QUESTION THREE

Milo Ltd was incorporated in November 2010 and has issued 5,000 shares, all with a nominal value of 100 each. The company's two directors, Kawira and Ross, each own 1,000 shares. Theo, a local businessman, owns 2,000 shares and the remaining 1,000 shares are owned by a number of local investors. Since it was incorporated, the company has run at a loss and has never made a profit. Theo believes that this is due to Kawira and Ross's poor management of the company. He also believes that, with new management, the company could be extremely profitable. He therefore starts buying from the local investors the shares that they hold in Milo Ltd with a view to voting Kawira and Ross out of office. Kawira and Ross discover Theo's plan. Accordingly, they cause the company to issue 3,000 new shares and offer to sell them to their friend, Gabrielle. However, Gabrielle cannot afford to buy these shares, but she does offer to sell her car to Milo Ltd as part-payment for the shares. The car is only worth 150,000 but Kawira and Ross accept the car as part-payment providing that Gabrielle uses the voting rights attached to her shares to defeat any resolution that aims to remove Kawira and Ross from office. The remaining payment comes in the form of 50,000, which Gabrielle loans from Milo Ltd. Theo, realising that his scheme to oust Kawira and Ross has failed wishes to sell his shares, but he cannot find a buyer. Kawira tells Theo the Milo Ltd will purchase the shares. By now, Theo has 250,000 shares and he agrees to sell them to Milo Ltd. The company purchases the shares and they are duly cancelled. Having rid themselves of the troublesome Theo, Kawira and Ross recommend that a dividend be paid at a rate of 10 pence per share. Gabrielle agrees and between them, the dividend is declared and paid out.

Required: Discuss the validity of Kawira and Ross's actions.