TMO Renewables Ltd (in liquidation) v Yeo and others [2021] EWHC 2033 (Ch) has been scrutinised for the actions carried out regarding inappropriately allotting share.
TMO has been struggling financially for many years and has grappled to keep the money flow, so have had to engage in many fundraisers to stay afloat. This company also allowed principal shareholders to have a seat on their board, leading TMO to have six directors. Two of these directors had ample indirect shareholdings in the company.
Back in 2013, TMO contracted VSA Capital as their financial advisor to aid them in setting up a significant fundraiser that would allow TMO to continue for another year. In addition, around this time frame, TMO's CEO began discussions with three other individual financial advisors with high net worths, viewing them as potential investors.
In September 2013, a dispute emerged between the companies directors over the wording of a circular to be sent to shareholders reporting on the businesses fundraisers and business strategy. This dispute led to two of the six directors refusing to sign the form proposed and then using section 303 of the Companies Act 2006 to remove them from the board.
Once the removal had been carried out, the defendant director issued 75 million shares in the company to an entity controlled by one of the new potential advisors for a total amount of £3 million in cash. The basis of this was that the payment would not be immediately made but within two years.
However, the fight for shares did not stop there. Only a few days after issuing 75 million shares, the defendant then issued another 2,625,000 shares to VSA Capital in place for cash.
These attempts failed, and the company fell into liquidation. Following the flow of liquidation also brought claims against the defendant director. These claims all proposed the defendant's same issues and stated that they had breached their statutory duty under section 171 of the Companies Act 2006.
Section 171 of the Companies Act 2006 states that the company's directors must act under its constitution and only exercise their power as directors for the purpose for which they are conferred. For example, the directors used their power and allotted shares in TMO purely to consolidate their control and their block shareholders resolution.
The court pronounced that the defendant directors had not improperly used their power to remove the contradicting directors. Instead, the judge stated "genuine reasons" over the frustration the disagreeing two directors caused.
However, the court did agree that the directors had misused their power when allotting shares within the company. In addition, the judge made it clear that the allotment was designed solely to defeat shareholder resolutions. Correspondence proposed that TMO directors primary motivation behind distributing shares to the market had stirred from raising staff to raising votes to defeat the resolution.
As a result, the defendant directors were also breaching section 172 as their duty was to promote the companies success to shareholders. However, this was no carried out whilst allotting shares as they were representing themselves as a dishonest company due to their primary motivations.
This case represents the clear limitations that directors cannot pass. The fact that directors must not exercise their power for a "collateral purpose." Therefore, directors must ask themselves the following questions; is the use of force moral? Is the motivation for a good cause?
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