Mar 24

Shareholders – the director’s ultimate master

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 4 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths.  The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors.  It is not a substitute for taking specific legal advice on a particular set of circumstances.

4. Shareholders – the director’s ultimate master

In many smaller, possibly family owned companies, the directors will be the same individuals as the shareholders and few problems may arise. In larger, more complex corporate structures, there are frequently shareholders who own a minority of the shares and who are not involved in the day-to-day running of the business.

They may well have made a sizeable financial contribution to the company or previously been involved in the management of the business. Maybe they are expecting an income from their shareholding. It is therefore understandable that disputes will arise from time to time between non-director shareholders and those directors running the business.

The starting point in such circumstances is to ascertain whether there is a shareholders’ agreement in place. Such agreements can spell out the implications of any unacceptable behaviour of a director including what steps need to be taken to resolve the dispute. In the event that the shareholders’ agreement does not help or there is no shareholders’ agreement in existence the law provides ample opportunity for the shareholders to hold the directors to account.

Here are some examples.

Disputes about money

The directors may be taking all the profit out of the business by way of excessive remuneration or spending money recklessly and failing to declare any dividends for the shareholders to the clear disadvantage of those individuals not involved in day-to-day operations. In such circumstances, the minority shareholders do not have to accept the situation and can bring what is called an unfair prejudice petition to court.

If successful, the Court has numerous powers including to require the minority shares to be purchased for proper value or to regulate the company’s affairs going forward.

The situation in which the directors are transferring assets out of the company to a rival business they have set up or otherwise taking money fraudulently out of the company

In such situations, the shareholders would be entitled to bring what is called a derivative claim. This claim would technically be brought by the shareholders on behalf of the company. If successful, the Court could order the rogue director to correct his wrongdoing and compensate the company.

The purpose for which the company was set up has been achieved, perhaps there is a complete deadlock or consistent mismanagement of the company that cannot be resolved.

In these circumstances, a shareholder would be entitled to petition the Court for what is called an equitable winding up. If granted, the Court has the power to wind-up the company, call in the assets and divide the spoils amongst the shareholders. Directors therefore discount the interests of the company’s shareholders at their peril.

A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

1. You have been appointed – but what kind of director are you?
2. The top 5 things directors do wrong – including the consequences
3. The Board of Directors cannot agree anything
4. Shareholders – the director’s ultimate master
5. Directors’ loan accounts – the best overdraft you can get?
6. Personal liability – so much for limited liability
7. Becoming a non-executive director – the risk free option?
8. Wrongful trading – the risks facing directors when the company is insolvent
9. The wound-up company – it’s not all over yet for directors
10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide.   Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666

Published on 7 March 2024