Together, Clare and Ophelia duly formed a close corporation, \"Clopco, Ihe., Sta
ID: 2799537 • Letter: T
Question
Together, Clare and Ophelia duly formed a close corporation, "Clopco, Ihe., Stalilig il tui se of "manufacturing and marketing clothing and accessories for infants and pre-school children." The corporation issued a total of 10,000 shares, and Clare and Ophelia each purchased 5,000 shares at a cost of S10 each Clare and Ophelia (the only two Directors), President and Treasurer of the Corporation, and Clare as Secretary. They did enter into a shareholder agreement that acting at the initial meeting of the Board of Directors, elected Ophelia as required the other shareholder's approval of any sale of shares to third parties. IL. Could they have arrived at a better method of restricting co-ownership by third parties, or of restricting the purpose of the business, and what would that be? Are there any agreement? What are the potential disadvantages of their 100% equity financing? other issues that could have been addressed in the shareholder For several years, things went smoothly. In fact, Clopco never actually held a subsequent meeting. In 2007, things began to change. Clare and Ophel upscale niche market where she thought profits would be higher. Clare felt just as strongly that they needed to diversify. This conflict grew to the point that Clare and Ophelia couldn't agree on anything. Finally they actually held a directors ia's relationship began to deteriorate. Ophelia wanted to move the business into a specialized meeting, but reached a stalemate on every issue that came before them.Explanation / Answer
The company has 10,000 shares and half of the shares are owned by Clare and the remaining half are owned by Ophelia. So the ownership of the company is between these two people only. The purpose of this kind of co-ownership is to keep the control in the hands of Clare and Ophelia only. But it is not a good idea to keep the ownership rights between two people only. They could have included other shareholders also and the restriction could have been imposed on through the shareholder agreement which Clare and Ophelia already implemented. So, the ideal plan would be to have other owners of the business also apart from Clare and Ophelia but restrict their sale of shares through shareholder agreement. The way in which Clare and Ophelia planned the ownership of the company, it is similar to partnership and not corporation.
The shareholder agreement lists the rights and responsibilities of the shareholders. It should also give the obligations of the shareholders. But in the given scenario, these items have not been mentioned in the agreement.
The potential disadvantages of 100% equity financing are:
a) The profit will have to be shared by the investors of the company i.e. with the equity shareholders.
b) There can be a potential conflict between the equity shareholders.
c) By investing in equity only, the company is losing out on the tax benefits or deductions that can be obtained on the interest paid on debt.