Red Ltd is a listed company (hereafter Red). Blue Ltd (hereafter Blue) holds 40 per cent of the issued shares in Red and Yellow Ltd (hereafter Yellow) has 35 per cent of the shares. The remaining 25 per cent is held by a diverse group of shareholders.

Red has tendered for the construction of a large timer mill and is likely to be the successful bidder. It will need an injection of funds to construct the mill. The directors are concerned that Blue, which has other timber milling interests, will launch a takeover of Red and they lose their positions. They are also concerned that Blue will terminate the employment of many of Red's workers as Blue has a reputation of using foreign workers rather than local workers.

At a board meeting the directors resolve to allot a substantial number of shares to Yellow in consideration for a promise that Yellow will arrange finance for the construction of the mill. The allotment to Yellow varies the shareholder power of Blue such that, after the allotment, Blue will only command 10 per cent of voting power.

Required: Advise the directors about the possibility of any legal challenge to their actions.

Include:

introduction

law

application

conclusion