Director and shareholder disputes occur from time to time between Directors of companies or between Directors and Shareholders of companies. Usually, in small companies, the Shareholders are also Directors of the company.
Under the Companies Act 2006, whilst the Shareholders own the company, the power to run/manage a company is largely in the hands of its Directors, unless fettered under the company’s Articles of Association, a Shareholders Agreement (where a Director is also a Shareholder) or a Director’s Service Contract. Such documents will contain provisions as to what a Director can do and if he/she is not following those provisions or is exceeding them, action can be taken to curtail this.
Providing the legal expertise on director and shareholder disputes.
Claims against Directors
A Director has statutory duties to the Company and the Shareholders under sections 171 to 177 of the Companies Act 2006 (‘the Act’). Under the Act a director should:
- act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred;
- promote the success of the company;
- exercise independent judgement (but do so bearing in mind any restrictions set out in the Articles or any other document he is a party to);
- run the company with skill and care;
- not act in conflict with the interests of the company or its shareholders;
- not accept benefits from third parties e.g. to encourage him to deal with them; and
- not make a ‘secret profit’, such that he must declare his personal interest in any proposed transaction.
If a Director is threatening to act in breach of these duties, an application can be made to the court on behalf of the Company to prevent such breach by way of a Prohibitory Injunction (an order of the court not to do something). If the breach has already been committed, then an application can be made for a Mandatory Injunction requiring the director to remedy the breach. If it is not possible to remedy the breach, then damages can be sought.
Claims by Shareholders – Unfair Prejudice Petition
Shareholders (or one alone) who are not Directors may consider that the Director(s) are running the company in a way that is detrimental to their interests. In such cases, if the Director(s) will not desist in their conduct, one or more shareholders can apply to the court by way of an ‘Unfair Prejudice’ Petition, under Section 994 of the Act on the grounds:
- “that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
- that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
The court can make various orders on such an application. It may: –
- Regulate the conduct of the company’s affairs in the future;
- Require the company to refrain from doing or to do an act whose commission or omission the petitioner has complained of;
- Authorise civil proceedings to be brought in the company’s name by such persons and on such basis as the court may direct;
- Require the company not to make any or any specified alterations to its articles without the leave of the court; and
Provide for the purchase of any shares of any members of the company by other members of the company itself.
Petition to Wind Up the Company
Alternatively, a Shareholder or Director can Petition the court to Wind Up the company on the ‘Just and Equitable Ground’. By way of example, this could be used where there are only two Directors/Shareholders who have fallen out and one or both consider the relationship cannot be repaired. They may already have made offers to buy the other’s shares but have been refused. In many cases where such a Petition is presented the court will order that one party buys the others shares rather than winding the company up.
Disputes may also arise between parties to a Joint Venture (where both parties may be corporate or one or both may be individuals), e.g. in respect of how the Joint Venture is being run. If a Joint Venture Company has been formed, then the above company provisions and remedies can be used. If there is no Joint Venture Company but there is a Joint Venture Agreement, then action can be taken under the Agreement if one party is in breach. That action could be to seek an injunction and/or damages.
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