Whether a business is a new start-up or a company that has been trading for some time, there always remains the risk between owner-managers as to what would happen in the event of a dispute, an allegation of wrong-doing between them or simply what an impartial succession plan looks like towards the end of their career.
These type of companies, often set up by 2 or more individuals, usually with history in a similar field of experience, or friends/relations with a common business idea or family business, are often referred to as a “quasi-partnership company”.
This name derives from the fact that the shareholders and directors are the same people and the company is run more like a partnership, with a much closer tie between the owners and managers.
However, for quasi-partners, there are very important precautions to take and common areas where disputes [LINK TO 8] commonly arise.
Importance of a shareholders’ agreement
Whether you have a new or old company, it is important at all times to have a private shareholders agreement which sets out how owner managers will work together and will set down more detailed bespoke aspects of how you all want to run the company.
A shareholders agreement is not a public document and is not filed at Companies House, but remains an agreement confidential to the shareholders entering into it and can manage how disputes are resolved, shareholder exit and success.
Corporate governance: supervision of directors
It is a basic legal principle that directors, as with partnership businesses, have a duty to govern and direct a company in accordance (historically|) with its objectives, but more commonly nowadays in accordance with any shareholder agreement agreed at the outset or as agreed between directors, subject to shareholders endorsing any such decisions.
- The Companies Act 2006 permits directors to unilaterally commit a company to most transactions (except for a few exceptions) and so, where each director is responsible for an individual division (finance, operations, sales etc), there is a need to ensure that all of the directors are acting collectively.
- The day-to-day collective management structure is usually governed by a Chief Executive Officer, or CEO, whilst a managing director will be responsible for managing the company as a whole.
However, it is not unusual for an external, or non-executive, director, to be employed to oversee some of the more important aspects such as financial management, such individuals being reported to by the directors at board meetings conducted on a regular basis.
Directors loan accounts and tax
It is essential to properly understand the way in which director loan accounts work – and that they are not abused. Our team of experts regularly deal with all manner of tax disputes, so proper planning and advice early on can can save time and money.
- conversely, whilst tax is often low down on the list of priorities for payment, directors quite often will draw monies from the company which may be drawn as director’s loans initially and accounted for at the year-end.
- whilst this is not illegal (subject to shareholder approval required in accordance with requirements under the Companies Act 2006) tax legislation does provide that a tax charge will be imposed on outstanding overdrawn director’s loan accounts at the year-end.
- many directors deal with this by declaring a dividend at the year-end in a similar sum, with the effect that the loan drawn to date is cancelled out.
In addition, where a company fails and is placed into insolvency, or alternatively other directors decide not to declare a dividend, then as well as the tax obligations on the directors loan (which the company must pay) the director is also responsible for paying back those monies lent (which by now may have been spent).
Shareholders who are not directors
Where a shareholder is not a director, then control of the company’s affairs is considerably more difficult as a result of their limited day-to-day involvement. Shareholders cannot access a majority of the company’s records for obvious reasons, as it is the directors who are responsible for running the company.
- a shareholder’s agreement can serve to increase the shareholders’ power or access to information but if this is overly complex then this can cause more of a burden and stymie the companies’ business.
- Shareholder disputes usually arise in such circumstances and so it is very useful to have an independent shareholders agreement which mediates what happens in such circumstances.
Shareholders, particularly minority shareholders, are protected and have access to a number of remedies but these can be costly and are best avoided by some reasonable due diligence in advance of such disputes arising.
Trust / family-owned companies
We often find that business owners may start out and indeed continue in business together for some years, each running their own division and (despite the above risks) more or less proceeding on the basis of trust.
Most commonly this occurs in family-owned companies where the assets are owned and shared between 2 or more parties, but only a few actually manage the income from such assets.
- invariably, the individual managing the income and/or assets may feel they have a larger entitlement or alternatively may just become greedy and begins to benefit more from the shared assets or seeks a higher share.
- the controlling director is a common problem in quasi-partnership companies.
Whilst this may be reasonable in certain circumstances, it is often the case that such problems arise between parents, children, siblings or married partners and arise from one or more individuals taking advantage of their position.
At Francis Wilks & Jones we deal with many of these types of disputes regularly and can recognise the most common signs and provide the most realistic and pragmatic advice on your situation, with cost solutions which may assist you in pursuing a remedy. Please call any member of our team for your consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient to you.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.A shareholder we helped settle a remuneration dispute