Managing Your Cash Flow

Published

Corporate divorce: How to emerge unscathed

3 Mins

  1. In an owner-managed business, directors only owe their duties to the company and not its shareholders.
  2. If you are a shareholder or director in an owner-managed business that has a small number of common directors and shareholders, it’s likely that you (and the other shareholders) will have additional rights beyond the company’s rules that can be protected if threatened.
  3. An example of an additional right? You have an ongoing right to remain a director and not be voted off by your fellow shareholders or directors.
  4. However, any removed director who has established an ongoing right to stay on the board will not be immune from removal if their behaviour and conduct is unreasonable (no longer seeing “eye to eye” with fellow directors is unlikely to be an example of this).
  5. Where the additional rights of a shareholder are prejudiced by those who control the company, the remedy will normally be for the majority to purchase the minority’s shares (although a “reverse order” can be made. This is relevant to any strategy being adopted to seize control and especially where a minority shareholder may be able to fund a large share acquisition). 
  6. Even where a purchase order is made by the court, there may be a battle about whether the purchase price should be discounted to reflect minority holding. In these circumstances the company may need to be valued, usually by a forensic accountant not the company’s auditor.
  7. A shareholder/director who wants to leave for personal reasons (but who can’t show that his rights or expectations have been infringed) cannot force his fellow shareholders or directors to purchase his shares without a discount, ie: he/she cannot obtain a “no fault divorce.”
  8. In every case involving a conflict between shareholders and/or directors, the company will be considered on its own facts and history. But in some circumstances, just because the company’s “rules” have been followed, it does not necessarily make a decision unchallengeable or free from a claim. 
  9. Where the company is “deadlocked” because of a fallout between equal shareholders this is not in itself an infringement of a right and not something that the court will necessarily resolve by ordering one to buy out another. In this situation, other steps need to be considered to resolve the deadlock and allow the company to operate day to day.
  10. Consideration should always be given to entering into a shareholders’ agreement.

Joel Heap is head of DWF’s corporate litigation team in Manchester.

Share this story

Ken Primrose
Entrepreneur forced to “shopgift” his goods into stores
Send this to a friend