Dear Supervisor

I have assessed each of the actions that the directors of CD Comics (“CD Directors”) are proposing that Wonder Films should take, and have set out below whether the directors of Wonder Films appointed by our client, Dream Productions (“DP Directors”), may be able to block these actions in accordance with the Joint Venture Shareholders’ Agreement (“JV SHA”) between the parties.

Summary

Appendix A of the JV SHA sets out a number of “reserved matters”, which – in accordance with clause 2.1 – may only be approved if at least one CD Director and one DP Director consents. This essentially gives each joint venture party a veto right over these specific actions.

Clause 2.2 states that any actions taken that fall outside the scope of these reserved matters may be approved by a majority vote. Given that CD Comics has more directors than Dream Productions on the board of Wonder Films, it is therefore likely that the CD Directors will be able to approve any proposed actions that are not explicitly covered in Appendix A.

In light of this, and for the reasons set out in more detail below:

• It is likely that the CD Directors can approve the production of a new children’s movie for the Australian market, as well as the purchase of a suite of technology costing £150,000, even if all the DP Directors vote against these actions.
• However, it appears that the DP Directors can veto the establishment of a new share option scheme, the salary increase proposed for the new Head of Production, and the grant of an exclusive licence to CD Comics, provided that all DP Directors vote against these actions.

Proposal to produce a new children’s movie for the Australian market

The only reserved matter than might be applicable to this proposal is clause 12 of Appendix A, which gives either party a veto right if a proposal involves “substantially changing the general nature of the Company's Business, or commencing any new business by the Company which is not directly related to the Business”.

In the JV SHA, “Company” means “Wonder Films”, and the Company’s “Business” is defined as “the creation, development and production of feature films aimed principally at children in the US, and such other business as the Parties may from time to time agree should be carried on by the Company”. In light of this, it could potentially be argued that creating a movie for the Australian market doesn’t align with Wonder Films’ stated focus on the US. 

However, the definition of “Business” in the JV SHA includes the phrase “aimed principally at” children in the US, suggesting there is some scope to deviate from this without the relevant action constituting a reserved matter. Wonder Films is still proposing to create a feature film for children, and it is unlikely that developing one film for Australian children will constitute a “substantial change” to the Company’s business or “new business…which is not directly related to the Business”. 

This action would therefore not likely be caught by clause 12 of Appendix A, meaning the DP Directors cannot veto the decision. As the CD Directors control more than 50% of Wonder Films’ voting rights, they can therefore collectively approve this action, even if all DP Directors vote against it. 

Proposal to launch a new share option scheme 

Clause 6 of Appendix A explicitly covers the launch of a share option scheme for employees, meaning the DP Directors could block the action if all vote against it.

Proposal to purchase a suite of technology for £150,000

There are a few reserved matters that might be relevant to this proposed action. 

Clause 3 of Appendix A affords each party a veto right over transactions proposed that are outside the normal course of business, or where the proposed terms (including price) are worse than could have been obtained elsewhere. However, the facts do not suggest that the purchase of this technology would be outside the ordinary course of business, or that the price and terms are worse than could be secured elsewhere. 

Clause 4 of Appendix A would afford each party a veto right if the technology purchase requires Wonder Films to enter into a long-term or unusual contract, but again there is nothing in the facts to suggest that the contract is ongoing or unusual. It might however be worth us reviewing the draft contract for the technology purchase to double check whether the technology relates to the Wonder Films’ business, whether the price and terms are market standard, and whether the contract is long-term or unusual.

Note that Clause 5 of Appendix A gives either party a veto right if Wonder Films proposes to raise debt or equity finance. In light of this, if Wonder Films needs to raise debt or equity finance to fund the £150,000 transaction, the DP Directors could block this action if all vote against it. 

Finally, clause 10 of Appendix A entitles either party to veto an acquisition of a “Material Asset”. This is defined as an asset (or collection of related assets) with a value that exceeds £200,000. Unless the price of the technology rises to exceed this threshold before the purchase is confirmed, then this clause will not be relevant to our client, given that the proposed purchase price is £150,000. As the CD Directors control more than 50% of Wonder Films’ voting rights, they can therefore approve this action, even if all DP Directors vote against it.

Proposal to promote the current production assistant and pay them a salary of £72,500 per year

Clause 8 of Appendix A gives either party a veto right where: (a) a party proposes entering into or varying a contract with an employee; and (b) that employee’s total remuneration will exceed £75,000 under the new or varied contract.

Although the proposed salary of £72,500 is under this threshold, there is a good chance that the total remuneration, including the value of pension payments and other benefits, could exceed this threshold. This is something we would want to double check, as if total remuneration does exceed the £75,000 threshold, then the DP Directors could block the action if all vote against it. 

Proposal to grant an exclusive licence to CD Comics 

Clause 14 of Appendix A gives either party a veto right in relation to a proposal involving Wonder Films entering into some kind of “transaction, arrangement or agreement” with one of its shareholders. The grant of a licence by Wonder Films to CD Comics would count as a “transaction, arrangement or agreement” between the Company and one of its shareholders, meaning the DP Directors could block the action if all vote against it.

I would be very happy to help if you have any questions on the above, or if you would like me to carry out any further research.

Kind regards

Trainee