Director and Shareholder Disputes
What to do when there is trouble at the top.
Running a business comes with many different risks and responsibilities. Sometimes one individual takes on the lion’s share of those obligations, but more commonly there are a group of people with complimentary skills that share the load.
There may be an informal arrangement between those running a business or a more structured approach may have been adopted. Either way, there are usually people in the roles of Directors and those who are shareholders.
A Director is responsible for the day to day operation of the business whilst also looking at the bigger picture. They are the custodians of the business for the shareholders. A Director must always ensure that the decisions they make further the interests of the company.
The Companies Act 2006 imposes a number of duties on Directors, including to act within their powers, promote the success of the company and avoid conflicts of interest. The general duties can be found in sections 171 to 177 of the Companies Act 2006.
Directors can be formally registered at Companies House or they can be people who have the responsibilities and level of control usually attributable to Directors. These people are known as de facto Directors.
Shareholders are individuals, businesses or organisations that own part (“a share”) of a company. Shareholders have rights in relation to the company, usually including the right to vote on a variety of matters such as the appointment of Directors. Shareholders usually receive profits from the business (commensurate with their “share”) if the business is doing well, but they also share the risk if the business has a period of poor performance.
Depending on the size and constitution of the business, sometimes Shareholders are also Directors.
Director Service Agreements & Shareholder Agreements
There are many types of disputes that can occur amongst those in leadership of a company. The rules that regulate these disputes can be technical and complex.
If Directors and Shareholders have agreements in place that govern the relationship between them, uncertainties can be avoided, rights, responsibilities and expectations can be recorded and decisions about how disputes are to be dealt with can be agreed.
A Director’s Service Agreement is a contract of employment between the Director and the company. If wrongdoing occurs on the part of the Director, the other Directors (or the shareholders) can rely on the terms of the Agreement (together with relevant company law) to act against that Director on behalf of the company and themselves.
A Shareholders’ Agreement is intended to govern the relationship between the shareholders and deal with matters such as voting rights and what will happen if there is a deadlock situation. Shareholder Agreements can, but do not always, provide protection for minority shareholders.
Directors usually have a close working relationship which can be advantageous for the growth of the business. It can also, however, lead to significant conflict. Disputes can arise in all sorts of situations. It can be as simple as one Director being perceived as not pulling their weight, whilst still receiving the same level of remuneration as the others. Other examples include when there is misconduct by a Director or they engage in legal wrongdoing. This could occur if a Director (i) removes assets from the company, (ii) takes money from the company’s bank accounts without consent (iii) diverts business away from the company to another company in which the Director has an interest (creating a clear conflict of interest situation) or (iv) acts in any other way that breaches the duties imposed on Directors by the Companies Act 2006.
Disputes between shareholders can be wide ranging, particularly in circumstances where some of the Shareholders are also Directors. Disputes can occur when (i) there has been a breach of the Shareholder Agreement, (ii) if there are disagreements as to decisions about the future of the company, (iii) if financial information is being withheld from a Shareholder or they have been excluded from decision making, (iv) if a minority shareholder has been “unfairly prejudiced”, or (v) if there is an imbalance in remuneration for no apparent or agreed reason.
If you are a shareholder in a business and you are involved in the day to day running of the business, you will probably be aware that you cannot do anything with the business that will unfairly prejudice the interests of another shareholder. Equally, your fellow shareholders cannot do anything with the business that will unfairly prejudice your shareholding.
An example of prejudicial conduct includes shareholders who hold the majority of the shares allotting new shares to themselves with the result that that the shareholding of the minority is diluted. The conduct does not always need to result in direct financial damage to a shareholding. Another usual example is a shareholder who has a right to be included in the day to day management of the company and has been excluded from that.
Section 994 of the Companies Act 2006 assists minority shareholders who can make a claim (known as a Petition) in circumstances where the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its shareholders. The claim names the individual shareholders as parties to the proceedings.
Whether the prejudice is unfair is not always clear and the Courts consider each case on its facts. There are, however, some matters that the Court will generally consider to be unfair prejudice. These include where there has been a disregard for the terms of a Shareholder’s Agreement or that the company is being managed in a way that is contrary to its Articles of Association.
If the relationship between shareholders goes beyond a purely commercial arrangement, the Court may find that a “quasi partnership” exists. If this is the case, the remedies that are available to a minority shareholder may be assessed in a different, more favourable way so as to reflect the situation.
We can help
Sewell Law can assist you with all types of director and/or shareholder disputes. We aim to avoid litigation where possible and will give you clear legal advice so that you always know where you and your business stands. If Court proceedings are unavoidable, we will guide you through the process to give you the opportunity to achieve the best possible outcome whether that is by way of settlement or otherwise. We are solicitors in Hull and East Yorkshire with many years’ experience in director, shareholder and contract disputes.