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CS Professional · Corporate Restructuring, Valuation and Insolvency · Process of M&A Transactions

A director of Epsilon Ltd, an unlisted company, signed an asset purchase agreement with a related party without Board consent or required shareholder approval. The agreement was signed on 1 March. Nothing was ratified by 15 June. Which statement is correct under Section 188?

The contract is voidable at the option of the Board or, as the case may be, the shareholders, because it was not ratified within three months. The directors concerned must indemnify the company against loss where the contract is with a related party to a director or is authorised by another director.

  1. AThe contract is void ab initio and cannot be affirmed
  2. BThe contract is voidable at the option of the Board or, as the case may be, the shareholders, and the concerned directors must indemnify the company for loss where the contract is with a related party to a director or is authorised by another directorCorrect
  3. CThe contract becomes valid automatically after three months
  4. DThe contract is voidable only at the option of the counterparty

Explanation

Section 188(3) lets the contract be voidable at the option of the Board or shareholders if not ratified within three months of entering into it; 1 March to 15 June exceeds three months. Directors concerned must indemnify the company against loss in the stated cases. It is not void ab initio, and the option lies with the company's organs, not the counterparty.

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