HomeFWJ takeawayTakeawayShareholder and director servicesShareholder and director disputesAvoiding deadlock – court intervention or shareholders’ agreement?

If the attendance of a specific director is a requirement of a company’s constitution, can a decision made at a directors’ or shareholders’ meeting be valid if that director is not present?  Further still, can that director’s removal as a director of the company be possible without their attendance?  

Simply put, the answer to this question is no, which leads to a situation in which it may be impossible to remove an uncooperative director without breaching the company’s constitution, resulting in a deadlock situation.

Perhaps unsurprisingly this situation is commonly encountered by many small and often family run businesses and, whilst understandable that a director wishes to ensure that the management and strategy of the company remains under their control and that their interest remains secure, the situation becomes complicated when director relations start to fall apart.

Court intervention

Section 306 of the Companies Act 2006 provides some comfort to companies, as a court may, at the request of a director or shareholder order a general meeting to be called, held or conducted in any manner it thinks fit where it is impractical to call or conduct the meeting in the manner prescribed by the company’s articles (as supplemented by the Companies Act 2006).  Furthermore, the court has the general power to make any necessary directions to give efficacy to the operation of the company, which may include amending a company’s quorum from two to one, amongst other things.

Smith v Butler & another [2011] EWHC 2301 (Ch)

The case of Smith v Butler successfully illustrates s.306 in action.  The claimant, Smith, was the Chairman of a company and held 68.8% of the shares whilst the Managing Director, Butler, held the remaining 31.2%.  The quorum requirement for general and board meetings was two, one of which had to be Smith unless he waived the requirement.  In 2011 the parties fell out with suspicions of fraud being raised by Butler against Smith culminating in Smith wanting to appoint a new CEO and Butler seeking to suspend Smith as a Director. Butler proceeded to hold a meeting in which Butler and a third director signed a resolution of the board authorising the suspension. Following this, Smith requested that a general meeting be held in order to remove Butler and the third director as directors, Butler’s refusal to attend the meeting led to the meeting be held inquorate causing Smith to make an application to court to seek an order that a general meeting be called with a quorum of one.

It was held by the court that a quorum of one would be allowed as the Articles were designed to give excessive protection to Smith who could not be dismissed as a director.  As a point of interest, the court also commented that Butler, as a minority shareholder, could in fact have commenced unfair prejudice proceedings and/or sought permission to commence a derivative action.

Conclusion – the need for a shareholders’ agreement

Whilst this case is an example of court intervention in a deadlock situation, the reality is that a s.306 application is often an option of last resort, as the courts are generally hesitant to interfere in company matters unless absolutely necessary.  A preferable and potentially more cost effective option would be for a company to invest in the drafting of a clear and concise shareholders’ agreement to strike an effective balance between protection and flexibility and which contains specific provisions dealing with potential deadlock scenarios.

This would enable the company to function successfully and thrive irrespective whatever the situation. For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact our expert director and shareholder team today.

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