A Short Report on ‘Management and Administration of a Company’

Submitted to:

M. M. Fakhrul Islam

Course Instructor and Assessor

BiMS University College, Dhanmondi, Dhaka.

Submitted by:

Md. Afzalur Rahman

BiMS ID: 2161

Edexcel Registration No.: AD66092

Date of Submission:

18th March, 2010

Letter of Transmittal:

16.03.2010

The Course Instructor,

Company Law, BTEC HND in Accounting,

BiMS University College, Dhanmondi, Dhaka.

Subject: A Short Report on ‘Management and Administration of a Company’

Sir,

I hereby submit the short report on the ‘Management and Administration of a Company’, a task given by you as the third and fourth learning outcome of the Unit 16 (Company Law).

During the accomplishment of the report I had to go through our syllabus in depth that not only increased my subject knowledge, but also opened up a new window of wisdom which definitely will enlighten my future path. Moreover, as the report was based on an interesting real life case, it enhanced my first hand experience as well and got me a grasp of how real life scenarios could be in relation to our study.

I tried to comply with the instruction given by you in the classes for the model of the report and gathered information from sources approved by you. However there might be some unintentional mistakes or errors asking for your kind pardon due to my lack of knowledge but I can ensure it is never for my negligence as you will find my whole hearted dedication while going through my report. I will be very happy to clarify any part of this report if you require justifying my work done and I declare to my knowledge the whole task was done by me under your kind observation.

Thank You.

Afzalur Rahaman,

ID: 2161

-------------------------------

Acknowledgement:

I would like to acknowledge and extend my heartfelt gratitude to the following persons who have made

the completion of this Assignment possible:

My course instructor Md. M.M Fakhrul Islam, for his vital guidance and support throughout the

completion of this report.

This thesis would not have been possible unless I got the direct assistance from the class lecture

slides provided by our course instructor for the students on the official website of BiMS

University College.

The librarian of BiMS went a long way choosing books for taking necessary notes from relevant

books from the library.

ContentsExecutive Summary....................................................................................................................................5

Chapter 1.....................................................................................................................................................6

Introduction:...........................................................................................................................................6

Chapter 2.....................................................................................................................................................8

Task: To analyze the role a chairman of the board of directors of Midway Games Inc........................8

Chapter 3...................................................................................................................................................11

Task: To analyze the underlying concepts in administration of a company. (Auditors Role of Midway Games Inc.)...........................................................................................................................................11

Chapter 4...................................................................................................................................................13

Task: To analyze critically the issues involved in liquidation or insolvency of Midway Games Inc.. . .13

Chapter 5...................................................................................................................................................16

Task: To explain the administrative process as an alternative to winding-up of Midway Games Inc................................................................................................................................................................16

Chapter 6...................................................................................................................................................20

Findings:................................................................................................................................................20

Conclusion:............................................................................................................................................20

References:...............................................................................................................................................21

Executive Summary

This report is based on a video games developing and publishing company, Midway Games Inc., once one of the market leaders, collapsed due to massive disorder in the management and administration of the company.

In the analysis of the case, number of chairmen as well as chairwoman was found who took charge of the company at different stages and in few issues it has been found that they were not let to play their role independently by a shareholder occupying majority of the shares.

Although much information were not available about the audit and auditor of Midway Games Inc., it was found that big names like Ernst & Young were involved in their audit and probably it went a long way to dismiss the case against the former officials of the company for publishing misleading information while selling shares.

In an embarrassing situation where the debts were far greater than the figure of the assets, Midway Games Inc. was compelled to be wound up although, for some unknown reason, they have not made an attempt to recruit an administrator as a last try. But recommendations are given in this report.

The case of Midway Games Inc. is an ideal example of poor management and administration of a company.

Chapter 1

Introduction:

Midway Games Inc. founded in 1973 and headquartered in Chicago, Illinois, with offices throughout the world, a leading developer and publisher of interactive entertainment software for major videogame systems and personal computers; is the company we are going to discuss about in this report.

Here is some key information of the current status of this company profilei:

Headquarter: 2704 West Roscoe Street, Chicago, IL 60618, United States.

Phone and Fax: P: +1 (773) 961-2222 and F: +1 (773) 961-2099

Industry: Computer Games

Type: Public Company

Status: Reorganizing

Company Size: 650 employees

2006 Revenue: $166 million (10%)

Founded: 1973

Website: http://www.midway.com

Employee Statistics:

Median Age 31 years

Gender : Male 80% Female 20%

Directors and Officers Name Age Since Title

Matthew Booty 43 2004 Chairman of the Board, President.

Ryan O'Desky 33 2008 Chief Financial Officer, Senior Vice President-

Finance, Principal Accounting Officer, Treasurer.

Deborah Fulton 45 2000 Senior Vice President, General Counsel, Secretary.

Miguel Iribarren 43 2002 Senior Vice President – Publishing.

Martin Spiess 43 2005 Executive Vice President - International of Midway

Games Ltd.

(Officers and Directors data as of March 13 2010)ii

Significant chronological events:

Year Events

I. 1973 Midway Games was founded as a video games developer and publisher.

II. 1998 Summer Redstone, Head of Viacom/CBS corp. had 15% share of Midway.

III. 2000 Continued to develop newer games although appeared to be a loosing

concern.

Engaged in a series of stock and debt offerings and financing and borrowings.

IV. 2007 Summer Redstone’s holdings reached 87%.

V. 2008 Summer Redstone sold all the shares to Mark Thomas, a private investor,

for $100,000 and handed over loan liabilities of $70 million.

VI. 2009

12th February Declared itself insolvent in Delaware under chapter 11 bankruptcy.

May Worner Bros, another gaming company, brought most of the assts for $33

million.

10th July The selling procedure was completed.

October Midway continued to sale more of its assets.

U.S district court of Chicago dismissed a lawsuit against former officers for misleading public while selling shares.

VII. 2010

23rd February Filed a proposed plan of liquidation in Delaware.

23rd March Hearing of the proposed plan to be approved.

Now, in this report all about the roles of the Chairman of the board of directors, role of auditor in Midway Games Inc., Issues involved in liquidation of Midway Games Inc. and the administration process in case of Midway Games Inc. are to be elaborately discussed.

Chapter 2

Task: To analyze the role a chairman of the board of directors of Midway Games Inc.

Chairman:

A chairman is selected by a company's board to lead the board of directors, preside over meetings and lead the board to consensus from the disparate points of view of its members. The chairman is the presiding director over the other directors on the board and is expected to be fair, a good listener, and a good communicator.

In public companies, the role of the chairman of the board is distinct from that of the company's CEO or managing director. This point has more recently been brought into focus after corporate governance shortcomings were observed in companies where the two roles are combined. It is believed that the separation of functions within the board of directors or in the structure of the supervisory board and management board would facilitate control over the workings of the company and increase the accountability of the CEO or chairman of the management board. In an attempt to inject transparency into the relationship between executive management and the board of directors as well as between management and the market or shareholders, the UK Cadbury Report was published in 1992. Its recommendations have been adapted to a greater or lesser extent by some countries within the European Union and the United States, as well as by the World Bank.

Types of chairman of the board of directors:

In the case of companies and similarly-organized bodies, there are generally two types of chairmen,

Non-executive and

Executive.

Non-executive Chairman: A non-executive Chairman of the Board is and does the following:

A part-time officeholder who sits on and chairs the main board of a company.

Provides support and advice to a CEO.

This position usually entails fulfilling a similar function on a number of additional board committees, as well as being a political figurehead of the Company.

Executive Chairman: An executive Chairman of the Board is and does the following:

A full-time officeholder who typically leads the board and also takes a hands-on role in the company's day-to-day management.

Helps the CEO to oversee all the operational aspects involved in running the company, which include project planning and development delivery, retail and leasing, sales, market research and many other areas within their extensive scope.

Has overall responsibility for the company which involves engineering and controlling the company's current growth in and future expansion into international markets.

In addition, oversees all projects' development activities and related businesses of the company, generating significant financial returns for the shareholders and driving sustainable development.

The chairman often sets the style of leadership of the board which in turn filters down through the organization.iii

Chairmen of Midway Games Inc.: Although Midway Games appeared as a corporation since 1973, it was formerly known as Midway Manufacturing and hence its history starts far behind 1973 and since then Midway Games Inc. was run under various Chairmen, most of them are as followsiv:

1. Bally(1969-1988): Midway Manufacturing was first bought by Bally in 1969 and thereafter it was run by Bally and hence, he might be considered the early stage spokesman of the Midway Manufacturing.

2. WMS Industries Incorporated (1988-1998): In 1988, majority of Bally/Midway business were bought by the Williams Electronic Games, and thereon run by the WMS.

3. Summer Redstone (1998-2004): In 1996, WMS made a public offering of the shares of Midway Manufacturing Co. after changing its name to Midway Games Inc. in Delaware. In 1998, Summer Redstone, head of Viacom and CBS Corp. purchased 15% of Midways share and he went on investing in Midway as he was designated the Chairman of the board.

4. Shari Redstone (2004-2008)v: Summer Redstone nominated his daughter Ms. Redstone, as the next Chairman of the board who joined Midway’s Board of Directors in 2004, and she was the vice chairwoman of the board and had served in the past on the Nominating and Corporate Governance Committee and the Compensation Committee.

5. Peter C. Brown (2008-2009)vi: Midway Games Inc. (NYSE:MWY) appointed Peter C. Brown as Chairman of the Board. Mr. Mr. Brown succeeded Shari E. Redstone, who had resigned from the Company’s Board of Directors.

6. Matt Bootty (2009-till liquidation): He succeeded Mr. Peter C. Brown as the Chairman of the board in a very critical situation of the demising Midway Games Inc.

Analyzing the Chairman’s statement of role of Midway Games Inc., the role due to be played by the above mentioned chairmen is as follows:

The Chairman of the Board of Directors shall, when present, preside at all meetings of the Members of the Board of Directors and shall perform such other duties and exercise such other powers as shall from time to time be assigned by the Board of Directors.

The Chairman of the Board shall also have the following responsibilities:

1. Ensure that the organization abides by its bylaws and established policies.

2. Serve as Chair of the Executive Committee.

3. Support the President.

4. Represent DOSECC to other organizations, the media and the public at large.

5. Appoint or approve committee chairpersons according to approved committee policy.

6. In collaboration with the President, develop agendas for all meetings of the Board of Directors.

7. Report to the Membership

8. Communicate regularly with the President.

9. Report periodically to the Board of Directors.

10. Train the incoming Chairman for his /her responsibilities.

11. Charge committees

12. Receive reports from all officers and committees.

Important Issues:

As the chapter 2 of this report deals with the roles of chairmen of the board of directors of Midway Games Inc., I would draw the attention of the reader to an were times and again the chairmen’s rights and duties have not been allowed to be independent breaching important issues of corporate governance. For example in an articlevii it has been published that Summer Redstone as the majority share holder pressurized the operation of the existing chairmen,

“Michael Pachter, an analyst at Wedbush Morgan Securities, said he was not surprised by the move. ‘(We) believe that Sumner Redstone influenced this action. Redstone has recommended several changes to Midway's board of directors since his ownership interest increased past 50 percent.’ He added that a more independent Midway board should be viewed as positive, but reiterated his "hold" rating.”

I believe these sorts of imposition might greatly accelerate the disorder in an organization which could have been a significant factor in the present condition of the Midway Games Inc.

Chapter 3

Task: To analyze the underlying concepts in administration of a company. (Auditors Role of Midway Games Inc.)

The Company Auditor: The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person / organization/system (etc) in question, under evaluation based on work done on a test basis.

In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person(s) known as auditors or accountants, who then issue an auditor's report based on the results of the audit.

Every company must appoint appropriately qualified auditors for each financial year (S 475). An audit is a check on the stewardship of the directors.

Membership of a recognized supervisory body is the main prerequisite for eligibility as an auditor. An audit firm may be a body corporate, a partnership or a sole practitioner. The Act requires an auditor to hold an ‘appropriate qualification’ if they;

Have satisfied existing criteria for appointment as an auditor

Hold a recognized qualification

Qualified by a similar overseas body and authorized by State regulatory department

Audit for Midway Games Inc.:

Last auditor: Jerry Siemienas (Chief Internal Auditor January 2008 — September 2009)

Last External Audit firms: Ernst & Young

Duties of Auditor:

The statutory duty of an auditor is to report to the members whether the accounts give a true and fair view and have been properly prepared in accordance to the company’s act.

They must also:

State whether or not the director’s report is consistent with the accounts.

For quoted companies, report to the members on the auditable part of the directors remuneration report including whether or not it has been properly prepared in accordance with the act.

Be signed by the auditor, stating their name, and date where the auditor is a firm, the senior auditor must sign in their own name for, and on behalf, of the auditor.

To fulfill their statutory duties, the auditors must carry out such investigation as are necessary to form an opinion as to whether:

Proper accounting records have been kept and proper returns adequate for the audits have been received from branches.

The accounts are in agreement with the accounting records.

The information in the director’s remuneration report is consistent with the accounts.

The auditor’s report must be read before any general meeting at which the accounts are considered and must be open to inspect by members. Auditors have to make disclosures of other services rendered to the company and the remuneration received.

I. In the back ground we found that after 2000, Midway experienced net losses in which case auditor had a very key role to play as we found that even after the losses they still they issued share capitals.

II. In October 2009, it was seen that Midway Inc. was rapidly selling its assets in which case also auditor must have played a key role if the selling procedures were done under authorized or not.

III. Auditors must have also ensured that the directors are dedicatedly and consistently running the administration of the Midway Inc.

IV. We have seen number of handovers of shares of Midway Inc. and a number of cases filed as well, where the auditors must have maintained their statutory duties.

V. We have seen that there was a law suit against the former officials of Midway Games Inc. for publishing misleading information, which should be scrutinized under the authority of the auditor and as the lawsuit has been dismissed, we can assume that the auditor had presented relevant evidence of maintaining true and fare records.

Midway Games Inc. Auditor’s Liability:

S-507: Where an individual auditor or an auditor working on behalf of a form, knowingly or recklessly causes their report to be materially misleading, false or deceptive, they commit a criminal offence and may be liable to a fine.

S-532: Any agreement between an auditor and a company that seeks to indemnify the auditor for their own negligence, default or breach of duty or trust is void.

S-534: An agreement can be made which limits the auditor’s liability to the company. Such liability limitation agreements can only stand for one financial year and must therefore be replaced annually.

Liability can only be limited to what is fair and reasonable having regards to the auditors responsibilities, their contractual obligations and the professional standards expected from them. Such agreements must be approved by the members and publicly disclosed in the accounts or directors reports.

Chapter 4

Task: To analyze critically the issues involved in liquidation or insolvency of Midway Games Inc.

Liquidation:

Liquidation is the dissolution or the winding up of a company. When a company is declared as financially insolvent to pay off its debtors, it must be dissolved and its affairs wounds up or are brought to an end. The assets are realized, debts are paid out of the proceeds and any surplus amount is returned to the members.

Liquidators:

There are three types of liquidation and most likely involved in the decision are:

1. The Director Compulsory Liquidation

2. The Creditors Creditors Voluntary Liquidation

3. The Members Members Voluntary Liquidation

In case of Midway Games Inc., the directors consulting with the members decided about the liquidation and hence it is under the creditor’s voluntary liquidation as the directors could not have shown solvency.

Role of the liquidator:

A liquidator must be an authorized, qualified insolvency practitioner.

Whoever takes the decision of liquidation, once it has been taken, the company goes under the control of liquidator as seen in case of Midway Games Inc. and the liquidator must be qualified and authorized person to do so.

Common features of liquidation:

Once insolvency procedures have commenced, share trading must cease, the company documents must state that the company is in the liquidation and the director’s power ceases.

Regardless of the method of liquidation, similar legal problems may arise in each of them. In addition the following factors are also true at the start of the liquidation:

No share dealings or changes in member is allowed

All company documents and websites must state that the company is in liquidation

The directors power to manage ceases

Midway Games Inc. opted for the creditor’s voluntary liquidation as when there is no declaration of solvency there is creditor’s voluntary liquidation.

To commence the creditor’s voluntary liquidation, the directors of Midway Games must have convened a general meeting of the members to pass a special resolution as well as the creditors giving seven days prior notice. It might either:

Give the name and the address of the qualified insolvency practitioner to whom the creditors can apply before the meeting for information about the company, or

State a place in the locality of the company’s principal place of business where, on the two business days before the meeting, a list of creditors can be inspected.

Then the procedures proceed as follows:

To resolve the wind up: All the personnel present in the meeting should agree the decision of liquidation.

To appoint a liquidator: the next stage is to appoint a qualified and experienced liquidator.

To nominate up to five representatives to be members of the liquidation committee.

During the liquidation process, the most important task of the liquidator is to distribute the assets in a way as to give priority to the lenders specifically the unsecured ones.

The Liquidator must repay debts in the following order:

◦ Fixed charge-holders

◦ Liquidator-expenses and remuneration

◦ Preferential Creditors

Employees

◦ Floating charge holders

◦ Unsecured creditors

Tax and vat

◦ Post liquidation interest

◦ Members-declared but unpaid dividend

◦ Members- return on capital

◦ Any surplus to be distributed to members

In the proposed plan of the liquidation of Midway Games Inc. the following order is planned:

I. On 23rd February 2010, there was a proposed plan of liquidation of Midway Inc.II. In the proposed plan the distribution of assets are planned as follows:

1. Secured Debtors: Would be paid in full.

2. Priority claims: Would be paid in full.3. Inter-company claims: Would be paid in full.4. Unsecured creditors: Would be paid $155 million which is 16.5%5. Subsidiaries’ unsecured creditors: Would be paid $37 million, 25% of total credit

III. Any unlikely to be, surplus is to be distributed among the unsecured creditors in the same ratio.IV. Subordinate loan agreements will not be paid.V. The equity holders or the general share holders will not be paid anything.

VI. To ensure that the administrator is working on behalf of the unsecured creditors, the proposal has been entitled to vote for the unsecured creditors.

VII. Hearing of the approval will be disclosed on 23rd March 2010.

When the liquidator completes his task he reports to the Government, which examines his accounts. He may then apply to the court for the dissolution of the company.

Chapter 5

Task: To explain the administrative process as an alternative to winding-up of Midway Games Inc.

Administration:

Administration puts an insolvency practitioners in control of the company with a define program for rescuing a company from insolvency as going on.

Its purpose is to insulate the company from its creditors while it seeks:

To save it as a going concern or failing that

To achieve a better result for creditor than an immediate winding up would secure, or failing that.

To realize property so as to make a distribution

Alternative to winding up:

Administration is designed to hold a business together while debt restructuring and management plans are compiled to rescue the business. In order to apply for this procedure a business must submit the application to the high court. The application will provide immediate protection from all creditors including hire purchase and lease creditors. By choosing administration all company assets are protected.

As administration order is a process designed to protect ltd. companies from their creditors while a debt restructuring plan is carried out and presented to creditors and courts. This administration order process requires a licensed insolvency practitioner to act as the administrator appointed by the court.

Administrative receivership differs from simple receivership in that an administrative receiver is appointed over all of the assets and undertaking of the company. This means that an administrative receiver can normally only be appointed by the holder of a floating charge. Because of this unusual role, insolvency legislation usually grants wider powers to administrative receivers, but also controls the exercise of those powers to try to mitigate potential prejudice to unsecured creditors.

Characteristically an administrative receiver will be an accountant with considerable experience of insolvency matters.

Procedures for Midway Games Inc.:

Before declaring as insolvent the Midway Games could have opted for into administration to have a last try to save the company. In that case they must have proceeded in the following way:

1. Appoint an administrator

Through court: various parties might appoint an administrator as,

o The company,

o The directors of the company,

o One or more creditors,

o Following a non-payment of fine, the justice and the chief executive of the

magistrates court

Without court: three sets of people are able to appoint auditor without court,

o Floating charge holders

o Directors

o Company

2. Effects of appointing an administrator:

A moratorium over the company’s debt commences,

The court must give its permission to,

o Security of the company assets to be enforced

o Goods held under the hire purchased to be processed

o A landlord to conduct fortitude by peaceable entry

o Commencement or continuation of any legal process against the company

The powers of management are subjugated to the authority of the administrator and mangers can act only with his consent

All outstanding petitions of winding up the company is dismissed

Any administrative receiver in place must vacate office; no appointments to this position can be made.

3. Duties of the administrator: The administrator to be appointed for Midway Games Inc. must have some fiduciary duties as its agent plus some legal duties.

Legal duties of the administrator:

o Send notice of appointment to the company

o Publish notice of appointment

o Obtain a list of company creditors and send notice of appointment to each

o Send notice of appointment to registrar within seven days

o Require certain relevant people to provide a statement of affairs of the company

o Ensure that every business document of the company bears the identity of the

administrator and a statement that the affairs, business and property of the company are being managed by him.

o Whilst preparing their proposals, the administrator must manage the affairs of the

company

The statement of the affairs must be provided within the 11 days of requesting it and must contain:

Details of company’s property

Company’s debt and liabilities

Names and addresses of the companies’ creditors

Details of the security held by the creditors

4. End of administration: An administration can last up to twelve months.

It ends when,

The administration has been successful

Twelve months elapsed from the beginning of the administration

The administrator applies to the court for the end

A creditor applies to the court to end the administration

An improper motive of the appointer is discovered

When the administrator thinks that the purpose cannot be achieved

The company should not have entered administration

5. Advantages: If Midway Games Inc. applied for the administration, they might have got some advantages for the company, members as well as for the creditors;

Company:

o The company does not necessarily case to exist while liquidation will always result in

wound up.

o It provides relief from creditors temporarily to allow breathing space to formulate

rescue plans

o It prevents creditors from applying for compulsory wind up

o It provides past transactions to be challenged

Members:

o They will continue to have shares in the company which has not been wound up, if

the y come out successful, regenerating the business should enhance share value and restore any income from the business.

Creditors:

o They should obtain a return in relation to their past debts from an administrator

o Unsecured creditors will be benefited when asset realization

o Floating charge holders might appoint administrator without the reference of the

court.

Chapter 6

Findings:

Let’s look at some figures,

December ’08: A liability of loan of Midway Games Inc. was found amounting $70,000,000

May ’09: Proceedings from Warner Bros. earned $33,000,000

So, it’s clear that there is still at least $37,000,000 deficit and as most of the assets were sold to Warner Bros., it is obvious that the remaining asset could have never covered the remaining liabilities.

Wind Up proceeds:

Unsecured Creditors: $155,000,000 X 16.5% = $25,575,000

Subsidiaries unsecured creditors: $37,000,000 X 25% = $ 9,250,000

Total Payable to the unsecured creditors alone: $34,825,000

Hence it is clear that the company had no other way than winding up.

Conclusion:

Form the findings above, as we have seen that the liquidation was a must for the company, it is suggested in the report that they might have gone for recruiting an administrator.

However, ‘lack of goal congruence’ and ‘disorderly management and administration system’ are solely liable for these hard days of the Midway Games Inc. Counting losses in spite of developing market leading games like Mortal Kombat, Ms Pac-Man, NBA Jam etc, justifies the statement that the company had a lot of business in its bag (superior, creative and skilled technical staffs) but weak management and administration ruined all.

References:

iURLs Date of Access Date of Publishing

http://www.linkedin.com/companies/midway-games 12.03.2010 N/A

ii http://markets.ft.com/ft/tearsheets/businessProfile. 14.03.2010 13.03.2010asp?s=207998&ss=WSODIssue

iii http://en.wikipedia.org/wiki/Chairman 13.03.2010 11.03.2010

iv http://en.wikipedia.org/wiki/Midway_Games 14.03.2010 11.03.2010

v http://www.dmwmedia.com/news/2008/11/10/ 13.03.2010 10.11.2008shari-redstone-resigns-chairman-midway-games

vi http://www.dmwmedia.com/news/2008/11/10/ 13.03.2010 10.11.2008shari-redstone-resigns-chairman-midway-games

vii http://www.neowin.net/news/ 13.03.2010 04.06.2004midway-games-chairman-nicastro-to-resign

Book: Publisher Date of PublishingACCA F4; Corporate and Business Law BPP Learning Media Ltd. December 2007