One of the most common areas of dispute we deal with is between shareholders and the management or directors of a company. Left unresolved, these can quickly lead to bad feeling, loss of focus, reduced profitability or even company insolvency.
Common types of management disputes
Over the last 20 years, we have successfully dealt with a wide range management disputes on behalf of shareholders, including
1. The failure to pay dividends
Failure to pay dividends is one of the most common disputes we encounter. Shareholders can understandably become disgruntled if they don’t receive dividends despite investing in the company. Whilst non-payment of dividends can be for legitimate reasons, it is not always the case. We can help establish what is going on and help ensure shareholders are not being taken advantage of.
2. Fraud and asset removal
Unfortunately, some directors act in breach of their directors’ duties of good faith and divert assets from the company or abuse their position of trust. If fellow directors or shareholders are either unable or unwilling to take control of those directors, then this can lead to a significant breakdown and even the failure of the company. Our team can help deal with this situation and take back control.
3. Director incompetence
General director incompetence can be a serious problem for shareholders who want to protect their investment in the company. We can help explore what action can be taken to remove directors, appoint new ones or hold the board of directors or management to account.
4. Breach of directors’ duties
All directors have a fiduciary duty to act in the best interests of the company. Directors who breach their fiduciary duties can cause many problems for shareholders. We can help take action to ensure that the directors act in the best interests of the company or are removed from their post. General abuse of position by the directors and breach of director duties should not be tolerated by shareholders.
5. Excessive pay for directors
A common complaint we deal with for shareholders is where directors are getting paid too much for their job, which in turn affects whether a dividend is paid. We can explore the legal remedies available to stop this happening.
6. Directors setting up competing businesses
Sometimes directors will set up a rival business which can seriously harm the existing company and shareholder value. We can take steps to prevent this happening or recover losses suffered by the shareholders / company.
7. Abuse of director loan accounts
Shareholder complaints about abuse of director loan accounts are very common. We can take action against directors who abuse their director loan accounts, especially if it leads to the failure of the company.
8. Attempts to dilute shareholder value
Where directors (or fellow shareholders) are taking action to dilute an existing shareholder’s share value, action can be taken to stop this happening. Minority shareholders are particularly at risk and we regularly act to protect their interests.
9. Directors ignoring pre-emption rights
Ignoring pre-emption rights is another common complaint we deal with. This can be a problem for existing shareholders where their right of first refusal to buy a departing shareholder’s shares is ignored. We can make sure that this right is enforced.
10. Other common problems
We also deal with a range of other issues, such as disagreement over corporate strategy and the direction of the business, directors unlawfully removing another director or adjusting the share register without any formal transfer of shares and personality clashes between directors leading to deadlock and breakdown.
How does control over management work in a business?
Who has control over the management of a business can quickly determine whether it will be successful or not. Establishing clear lines of control and understanding the role of directors and shareholders is fundamental to this issue. We can help you with this.
1. The role of directors
A limited liability company is managed by its director or board of directors. Directors have the ability and the powers to make decisions concerning the running of the business on a daily basis. Directors powers come from a mix of
- the company’s Articles of Association;
- from legislation;
- from resolutions by the company’s shareholders (also known as members); and
- if there is a service level agreement (SLA) in place, then directors may be given specific powers and responsibilities under that.
The board of directors must run the company following their duties of corporate governance. Directors should hold board meetings on a regular basis to resolve matters that arise concerning the company and to ensure that a strategy that supports the company’s aims and goals is set out and clear to all of the directors for the management of the company.
2. Shareholders role & control over the company
Generally, shareholders do not have control over the day to day running of the company simply by being shareholders. Shareholders do not have access to the majority of company’s records. These sit with the directors. The shareholders’ only information comes from being provided with the annual accounts, unless the directors provide them with additional information voluntarily.
- however, this can differ greatly, depending on the relationship between the directors and shareholders, and usually on the size and type of the company;
- it is frequently the case in small and medium size companies that the shareholders are also directors;
- if that is the case, then the shareholders will have far more day-to-day control of the company.
In some businesses, shareholders might also act as directors without themselves or the company recognising themselves as such. This is often seen in family businesses, where one of the family may be a founding member, retired as a director, but unable to keep away from the running of the business. Such shareholders need to be especially careful, as they will be considered to be directors and subject to all of the duties and personal ramifications for breach.
Shareholders’ interests are usually defined by the number of shares they hold, which reflects the percentage of the company they own. Shareholders can have some power over directors’ actions by the exercise of their voting rights in a shareholder’s meeting. To dictate the direction of the company, shareholders (jointly, or a majority shareholder) with more that 50% of the voting powers must vote in favour of taking action at a general meeting.
- shareholders may be asked to vote on such issues as change of directors, amending the company’s constitution, the declaration of dividends and other potential structural alterations to the company;
- shareholders also have the ability to remove directors.
Shareholders specific powers originate from the company’s documents of constitution, namely the Articles of Association and the Memorandum of Association. These will define the powers of shareholders and the powers of directors along with any legal obligations and duties found under company and other legislation.
A shareholders agreement may deal with issues that aren’t found in the Articles of Association.
Shareholders may have additional powers to manage some aspects of the company if there is a shareholders’ agreement in place which gives additional rights.
A shareholders’ agreement is not obligatory, but it can be very useful to set out what happens in the care of shareholders’ disputes etc. It may also give powers of veto to shareholders, or a certain class of shareholder, for specific actions of the directors. However, if it is over-prescriptive, then it may stifle the directors’ abilities to run the company on a day-to-day basis. It is important if considering a shareholders agreement to take legal advice on the same.
Majority versus minority shareholders
To the extent that they can vote on certain issues, the level of control of any one shareholder will be dependent on the percentage shareholding they own. Majority shareholders will be able to potentially block decisions that require shareholders resolutions if they hold more than 50% of the shares. Those with majority interests generally have the power to control the company and its directors from within.
- Shareholders with minority interests (50% or less) are subject to the power of the majority shareholders, in the absence of which there are other remedies available to minority shareholders.
- If a minority shareholder wishes to affect a particular resolution in a shareholder’s meeting, they should try to get the support of other shareholders so that those with more than 50% of the shareholding powers can act together.
Remedies available to shareholders
Ultimately there are a number of remedies that are available if a director is in breach of their duties.
1. Negotiation & mediation.
We always try first to find a way to resolve outstanding issues without formal legal action. Sometimes it can be enough to get the parties talking again and expressing their concerns – and helping them find a solution which is in the best interests of the company and the shareholders.
2. Legal remedies
Sometimes the only option to resolve the dispute are formal legal proceedings. For a shareholder, this normally means bringing a claim by way of a derivative claim. If this is done, the court has very wide powers to make any order it sees fit. This could include
- removing a director;
- awarding compensation;
- ordering restitution regarding a transaction that they have erroneously made; or
- injuncting a director from doing something that would prejudice the interests of the company.
Contact us today to schedule a free consultation and let us guide you through the complex process of resolving disputes with management or the board of directors. We can help you through this and achieve a successful outcome.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares