Mrs. A and the transfer of shares by her shall not be effective until the Board of Directors of COMPANY 2 and the other syndicated lender(s) have given their consent.
COMPANY 2 seeks to replace the personal guarantee of Mrs. A with the personal guarantee of Mrs. B, the proposed new director and personal guarantees from the proposed minor shareholders – Mr. C and Mr. D.
There is no legal prohibition or restriction for the replacement of the personal guarantee Mrs. A with the personal guarantee of Mrs. B. The decision of which is a commercial issue.
Regarding the giving of personal guarantees by the minor shareholders – Mr. C and Mr. D, please note that according to Section 11 of the Contract act 1872:
“Every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.”
According to the Majority Act 1875, a person is deemed to attain his majority when he has completed his age of 18 years not before.
Therefore, any contract entered into by a minor, i.e. a person below the age of 18 years, is void.
Although the ages of Mr. C and Mr. D has not been provided to us, we assume that both are below the age of 18 and as such they are not competent to give personal guarantees.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”