Shareholder and Boardroom Disputes FAQs

Below are some frequently asked questions regarding shareholder and boardroom disputes. If you would like further information or advice, please contact the team.

 

1) What rights do I have if I disagree with other shareholders about decisions and strategy for the company?

An individual shareholder’s rights will generally depend on the terms of any shareholders agreement and the company’s articles of association, as well as provisions of the Companies Act 2006. Different rights may attach to different classes of shares.  

In general, decisions among shareholders - at, for example, a general meeting - are taken by a vote. In most cases, the vote is passed by a simple majority of those present at the meeting who vote. Some decisions require a higher majority: for example, a special resolution to change the company's articles of association requires a majority of 75 per cent of votes cast. Most disagreements between shareholders will eventually be resolved simply by voting power.

 

2) What rights do I have as a minority shareholder?

Under the Companies Act 2006 the court has a wide discretion to make such orders as it thinks fit in response to the application of a minority shareholder where majority shareholders are acting in such a way which is prejudicial to their interests.

Common examples of conduct that may amount to "unfairly prejudicial" conduct are:

  • Being excluded from management where there is a legitimate expectation of participation
  • A diversion of business to another company in which the majority shareholder has an interest
  • A majority shareholder giving themselves financial benefits which could be thought of as excessive
  • An abuse of power and breaches of the company’s articles

If a court considers that there has been unfair prejudice, it has a general power to make any order it sees fit, including ordering the purchase of the minority shares at a “fair value” either by the other shareholders or by the company itself. In addition, the court has the power to wind up the company.

 

3) How can I enforce my rights as a shareholder?

There are various options, including:

  • Proposing a resolution at a general meeting which redresses the situation
  • Asking the board of directors to take action in the company's name against an individual director (because generally the shareholders cannot sue in the company's name)
  • Applying to the court for an order that the company is acting or has acted unfairly (a so called "unfair prejudice" action as described above)
  • Applying to the courts for the company to be wound up
  • Suing the directors by means of a derivative action

 

4) Which management decisions will require shareholder approval?

Unless additional decisions are specified in the articles of association, the main decisions which require shareholder approval are:

  • Appointment of auditors (if there are any)
  • Appointment or re-appointment of directors
  • Removal of a director or the auditor
  • Adoption of the annual accounts and the reports of the directors and auditors
  • Declaration of dividends
  • Changes to the company's memorandum or articles of association
  • Voluntary winding up of the company
  • Approval of property transactions involving directors
  • Increasing the authorised share capital and giving the directors authority to issue the shares

 

5) As a director, what should I do if I feel that the board is acting improperly?

It is essential to take action if you feel that the board is acting improperly. The most appropriate course will depend on the circumstances. If the error or omission is relatively minor, the most commercially sensible thing to do is give the board and/or relevant director an opportunity to rectify the problem.

However, if you feel that one or more members of the board are deliberately acting improperly you should ensure that there is written evidence of your objections and you should take legal advice on other steps you may need to take to protect yourself.

 

6) What fiduciary duties do directors have?

There may be duties listed in the company’s articles or the director’s employment contract, but the most common fiduciary duties are:

  • To act in good faith in the best interest of the company
  • To act for proper purposes
  • Not to make secret profits
  • To avoid conflicts of interest

 

7) What are the consequences for a director in breach of their fiduciary duties?

Typical remedies for breach of fiduciary duty include damages for loss of profit, recovery of profits earned by the director when acting in breach of duty, and recovery of salary paid to the director during the period in which they were in breach.

Alternatively, directors who act recklessly or carelessly may be responsible for any resultant loss to the other directors of a company and the shareholders, and damages may be recovered in a civil action for negligence.   

 

8) Am I liable for improper or fraudulent conduct by my fellow directors?

You are not generally liable for the actions of other directors if you didn't know about them and took no part in their improper or fraudulent conduct. However, knowing but turning a blind eye is not enough to protect you.

Directors have statutory duties to keep themselves informed about what is going on in the business and to participate in its management. This means that they should not sit by and let other directors act without being prepared to challenge them, no matter how dominant those other directors are.

Likewise, resigning as a director is not enough to protect you as some directors' duties continue after resignation and if, for example, the company subsequently becomes insolvent, you might still face action against you for acts/omissions from when you were a director.

 

9) Is the company liable for the fraudulent acts of a rogue director?

The law is complex around this subject and it will depend on the facts of each case. Knowledge can be imputed to the company in some circumstances where a member of the board is a directing mind and/or has a sufficient degree of control of the company affairs. Specialist legal advice should be obtained whenever there are allegations or fraud.

 

10) What should I do if I believe a fellow director is paying bribes to win business?

Since the introduction of the Bribery Act 2010, the law can be summarised into four key offences: bribing, receiving a bribe, bribing a foreign public official, and failing to prevent bribery. Directors should also be aware that they could be guilty of an offence if they are implicated, either actively or passively, in a failure to prevent bribery. If you suspect that other directors might be paying bribes to win business, you should take legal advice as soon as possible.

 

11) Can the shareholders dismiss a director?

Shareholders representing at least 5% of the company's voting rights can require the board to call a general meeting of the shareholders to consider a resolution to dismiss a director. To be effective, the resolution must be passed at the meeting by more than 50% of the votes cast. The Companies Act 2006 contains strict procedural requirements, including time limits. It is therefore inadvisable to attempt to remove a director without first obtaining legal advice, especially as there may be other consequences if the director is also a shareholder or an employee of the company.

 

12) What can I do if a fellow director or partner is setting up a competing business and/or is planning to take some of our clients with him?

If the individual has signed up to a shareholders agreement, partnership agreement or employment contract, it would be expected that one of those contractual documents contains restrictions, including those applicable post termination. Typically, these restrictions may prevent the outgoing shareholder, director, employee or partner from setting up a competing business within a specific radius and/or dealing with your clients for a specified period. The restrictions would also usually prevent the outgoing person from exploiting confidential business of your business.  It is important to act quickly if any such concerns arise, possibly by making an application to court for an injunction.   

 

13) What happens if we do not have a partnership agreement for our partnership?

In the same way that shareholders in a company should have a shareholders agreement, partners in a partnership should always have a partnership agreement. A number of disputes arise simply because the parties have not clearly defined their obligations in a written agreement. In the absence of a written agreement, the applicable regime depends on whether the partnership is formed under the 1890 Partnership Act or the LLP Act 2000.

 

14) How do I force dissolution of my partnership?

Partners in a partnership or a LLP can apply to court for an order to dissolve the partnership. This will usually result in the assets and liabilities being crystallised. 

Once the liabilities have been paid from the partnership assets, the remaining assets may be distributed to each partner according to his interest in the practice and in accordance with any partnership agreements that might exist. If there are no such agreements, the courts can step in to assess the value of each partner’s partnership share by applying the provision of the Partnership Act 1890.

 

15) What needs to be considered before declaring a dividend?

When considering whether to declare a dividend, the directors of the company must consider whether the company has sufficient distributable reserves to afford to pay a dividend to shareholders. They also have to exercise their discretion in accordance with their duties, in particular the duty to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

 

16) What is a derivative action?

A derivative action is a claim bought by a shareholder in the name of, and for, the benefit of the company.  The typical situation would be where a shareholder believes that the directors of the company have breached their statutory duties to the company.  Sections 260 to 264 of the Companies Act 2006 set out the circumstances in which a derivative claim can be bought and the procedure for determining whether the court should grant permission to a prospective derivative claimant to continue with the claim.

 

17) My shareholding is not being recognised by the company, what can I do?

If you believe that you are a shareholder of a company but the directors of the company refuse to recognise you and you do not appear on the records at Companies House, you can apply to the court for rectification of the Register of Members of the company. This will involve issuing proceedings against the company for rectification pursuant to Section 125(1) of the Companies Act 2006. The court has the power to decide any question relating to the title of a person who applies to have their name entered in or omitted from the Register of Members (Section 125 (3)). If the application is successful, the court may order the company to pay damages to the affected person (Section 125(2)).

 

For more information, please contact Ryan Mowat or Fiona Simpson.

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