TERM 2 2007-08 EXAMINATION

17 APRIL 2008
LGST101 BUSINESS LAW
INSTRUCTIONS TO CANDIDATES
1. The time allowed for this examination paper is 3 hours of which the first hour
should be used to read the questions carefully and formulate an outline of your
answer.
2. This examination paper contains a total of Two (2) questions and comprises Four
(4) pages including this instruction sheet.
3. You are required to answer ALL the questions and their parts thereof.
4. Write ONLY your Student Identification Number on the cover sheet of your
answer booklet. Do NOT write your name.
5. Return this examination paper together with the answer booklet.
6. Open the examination paper only when prompted and stop writing when the time
is up.
7. All the best!

Question 1 (70%)
Onex is a Singapore company involved in catering and manufacturing of food products.
The Chief Executive Officer of Onex is Chua.
Basicfood Company Ltd (BC), a Singapore company, manufactures instant noodles,
under the brands Noodly. BC is owned by Tan. Tan is looking to sell BC. Chua had
long been interested in looking at acquiring a convenience food company and did some
calculations in respect of BC. During the negotiations between Chua and Tan in late
2007, Tan assured Chua that BC has extensive distribution networks in Asia-Pacific,
including Singapore and Malaysia, BCs relations with the distributors were excellent,
and that these distributorship agreements would end, at the earliest, in 2013.
Chua indicated to Tan that Onex was willing to pay a premium of 10% above the net
tangible asset value of BC. However, the negotiations dragged on for many months as
Tan believed that BC was worth much more because BC had potential for expansion into
many untapped markets, including China. In early February 2008, while the negotiations
were on-going, Tan requested BCs auditor, Ernie, to review the draft accounts of BC for
the year ended 31 December 2007 prepared by BCs accountants. Ernie had been BCs
auditor since 2000. The draft accounts showed that the net tangible asset value of BC was
S$25 million as at 31 December 2007. A copy of the draft accounts was shown to Chua.
On 29 February 2008, Chua heard that Predator, Onexs rival, was interested in BC and
had commenced negotiations with Tan. Realising that BC could fall into the hands of its
rival, Onex increased its offer for BC to S$50 million, which represented a substantial
premium over the net tangible asset value of BC, as shown in the draft accounts. Chua
reasoned that there were substantial synergies to be gained from the acquisition. Also,
Chua believed that BCs market could be expanded by selling the products in China,
where Onex already had an existing distribution network.
On 1 March 2008, Tan decided to accept Onexs offer to buy BC for S$50 million. Chua
was ecstatic. The sale and purchase agreement was hurriedly drawn up on the same day
by the lawyers for Onex and Tan. It provides that:
Clauses
1. On 1 March 2008, Onex agrees to buy, and Tan agrees to sell, Basicfood
Company Ltd for S$50 million, in cash.
2. Completion of the sale and purchase of BasicFood Company is to take place on
31 March 2008.
3. Tan represents and warrants that the net tangible asset value of BC as at 31
December 2007 was S$25 million.
4. The parties agree that this agreement contains the whole agreement between the
parties relating to the subject matter of this agreement and supersedes any
previous written or oral agreement between the parties in relation to the matters
dealt with in this agreement. Onex agrees that it has not relied on any statement
made by Tan which is not incorporated into this agreement.

At 11 p.m. on the same day, just before Chua signed the agreement on behalf of Onex,
Chua realised that the accounts of BC were still in draft form and the auditors of BC had
not yet issued the report that the accounts of BC represented a true and fair view of the
state of affairs of BC as at 31 December 2007. Tan assured Chua that the accounts were
in perfect order and told Chua that Onex was, in any event, fully protected under Clause 3
of the agreement. Nevertheless, Chua called Ernie (who was Chuas classmate at
University) at home and asked Ernie Hi buddy, I am sorry to call you at home and to
wake you up. However, this is important and will not last more than 2 minutes. Are the
accounts of Basicfood Company in order? Ernie said Yes sleepily. Chua then signed
the agreement, on behalf of Onex. Tan also signed the agreement.
On 31 March 2008, the sale and purchase of BC was completed.
In May 2008, Chua discovered that BCs chief financial officer had, between 2004 to
2007, embarked on a course of conduct of over-paying himself a sum far in excess of his
salary, which was clearly not authorised under the terms of his employment contract. Tan
and Ernie did not know about the fraud. Once the fraud was taken into account, the net
tangible asset value of BC was S$20 million. If Tan had been prudent in monitoring the
cash flows of BC, the fraud would have been discovered much earlier. Further, if Ernie
had completed all his usual checks, he would have discovered that these over-payments
had not been accounted for in the accounts.
Further, the distributors in Singapore and Malaysia informed BC that they no longer
wished to continue with the distributorship once their respective agreements come to an
end on 30 June 2008. These distributorship agreements accounted for 80% of BCs
revenues for the year ended 31 December 2007. In May 2008, for the first time, Chua
inspected the distributorship agreements entered into between BC and the relevant
distributors and found that each of these agreements provides that the obligations of the
respective parties commences on 1 July 2003 and ends on 30 June 2008. Each of these
agreements is renewable for a period of another five years (till 30 June 2013), but they
provided that the parties to the relevant agreement must consent to such renewal.
These distributors had earlier informed Tan in mid-2007 (before Tan began negotiations
with Chua) that they were not likely to renew these agreements after 30 June 2008
because the agreements were unprofitable. Chua is outraged that the views of these
distributors were never disclosed to him or to Onex.
(a)

Advise Onex as to whether it has any remedies in contract and/or tort against
Tan in relation to the sale and purchase of BC. (40%)

Can skip offer acceptance.

(b)

Advise Onex as to whether it has any remedies against Ernie. (30%)

In parts (a) and (b), you can assume that Chua has actual authority from Onex to do all
necessary acts on behalf of Onex, including the signing of the sale and purchase
agreement between Onex and Tan.
Question 2 (30%)
Hotel 881 is strategically situated at the side of Raffles Boulevard with an unobstructed
view of what was to be a part of the 2008 Formula One route. Room 18-8 had a great
view of 70% of the track including the starting and ending line. Taking advantage of this,
on 20 January 2008, it held an eBay online auction to sell a 3 Day Formula One Grand
Prix Hotel Stay Package at a starting bid price of $2000 on the scheduled dates of the
race (26-28 September). Willie was interested in the package and got his personal
secretary Aries to bid on the package on his behalf using Aries account, telling her to
get that package at not more than $5 000. Aries successfully bidded on it, but by
mistake overbidded for it at the price of $6 000 on 1 February 2008 when bidding closed
at midnight. On 10 February 2008, construction started for a grandstand right in front of
Hotel 881 by the government to seat MPs to watch the Grand Prix, which would obstruct
the view of the route from Room 18-8 to 30% without the starting or ending line in sight.
Advice Willie, Aries and Hotel 881 on their legal relationship and contractual rights
and liability. (30%)
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