Question

Paul is the shareholder that owns most (90%) of the outstanding stock of Purple Machine, Inc. Paul is not involved in the day-to-day running of Purple Machine, Inc. However, last week he approached by Red Supply Corporation with what he believed to be a very favorable Supply Agreement for the purchase of inventory that Paul is certain Purple Machine, Inc. can use. Paul signs the Supply Agreement on behalf of Purple Machine, Inc. Is the execution of the Supply Agreement valid against Purple Machine, Inc.? Why? (5 pts)

Suppose Paul approaches David, a director on the board of directors of Purple Machine, Inc., about the transaction with Red Supply Corporation, and David thinks it’s a great deal. David executes the agreement on behalf of Purple Machine, Inc. Is the execution of the Supply Agreement valid against Purple Machine, Inc.? Why or why not? (5 pts)

Answer 1

1. The signing and executing an agreement with a third party that affects the company's interests need to be signed in accordance with the law in following ways.

(a) Under the affixing of common seal

(b)The signature of a director and a company secretary or the signatures of two directors.

In both cases, the document should state that it has been executed by the company, not the individuals.

In both scenarios mentioned in the case, neither the majority shareholder nor a single director is authorised to execute a contract with an external party. Hence both are invalid.