Boardroom and Shareholder Disputes

Boardroom and shareholder disputes can arise for many reasons.

• disagreements over the direction and development of the company
• poor personal relationships
• conflicts of interest (because a director has interests in another business)
• a lack of performance on the part of one shareholder/director, the terms of directors’ service contracts, or concern over whether the board is meeting its legal responsibilities

They can also arise because directors are stopping money getting through to the shareholders by paying themselves high salaries or keeping money in the company (for a rainy day) when shareholders think it should be paid out as dividend.

Anticipating and providing for disputes in the articles of association or a shareholders’ or partnership agreement in advance can save a great deal of time, money and aggravation.

Disputes escalate because the parties don’t find out exactly what their legal rights are at the outset, and don’t understand the options for enforcing these. The longer you put off taking advice, the more time and money you will eventually spend sorting it out, and the more it will damage your business. Act at once.

Most decisions in a company are made by the directors, by majority vote, with the chairperson having a casting vote if there is a tie. The majority on the board can therefore force through any decision that is made at board level.

If a director forces through a decision at board level, it could be challenged if the director has acted improperly. The Director has legal duties and responsibilities, owed to the company e.g. there is a duty to act in the best interests of the company. Breach these, and the Director could be made personally liable to pay over any profit they have made to the company and reimburse it for any losses it has made.

A director would be breaching those duties if:

• he/she uses company property for personal use
• he/she diverts a contract that the company could have won to another business of their own, without approval of the shareholders or of the independent directors on the board
• he/she fails to meet the minimum threshold required of someone with the directors’ functions in the company – for example, if he/she is the finance director, but he/she fails to keep proper accounting records or monitor the company’s solvency
• he/she doesn’t comply with the company’s articles of association, or he/she fails to comply with the Companies Act

Even if a director controls the board, they will be vulnerable unless they also have control at shareholders’ meetings. Some matters can’t be decided by the directors but have to be referred to the shareholders for a decision.

If an individual can cast more than 75% of the votes at a shareholders’ meeting, they can always force through any decision. If an individual can cast more than 50% of the votes at a shareholders meeting, they can force through some resolutions, but not all.

One resolution that can always be passed by majority vote at shareholders’ meetings is a resolution to remove a director from office. This power is enshrined in the Companies Act, though the director has the right of appeal. The threat of removal can
sometimes stop a minority shareholder who is on the board from taking things further.

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 any of these sorts of action is both time-consuming and expensive.

If the individual hasn’t acted properly as a director, they may still be safe. It is the company that has been wronged if the director breaches their duties, so it  is the board that decides whether to take action against the director. However, it is now possible for someone else to apply to the court for permission to bring an action on behalf of the company a ‘derivative’ action. It is dangerous to assume that the director will get away with improper conduct.

The biggest danger is that any shareholder can take the director to court on grounds that the company’s affairs have been conducted in a manner which is ‘unfairly prejudicial’ to their interests. These are personal actions, not actions brought by the company, so the Director can’t stop a shareholder bringing one against him/her simply because they control the board and/or shareholder meetings.

These disputes consume time and money and are a major distraction from the business. The Director can’t use the company’s money to fund their defence and if they try, the other side may take out an injunction to stop them.

In private companies, ‘unfair prejudice’ actions are often based on a failure to fulfil the ‘legitimate expectations’ of the aggrieved shareholder about what the company was set up to do, and how it would be run. For example, if it was agreed (formally or informally) that:

• the company would carry on a particular business
• all would be entitled to an equal say in how the company is managed
• the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out and you act contrary to these legitimate expectations, the court may intervene

The court has a general power to wind a company up, on a shareholder’s application, if it is ‘just and equitable’ to do so. Like an unfair prejudice action, the director can’t stop this action being brought even if they control the board and/or shareholders’ meetings. An aggrieved shareholder will usually also ask that the company be wound up at the same time as they petition for unfair prejudice (see above), citing the same facts in support of each claim.

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any actin based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org