A recent case has considered the conflict that arises for an individual who is both a Shareholder (or Shareholder representative) and a Director of an organisation when it comes to voting on a particular issue. It has also highlighted the importance of having a Shareholders’ Agreement.
When advising a Shareholder/Director of a company about his rights and duties, it is invariably necessary to examine any Shareholders’ Agreement as well as any Memorandum and Articles of Association of the company. The Shareholders’ Agreement itself will usually have a provision which makes it clear that in the event of any conflict between the Shareholders’ Agreement and the Articles of Association, the provisions of the Shareholders’ Agreement will take precedence. The Shareholders are under a duty to comply with the obligations set out in the Shareholders Agreement and in the Articles.
However, neither document will usually set out specifically the duties of the Directors which are now enshrined in statute in the Companies Act 2006 and which in summary are:
- To act within powers
- To promote the success of the company
- To exercise independent judgement
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare an interest in a proposed transaction or arrangement
So what happens when the Directors feel that their duties (e.g. to act in the best interests of the company) conflict with or undermine the effect of the Shareholders’ Agreement? This was a point which was addressed in a recent case of Jackson – v - Dear and another [2012] EWHC 2060 (Ch).
In this case the Board of Directors of the company included one Director who was a representative of one particular Shareholder. The Shareholders Agreement provided that this Director (Mr Jackson) would be appointed by the Shareholder as a Director of the company at the 2008 Annual General Meeting (AGM) and then subsequently re-appointed at successive AGMs. The other Directors were parties to this Shareholder Agreement.
In 2010 the other Directors considered that Mr Jackson was unfit to continue as a Director and passed a resolution to remove him pursuant to a provision in the Articles allowing them to do so. They considered this to be in the best interests of the company and that it was their duty to vote for his removal. They refused to allow him to be re-appointed at the next AGM.
When Mr Jackson was not re-appointed he applied to the Court. The Court ruled that it was an implied term of the Shareholders’ Agreement that the other Shareholders were not entitled to vote (as Directors) to remove Mr Jackson under the Articles. The Judge stated that the other Directors could have avoided the effect of being in breach of their duty to act in the best interests of the company because, as Shareholders, they were entitled to sanction any breach of that duty that might arise. The judge stated that the Shareholders Agreement imposed an obligation on them to do what they could to ensure Mr Jackson remained a director as they had previously agreed.
As in many of these cases, the decision turned on the particular facts of the case, including the wording of the Shareholders’ Agreement and the Articles of Association. The wording of these documents was only really tested once the parties found themselves in dispute. Two points arise
- Without the protection afforded by the Shareholders Agreement, Mr Jackson would have been removed by the Board and would have had no remedy;
- If a dispute arises, examine all the documents carefully and make sure you understand the ways these work together and the risks that might be inherent in any action that you are taking.