Director shareholders who don’t perform their duties can cause trouble for a business due to differing views on input and success, leading to disputes.
The first step to address this issue is to check the governing documents of the business, starting with the Articles of Association and Shareholder Agreement. They are essential in resolving such disputes.
Understanding Shareholder Agreements
A well-drafted Shareholder Agreement often includes a list of ‘trigger events’ that allow for the removal of a shareholder and provisions that require an outgoing shareholder to resign from their office as director. These agreements can be put in place retrospectively if all shareholders agree, which can improve the situation within a business by setting clear expectations. This helps to prevent potential conflicts.
In some cases, a retrospective Shareholder Agreement can be the wake-up call that some director shareholders need to get back on track and improve relationships with others. However, if a shareholder is still in breach of their duty after signing the agreement, it will set out a potential pathway for their removal. The agreement provides a clear framework for resolving disputes.
Removing a Director Shareholder
It is possible to remove a director (who may also be a shareholder) as a director via an ordinary resolution, which involves a majority vote of over 50% of the remaining shareholders. However, this does not remove their status as a shareholder, and they will still retain equity in the business but won’t be involved in day-to-day decision making. The company must follow the proper procedures to avoid any potential legal issues.
In recent months, several companies have sought advice on how to potentially oust a director shareholder who isn’t pulling their weight within the business. The recent economic climate means many business sectors have been facing challenges and are perhaps less likely to tolerate a director shareholder not performing effectively. As a result, they are looking for ways to support growing companies and improve their overall performance.
Legal Considerations
When removing a director shareholder, there are other legal issues to consider. It is essential to take legal advice before taking any action to avoid these issues.
Director shareholders who have commercially sensitive information can pose a serious threat to the success of the business in the future if they move to a rival firm or set up in direct competition. A well-drafted Shareholder Agreement can protect against such risks.
Taking swift and decisive action is necessary when there is a breakdown of trust and relationship between director shareholders, as it can cause immediate damage to the business. The Companies Act 2006 governs the Articles of Association, which include details about how directors are appointed and removed. The company should follow the procedures outlined in the Act to ensure a smooth transition.
In the middle of such disputes, it’s worth considering how similar situations have been handled in the past. For instance, businesses that have successfully handled the removal of underperforming director shareholders often have strong, clear governance documents in place. By learning from these examples, companies can better prepare themselves for potential conflicts and minimize the risk of damaging the business. They can also stay up-to-date with the latest EU rules and regulations that may impact their operations.
Ultimately, the key to resolving disputes involving director shareholders is to have a clear understanding of the governing documents and the legal options available. By taking a proactive and informed approach, businesses can protect themselves and ensure the best possible outcome for all parties involved. This requires careful planning and a thorough understanding of the legal framework.
Businesses must be prepared to handle potential conflicts and have a plan in place to resolve them quickly and efficiently.