Company Disputes, Shareholder Disputes, Shareholders’ Agreements and Directors’ Disputes
Disputes often arise over the direction and progress of a company. Deterioration in personal relationships, conflicts of interest, eg where a Director has an interest in another business, lack of performance are all factors that can raise tension in companies.
As, indeed, are different people being paid differential salaries or having different priorities. An example of this being one director wanting to keep money in the company for future investment in another, leaving the funds to be released by dividend now.
Providing for disputes in your Articles of Association or a Shareholders’ Agreement in advance can save you a great deal of time and money. Both the Articles and the Shareholders’ Agreement would usually say that in the event of a dispute you should go to mediation in the first place.
Mediation is a service we offer and it is independent of everyone participating in the mediation and is cost effective and quick.
But if mediation fails the Articles or the Shareholders’ Agreement may impose a mechanism for shareholders to part company. Commonly, an aggrieved shareholder would have the right to require others to buy them out at a fair price. Often there are pre-emption rights, ie one side must offer to buy the other side out. Usually the one offering the highest price can buy the shares of the other.
It is important to consider that a shareholder/director who works in the business may also be an employee, even whether there is no written contract of employment. Employment rights will therefore apply just like any other employee. Care needs to be taken to make sure that these are considered.
Most decisions of a company are made by the directors, usually be majority vote with a chairperson having a casting vote in the event of a draw.
The majority of the board can usually therefore force through any decisions.
Sometimes shareholders agree that these normal rules do not apply and that some or all important decisions by the board need to be passed by a higher percentage than just the majority vote. Sometimes there needs to be unanimity in voting.
All directors have legal duties and responsibilities owed to the company. That duty is to act in the best interests of the company. Breach of that duty could make all directors personally liable to pay over any profit they have made to the company and reimburse the company for any losses made.
Usually, directors’ and officers’ liability insurance is taken out. Or sometimes the company may agree to indemnify you against certain liabilities.
Breach of duties could include:
- Using company property for personal use.
- Diverting a contract that could have been won for this company to another business owned by you without the approval of the shareholders.
- Failing to keep a minimum threshold of duties required, eg the finance director fails to keep proper accounting records or monitor the company’s solvency.
- Failing to comply with the constitution of the company, eg the Articles of Association, or the Companies Act by, for example, not declaring an interest in a proposed contract or a proposed partner.
Even if you have control of the board, you may still be vulnerable unless you have control of the shareholders’ meeting.
So some matters can’t be decided by the directors alone. Again, different shareholders’ decisions will require different majorities, usually. A simple majority isn’t enough.
One resolution that can always be passed by a majority vote in the shareholders’ meeting is a resolution to remove a director from office as this power is enshrined in the Companies Act – though the director does have a right of appeal.
Minority shareholders have significant remedies if they have been “unfairly prejudiced” or it is “just and equitable” that the company be wound up.
Getting embroiled in these sorts of actions is both time consuming and expensive.
Where a director hasn’t acted properly in his capacity as a director, it is possible for someone else to apply to the court for permission to bring an action on behalf of the company. This is called a derivative action.
Usually, the biggest danger to any shareholder is that they are taken to court on the grounds that the company’s affairs are being conducted in a manner which is unfairly prejudicial to a shareholder’s interests. These are personal actions not brought by the company so you can’t stop a shareholder bringing one against you simply by the fact that you control the board or the shareholder meetings.
These are expensive and are a distraction from the core business.
Company money can’t be used to fund your defence in these actions, or if you try the other side may take out an injunction to stop you from doing so.
If an unfair prejudice claim against you succeeds, the court can grant any remedy it thinks fair, eg to buy out each other.
In private companies, unfair prejudice actions are usually based on a failure to fulfil the “legitimate expectations” of the agreed shareholder. So, for example, if it was agreed formally or informally that the company would carry on a particular business or the directors would be fair when deciding salaries to be paid in line with company growth, then the court may intervene if these legitimate expectations are not met.
The court has a general power to wind up a company on a shareholder application if it is just and equitable to do so. Like an unfair prejudice action, you can’t stop this action being brought even if you control the board and/or shareholder meetings.
For further information please Contact Us.