LGST 201: Quality Fabrics Ltd (“QFL”) is a Singapore Public Company Founded by Pishu and Peekay: Company Law Assignment, SMU, Singapore

FACTS

Quality Fabrics Ltd (“QFL”) is a Singapore public company founded by Pishu and Peekay, who are also QFL’s largest shareholders. VJPL, a private investment firm, is QFL’s other significant shareholder. the remainder of QFL’s shares being held by a smattering of other smaller shareholders.

The board composition and largest shareholders of QFL are as follows:

QFL functions as a woolen fabric representative agent in Singapore, specializing in premium quality wools and other exotic fibers. This means that QFL serves as a middleman between foreign woolen mills and merchants on the one hand and Singapore customers on the other. While QFL does sporadically deal with individual consumers, the bulk of its revenue comes from its B2B business where it represents foreign woolen mills and merchants in pushing through woolen fabric to distributors and stockists (i.e. fabric shops), who would then on-sell fabric (either on its own or tailored into garments) to end-users and tailors.

In recent years, Pishu and Peekay noticed a trend of foreign fabric mills undergoing mergers with, or acquisitions by, larger players in the industry. They also saw the fabric agency business die in neighboring countries, as foreign mills and merchants choose to enter into markets directly, in the interest of saving a layer of cost. The two discussed the best way forward for a smaller Singapore distributor such as QFL and concluded that QFL would have to embark on an aggressive business strategy of vertical integration in order to remain competitive on a global scale. In other words, QFL had to own the full production chain, from sheep to wool to distribution. To this end, QFL acquired an 18% stake in a small Singapore fabric distributor, Rong Wool Pte Ltd (“RWPL”), and also wholly acquired an Australian wool processor, Meh Meh Pty Ltd (“MMPL”). With these two investments, QFL took its first baby steps towards integration, since it now had some degree of control over the process from farm to tailor (almost).

QFL then began to look at raising funds for the purpose of acquiring sheep farms, whether in whole or in part. To this end, the board of QFL expressed a preference for fundraising through equity –QFL would issue shares to a new investor –instead of through debt.

QFL eventually found a suitable candidate in Premium Fabrics Pte Ltd (“PFPL”), the largest fabric distributor in Singapore, that was also one of QFL’s customers. QFL had caught wind of news that PFPL was also adopting a similar business strategy of vertical integration, and was worried that PFPL would become an unwelcome competitor. In fact, PFPL had already wholly acquired fifty (50) popular tailor shops around the region, in an attempt at downstream integration. QFL hoped that, by having PFPL invest in QFL, PFPL would think twice before taking adverse positions against QFL because it would not want to sabotage its own interests. QFL would also benefit from the relationship, as PFPL would massively upsize QFL’s distribution capabilities in a way RWPL could never do.

After many rounds of negotiation, it was agreed that PFPL would subscribe for new shares in QFL at a price of S$10 million, with the following conditions:

• MMPL would extend an interest-free loan to PFPL for the amount of S$2.5 million
• PFPL would be entitled to nominate one director, Andy, to the board of QFL. QFL would pay Andy a salary of S$800,000 per annum, for a contract term of three (3) years.
• QFL would acquire a 12% stake in PF Tailors Pte Ltd (“PFTPL”) at a price of S$5 million. PFTPL was PFPL’s wholly-owned subsidiary through which PFPL owned its regional tailor shops.
• RWPL would grant a fixed and floating charge over the entirety of RWPL’s assets to secure the repayment of the debt owed by PFPL to MMPL in (a) above.

As part of QFL’s ongoing efforts at expanding its reach, Peekay got acquainted with Lots Of Lanolin Pte Ltd (“LOL”), a newly-established producer of lanolin.¹ Peekay introduced himself as a director of QFL to LOL’s managing director, Ajay. Upon hearing that LOL was looking for an exclusive supplier of raw wool, Peekay’s eyes lit up in excitement. This, to him, was the perfect opportunity! QFL was already in the midst of negotiating acquisitions of sheep farms, and LOL would be a wonderful customer to have.

Confident that QFL would soon be flushed with capital, Peekay informed LOL that QFL would like to confirm a five (5) year exclusive supply contract with LOL, at a rate of S$5 million a year. Ajay then told Peekay that LOL just needed “some official confirmation of the arrangement for records”. Peekay, eager to impress, whipped out his phone before Ajay and sent Ajay an e-mail from his office e-mail address, with the following message and a copy of QFL’s constitution:

“I hereby confirm the five (5) year exclusive raw wool supply arrangement with Lots Of Lanolin Pte Ltd at the agreed rate of S$5 million a year. Please see the attached constitution for proof of authority.”

As it turned out, the rest of the QFL board did not share Peekay’s excitement over the LOL deal. To them, LOL was too new a player in the lanolin industry to deserve an exclusive arrangement of such high value. “What have you done, Peekay! Get us out of this mess you’ve created,” they told Peekay.

QUESTIONS

For the following questions:

• Assume that the Model Constitution does not
• You should state the reasons for your answers, as well as any assumptions that you might rely on.

1. Are there any problems with the arrangement between QFL and PFPL?
2. The board of QFL has issued a letter to inform LOL that any alleged agreement entered into between QFL and LOL is “null and void” because Peekay “had no power or authority” to commit QFL to the five (5) year exclusive supply agreement. In doing so, it referred LOL to the constitution attached in Peekay’s e-mail to Ajay, and said that LOL would have known this to be the case had it bothered to be more diligent. The constitution contained, amongst other regulations, the following:
3. The directors may entrust to and confer upon a managing director or any other executive director any of the powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit, and may from time to time revoke, withdraw, alter, or vary all or any of those powers.
4. The directors may exercise all the powers of the company to contract and to borrow money and to mortgage or charge its undertaking, property, or any part thereof, and to issue debentures, guarantees, and other securities (whether outright or as security for any debt, liability, or obligation of the company or of any third party): Provided that no contract with a duration of (four) 4 years or longer shall be entered by the company. Can QFL get out of the contract? Can Peekay be held responsible for anything?