Resolving arguments between Directors, Shareholders or Partners

The pandemic has put a strain on many business relationships, but what are the legal options when disagreements arise? Dialogue is often the best way to resolve matters, including mediation  but if that is not possible, there are legal remedies.  

Removing a Director

The directors as a board generally have no power to remove another director unless included in the company’s constitutional documents, such as the ‘Articles’.  Even if, as a shareholder, you hold over 50% of the voting shares and can remove a director:

• Make sure you give notice  (called ‘special notice’) to the company at least 28 clear days before any meeting.

• Check the company’s constitutional documents, including any investment or shareholder agreements. These may contain several options for the removal of a director.  Some of these agreements may have weighted voting rights granted to directors. 

• Check how removal will affect day to day running of the company, including access to bank accounts.

• Are there directors’ loans to be repaid?  Unless agreed otherwise these are payable on demand.

• Do you need to preserve confidential information – clients lists or company credit cards?

• Carefully check a director’s right to compensation under a service contract. 

If a director is also a shareholder, consider any shareholder agreement carefully as this might govern how to deal with the return of shares.  

If the shares are held 50/50, and the shareholder agreement does not assist, then unfortunately, there will be deadlock, and court action may mean the dissolution of the company. 

Unless there is severe or unlawful activity to justify gross misconduct, it may also be difficult to justify immediate termination of the director if they are an employee.  Check the director’s contract of employment, which may contain notice periods or compensation rights on dismissal. And:

• Get legal advice if you wish to suspend a director whilst you investigate any misconduct, as getting it wrong has serious consequences. 

• If there is no employment contract, you will need advice on whether the director is an employee and on statutory and implied notice periods.

• Employees with more than two years continuous employment may have rights under the law, including remedies for  unfair dismissal. Obtain advice before acting to avoid a claim. Even if the director has less than two years of employment, a dismissal may be an act of discrimination as defined by statute. 

Shareholders

Generally, shareholders have certain rights which are contained in the company’s ‘Articles’, and these may contain additional rights not available under general law.  A shareholder may have the rights to call a general meeting  or to have the company’s accounts audited at the company’s expense. If a shareholder holds more than 25% of shares, they can block the passing of a ‘special’ resolution  for instance to allow a change in the Articles to give a majority shareholder greater voting powers. 

If shareholders are acting in a way that is ‘unfairly prejudicial’ to the interests of other minority shareholders (for instance being excluded from management), an application can be made to the court who has the discretion to prevent that form of conduct, or to request the buy-out of shares from those being prejudiced. A shareholder can also seek to wind up the company and appoint a liquidator where the court is persuaded that it is ‘just and equitable’ to do so.  

Partnerships

In partnerships the relationship between partners will be governed by a partnership agreement. This will often cover:

• Removal of one partner from the partnership and the procedure.

• The consequence of the removal of a partner, including compensation.

• The process which must be followed if breaches of the agreement occur. 

• Notice periods

The agreement should also govern the process for termination of the partnership, either by unilateral notice or whether a vote is required and defining the % majority. A partner who cannot dissolve the partnership by notice or a vote, can apply to the court. There are various grounds for dissolution including, breaches of the partnership agreement or it is ‘just and equitable’ for the partnership to be dissolved. 

If there is no partnership agreement, you will have to rely on the application of specialist partnership law… However, the following issues may arise:

• The partners are jointly and severally liable for the debts of the partnership.  If the partners have changed over time, it is important to establish who was a partner at the time the liability was created. 

• Sometimes, there can be a debate over who the partners are and whether they are employees. 

• If there is no partnership deed, statute law may require a partnership to be dissolved – even if it is a thriving business. If there is no partnership deed, a partner may be able to demand that their capital be paid out immediately.

Disputes can be costly so ensure that you have shareholder or partnership agreements in place and take legal advice before deciding on a course of action.

By Karim Mohamed – Partner
Mayo Wynne Baxter
www.mayowynnebaxter.co.uk