Legal Advice to Board of Directors of Stone You Go Pty Ltd Regarding Free Supply of Plants

Question

Assume that, in view of all of these events, the parties agree that the directors of Stone You Go Pty Ltd should be Julie Stone’s Mother (Eva Smith) and Mr Colin Smith’s trustee (Ms Ethical).

The shareholdings are as follows:

Julie Smith                                                         20 x $1.00 shares

Graham Smith                                                    60 x $1.00 shares

Ms Ethical (as trustee for Colin Smith)              20 x $1.00 shares

The company commences its nursery and plant business. Graham visits the company's business office on an almost daily basis, and has recently told both directors that they must provide free plants from now on to Wink Wink Pty Ltd, a client of the company which operates a state wide chain of florists. Graham is a majority shareholder in Wink Wink. The directors of Stone You Go Pty Ltd are very worried about Graham’s request.

The company's business is doing very well at present and Wink Wink is their largest client. If they provide free plants to Wink Wink, revenues will drop significantly. Both directors are somewhat intimidated by Graham. They do not want to upset him, particularly because he is the company's majority shareholder, and also because of the family connections.

Required:  

a) Advise the directors.

b) Does Graham Stone run any risk if the directors act on his advice (both on this issue and on some other matters), and the company subsequently becomes insolvent?

Summary

This question belongs to business and corporate law and discusses about advice to board of directors regarding free supply of plants to a company.

Total word count: 260