Potomac Ltd (Potomac) is a listed company incorporated in NSW with an issued capital of $20 million. It is mainly a computer hardware company that produces computer equipment and supplies the parts to globally renowned and branded computer companies. Mini Ltd. (Mini) holds 40 per cent of the issued capital of Potomac. Mily Ltd. (Mily) holds 35 per cent and the remaining 25 per cent is held by a diverse group of shareholders. All of these shares are ordinary shares, holding the same rights, privileges, burdens and liabilities to all members. The company is located in North Ryde due to its proximity to the Macquarie University Research Park and the fact that the business advice they received suggested that the area is good for Potomacs type of business. Other than the directors, there are 56 employees at Potomac.

Very recently Potomac tendered for the construction of a large hardware production plant in Parramatta and is likely to be the successful bidder. It will need an injection of funds to construct the production plant. The directors of Potomac are concerned that Mini Ltd., which also owns a different hardware production plant in Perth, will launch a takeover of Potomac.

At a board meeting, the directors of Potomac resolve to allot a substantial number of shares to Mily in consideration of a promise that Mily will arrange finance for the construction of the Parramatta hardware production plant. The allotment to Mily varies the shareholding power of Potomac such that, after the allotment, Mini Ltd. will only command 10 per cent of voting power in Potomac Ltd.

On the basis of the facts outlined here, you are REQUIRED to:

Advise the directors of Potomac about the possibility of any legal challenge to their actions and describe all possible consequences. [10 marks]