Directors who are not shareholders have been know to abuse their position to the detriment of the shareholders. In those circumstances, there are actions which the shareholders can take to protect their position. We have been advising shareholders and directors since 2002.
Companies legislation provides safeguards to protect a company from internal interference or manipulation by its officers for their own ends. Our other web pages discuss in detail directors duties. The main duties are in place to establish trust and confidence over the directors and to ensure that they act within the wider principles of no conflict and no profit.
Examples of the duties of directors are:-
- to act within the powers conferred by the company’s memorandum and articles of association;
- to avoid a conflict of interest;
- to act in the best interests of the company;
- not to fetter one’s own discretion; and
- not to make unauthorised profit.
Directors duties are very wide and cover all aspects of running a company, including when dealing with shareholders, employees and creditors. Whilst in a lot of companies, particularly small and medium sized enterprises, the directors are also shareholders, this isn’t always the case. There are times when directors are brought in because of their expertise and are employed by the company without any shareholding. The disadvantage of this is that those directors don’t have a vested interest in the progression of the company or the value of the shareholding. Therefore, if one of these directors goes rogue, it is easier for them to do so because they are not shareholders and don’t have an ownership interest in the company.
Powers of non-shareholding directors
Director’s powers are generally conferred upon directors by the Articles of Association or, particularly in the case of a non-shareholding or business owning director, then set out in the contract of employment with the director which, if drafted correctly, should set out specifically what the director of that company is entitled to do and where they need to speak to the board of directors or go to the board of members for resolutions to take certain actions. This is also known as a service level agreement.
Directors have wide powers to bind companies in day to day running of the company, but the Articles will usually require that specific decisions on the direction of the company or binding the company into agreements other than the usual day to day processes, must have a resolution of the board of directors to be valid.
- sometimes however directors step outside of their powers and duties and enter into a transaction that abuses these for their own financial gain;
- examples of this might be issuing additional shares that are not authorised;
- the impact of this can be significant on the voting rights of the remaining shareholders, thereby potentially being advantageous to a director with a friendly shareholder, or diluting the value of shares through this process.
Directors are also responsible for changing Companies House records and if they deliberately mislead Companies House for their own purposes, it is particularly difficult to undo Companies House records without having to provide a lot of evidence and applying to court. One way that shareholders could get around this is to ensure that only the accountants hold the Companies House passwords and that only the company’s accountants are permitted to file documents or to make changes to Companies House.
Remedies for breach of directors’ duties
A court has very wide powers to set aside or to restore a transaction made contrary to a director’s duty. It very much depends on what the breach entails. For example, it may be that the court will need to stop a director from doing something, or it may order a director to personally compensate for a breach. There are various different types of claim against directors.
When a company is solvent, then the company or an aggrieved shareholder may apply to the court for a remedy.
If the company later enters into an insolvency situation, then further duties are imposed to creditors, and it is possible that a director can be disqualified as a company director for a period of anywhere between 2 and 15 years, depending on the misconduct. This is in addition to any remedies for recovery or compensation brought against a director by an insolvency office holder or by the company at an earlier point.
Problems with enforcement
Whilst the duties of directors are wide ranging and often clear, the practical reality of dealing with abuse of a director is more complex. It is often the company itself that will need to take proceedings against a rogue director, and this poses its own problems. The board of directors would need to take proceedings against the director, which is both disruptive to the company and can be costly. The board would therefore need to be very sure of their claim before embarking on this route.
- shareholders may take these proceedings by way of a derivative claim in place of the company but again this is a costly measure and is not used frequently in practice;
- shareholders have the ability and the right to remove directors if required. This is a significant power by shareholders that are not on the board of directors and there does not need to be a reason given if a majority resolution passes the proposal to remove a director or directors.
However, the company, via the board of directors, must issue the proper notices of the meeting of the board of shareholders in order to pass this resolution. A rogue director may try to thwart this by ensuring that the right notices aren’t sent out at the right time etc, so it is important that any shareholders taking this route make sure that other directors should be involved and fully aware of the process.
The removal of a director by a shareholder is not without its problems. A non-shareholding director who is removed has a right to compensation or damages in respect of the termination of their appointment. This may be provided under their service level agreement with the company.
At Francis Wilks & Jones we are often asked to act for companies or individual shareholders who suspect there may be an abuse by a director and require advice on how to deal with this. We also act for directors accused of breaching their duties. We have many years’ experience on advising and acting for all parties in dispute resolution, including using mediation as an alternative to costly disputes. If you would like further information on any of these matters, contact one of our friendly team today.