Corporate Case Study Questions

 

In 2000, Mrs Froome, a corporate lawyer, set up a partnership with her husband, providing

consultancy services to small businesses. Mrs Froome was solely responsible for managing

the partnership, and Mr Froome’s role was limited to undertaking small administrative

roles. As a result, Mrs Froome received 80% of the profits, with Mr Froome receiving the

remainder.

 

The business was a success and so, in December 2007, Mr and Mrs Froome decided to

incorporate the business. In anticipation of this, Mr Froome entered into a contract with

BrandMark Ltd who would provide marketing services for the new company. The contract

was signed ‘on behalf of FroomeCorp Ltd.’ A few weeks later, FroomeCorp Ltd was formally

incorporated. Mrs Froome was the company’s only director and shareholder (holding all

100 of the company’s shares), with Mr Froome acting as the company secretary. The

company’s accounts were audited by Rog & Pog LLP. Shortly after FroomeCorp Ltd was

incorporated, BrandMark sought payment for the services provided, but FroomeCorp

refused to pay, on the ground that no contract existed between it and BrandMark.

 

The business continued to grow and, to fund the expansion of the business, it was decided

that FroomeCorp would re-register as a public company. FroomeCorp Ltd re-registered as

FroomeCorp plc in March 2010. Mrs Froome remained the only director until June 2010

when Mr Froome was also appointed as a director. Mr Froome also continued to act as

company secretary. Upon re-registering as public, FroomeCorp adopted the model articles

for public companies, but added the following provision:

  • Article 22(g) provides that ‘a director of the company must vacate office if all the

other directors so require. This provision cannot be altered or removed.’

 

A few months later, Mrs Froome stated that she was amending art 22(g) so that it now

provides that ‘a director of the company must vacate office if a majority of the other

directors so require. Any director so removed must also sell any shares in the company to

the other directors.’

 

To fund FroomeCorp’s expansion, the directors authorised the issuing of 10,000 new

shares, of which 8,000 are issued to Mrs Froome and 2,000 are issued to Mr Froome. The

expansion of the business necessitated an expansion of the board. Accordingly, two new

directors, Mrs Thomas and Mr Rowe, were appointed to the board on 5-year contracts.

Unbeknownst to Mrs Froome, Mr Froome and Mrs Thomas were having an affair and have

set up a company that has started competing with FroomeCorp. Mr Froome has started

soliciting clients of FroomeCorp to this rival company. Upon discovering this, Mrs Froome

was incensed and called a general meeting of the company where she tabled a resolution

proposing to remove Mr Froome and Mrs Thomas from office. At the meeting, Mr Froome

circulated a statement which stated that Mrs Froome was a poor director, who refused to

work with others and used FroomeCorp simply as a means to benefit herself financially.

The resolution was passed. Mrs Froome told Mr Froome that his appointment as company

secretary has been terminated immediately and he was required to sell his 2,000 shares.

He refused to sell his shares in the company. Following the removal of Mr Froome as

company secretary, the board asked Mr Yates (FroomeCorp’s General Counsel) if he would

be willing to also act as company secretary. He agreed.

 

In the years that followed, the company expanded significantly and further share issues

were made in order to raise capital. In March 2019, it was decided that the company would

trade its shares on the London Stock Exchange and would seek an official listing.

 

FroomeCorp was admitted to the official list in June 2019 with a premium listing. At this

time, the board consisted of Mrs Froome (the CEO), Mr Rowe (the chair), Mr Contador (the

chief finance officer), Dr Sagan (the chief operating officer), and Mr Swift (the marketing

director). In addition, the company appointed two non-executive directors, namely Mrs

Deignan and Mr Lloyd. Concerned that employee concerns are not being taking into

account sufficiently, the board decided to appoint one of FroomeCorp’s employees, Mr

Gilbert, as a NED so he could voice employee concerns.

 

In January 2020, Mr Yates was convicted of a tax evasion offence that was unconnected

from his employment with FroomeCorp. Upon discovering this, Mrs Froome informed Mr

Yates that she would need to discuss the issue with the board to determine if Mr Yates

should remain on the board. Mr Yates stated that his conviction was completely unrelated

to his employment and, later that evening, he sent a tweet from his personal Twitter

account in which he stated that if FroomeCorp fired him, it would demonstrate how

cowardly the board was. The following day, the board of FroomeCorp informed Mr Yates

that his employment was terminated immediately, and he would not be provided with a

reference. You are appointed as company secretary.

 

In March 2020, FroomeCorp agreed to provide consultancy services to PharmaTech plc, a

pharmaceutical company that had been found in breach of animal testing laws on several

occasions. Mr Rowe was of the view that FroomeCorp should not take the contract on, but

Mrs Froome argued that it was very lucrative. The other directors expressed no opinion

and simply agreed with Mrs Froome without seriously considering the issue. The contract

was indeed lucrative, but following a television documentary that revealed PharmaTech

employees were still engaged in animal cruelty, media reports focused on FroomeCorp’s

role in advising the company. A significant number of FroomeCorp’s clients no longer

wanted to engage in business with FroomeCorp on the ground that it could be damaging

to their reputation. As a result of this, it became clear that FroomeCorp would not make a

profit in 2019/20. The board decided not to make this known as it could negatively affect

the share price and there were concerns that several major institutional investors would

table resolutions seeking to remove directors.

 

FroomeCorp sustained significant losses as more clients left. Mr Rowe, infuriated that his

advice regarding PharmaTech was not heeded, informed Mrs Froome that he was resigning

from the board with immediate effect. Mrs Froome stated that she would undertake the

role of chair until a suitable replacement for Mr Rowe could be found. At a board meeting

in September 2020, it was suggested that the role of chair should be offered to Mr Dennis,

who had recently retired from Rog & Pog. During his time at Rog & Pog, he provided

consultancy services to FroomeCorp and so knew the company well. On this basis, the

board agreed to appoint Mr Dennis as chair on a three-year contract.

 

In order to bolster the company’s dwindling cash reserves, in October 2020, Mrs Froome

loaned £100,000 to FroomeCorp, secured by a floating charge over all the assets of the

company. In June 2019, the auditing partner at Rog & Pog responsible for auditing

FroomeCorp’s accounts stated that the company would likely be unable to avoid liquidation

if its financial position did not improve significantly and quickly. Upon hearing this, Mrs

Froome sold 5,000 of her shares in FroomeCorp and told her daughter ‘the company may

not survive for long, so sell your shares in the company.’ Her daughter did so.

 

The company’s financial position continues to worsen. It had maxed out its £1 million

overdraft with BigBank plc. In November 2020, BigBank agreed to increase the overdraft

limit to £1.5 million in return for a charge over all the assets of FroomeCorp, which

FroomeCorp agreed to. The charge instrument described the charge as a fixed charge, but

provided that FroomeCorp could continue to use the charged assets. FroomeCorp also

borrowed £2 million from CreditCo plc, secured by a fixed charge over FroomeCorp’s

corporate headquarters. To raise money quickly, FroomeCorp sold off an unused office

building for £500,000, even though it had a market value of £800,000. The company also

sought to call in debts owed to it. Notably, FroomeCorp was owed £100,000 for consultancy

services provided to Gears Ltd. The board of Gears was aware that FroomeCorp was in

financial difficulty and so the CEO of Gears informed the board of FroomeCorp that Gears

could only pay £60,000 in full satisfaction of the debt. Desperate for cash, the board of

FroomeCorp accepted this.

 

The board were increasingly of the opinion that the company’s woes were due to Mrs

Froome’s poor leadership of the company. Accordingly, in January 2021, at a board

meeting, the other directors of FroomeCorp informed Mrs Froome that her appointment

as director and CEO was terminated with immediate effect. As recognition of the service

she had provided, the board stated that she would be paid a loss of office payment of

£200,000. Mrs Froome stated she will accept this and leave without causing a fuss if the

company also agreed to immediately pay back the £100,000 she lent it. The board agreed

and Mrs Froome was paid £300,000.

 

The board was of the opinion that an outside perspective was required and so it decided

that the new CEO should be an external appointment. In March 2021, Mr Bennet is

appointed as CEO. Upon discovering the above events, he is extremely concerned and asks

you to undertake the following tasks:

(a) Identify all the breaches of the law involving FroomeCorp (and its previous

incarnations), its directors, and those it has dealt with;

 

(b) Identify any breaches of the UK Corporate Governance Code or other relevant

corporate governance rules and recommendations and, if such breaches should

be remedied, how to go about this;

 

(c) If FroomeCorp were to be liquidated (i) what would the legal consequences be;

(ii) in what order would its debts be paid, and; (iii) how much would each creditor

likely receive. The board estimates that liquidation expenses would be £50,000.

As of April 2021, the assets of FroomeCorp (including its headquarters, which are

valued as being worth £2.1 million) amount to £3 million (this does not include

sums that could be recovered due to breaches of the law etc). FroomeCorp has

struggled to pay its taxes as they fall due and owes HMRC £100,000. It also owes

£70,000 to assorted unsecured creditors and has maxed out its overdraft with

BigBank.