Shareholders’ interaction with directors

In a large publicly listed company, there are often a large number of shareholders and they will have very little interaction with the directors. They will have little or no say in the running of the company and are usually happy with the status quo.

In smaller companies, the interaction between shareholders and directors may be much closer. Indeed, it is very common for directors and shareholders to be the same, particularly in smaller family run companies or small businesses which only have a few directors, who are also the business owners.

Potential for conflict

There is a potential for conflict when the shareholders and the directors are close or similar, but they are not the same.

For example, in a family owned company the assets may be owned and shared between two or more parties, but it may be that not all of the business owners actually manage the company on a day to day basis as directors.

• the director managing the income and/or assets may feel they have a larger entitlement as a result of the extra work they carry out, or alternatively may become greedy and take more out of the shared assets;
• a controlling director can be a very common problem in quasi-partnership companies, where the owners and directors are the same, but one dominates.
• problems might arise where a shareholder for example, who has been the founder member of the company but has now retired as a director, still believes that they should have a strong say in the direction of the company, and tries to control decisions.

Conflict might also arise if the director who is working within the company believes that they should have a larger entitlement to profits because they are working day to day for the company.

Problems can often arise in family companies for any number of reasons, between parents and children, between siblings, or married partners who may believe that they have a different entitlement than they actually have.

Many promising businesses are brought down by internal conflicts. This is frequently as a result of a deadlock in decision-making. Conflicts can arise and cracks start to set in if the company experiences difficult trading periods, but also, more frequently, where parties expectations of what the company was intended to provide to them personally differ.

Shareholders agreements

One of the best ways to avoid conflict in the first place, or to resolve conflict that arises is for a shareholders agreement to be in place between the shareholders and the company.

In any company, shareholders and directors have specific powers and responsibilities granted by and set out under legislation and under the company’s Articles of Association. However, these rarely cover what happens if conflict arises between the parties.

• a shareholders agreement can provide for dispute resolution and provide arrangements to properly manage the exit of a business owner or a director from the company’s business, dealing with all aspects around protecting the company and its business, but also ensuring that the outgoing shareholder doesn’t feel aggrieved.
• a shareholders agreement can also set out the parameters for valuing shares on exit.

At Francis Wilks & Jones, we have many years of experience in advising on and dealing with disputes between business partners, directors and shareholders, and also in drafting bespoke shareholder agreements in order to avoid disputes and ensure all parties are clear on their roles. If you are experiencing any of these issues, then contact one of our expert team today to discuss your options.

Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs.

A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value