Boardroom Disputes (2) – The Majority Shareholder
In the previous article, we gave an overview of the issues which commonly arise and the importance of looking at the Articles and any shareholders agreement in determining what rights exist. In this article we look at a boardroom dispute from the perspective of the shareholder who wishes to remain in the business.
Whatever the agreed provisions, the remaining shareholder will want to get to a position in which the other shareholder has severed all links with the company. In addition to getting him to resign as an employee, he will want to get him to resign as a director and to sell his shares. The best course of action to achieve this goal may not be immediately apparent and may depend upon the individual circumstance. However, we touch upon some issues below.
Employment issues
One of the early manifestations of disenchantment may be the fact that the other shareholder is not pulling his weight or has decided to resign his employment with the company and to look for employment elsewhere.
If the other person has resigned this may trigger provisions powers within the Articles or any shareholder agreement which allow notice to be served requiring resignation as director and the sale of the shares. If the other party has not resigned, but is performing poorly, he must be managed as an under-performing employee. Dismissal without justification will still be unfair even though the company is small.
Dealing with the shares
If the Articles or shareholder agreement require the shares to be sold, then, assuming that a price cannot be agreed between the parties, the shares may have to be independently valued. Generally speaking, the value of a shareholding of less than 50%, which does not carry with it control of the company, is usually heavily discounted to reflect that lack of control. Many shareholder agreements will provide for a fairer valuation mechanism.
If there are no provisions with the Articles or shareholders agreement which entitle the remaining shareholder to require the other to sell his shares, the remaining shareholder can face the prospect of working full time in the business but seeing up to half of the value of it accruing to the shareholder who has departed.
Continuing the business
There are other options the remaining shareholder will wish to consider if he cannot acquire the remaining shares.
He may need to review the remuneration arrangements. The shareholders of many small companies pay themselves a nominal PAYE salary on the basis that they extract value from the business by declaring dividends, which are sometimes paid on an interim basis. Unless there are different classes of shares, the non-working shareholder will be equally entitled to receive any dividend declared. Therefore the salary of the working director will have to be increased and dividends may have to be abandoned despite the obvious tax advantages.
As an extreme option, the remaining shareholder may wish to consider abandoning this company and setting up a new one. Whether he can do so may depend upon a number of factors including the nature of the business; the value of any net assets; whether it has long-term valuable contracts and the existence and enforceability of any restrictive covenants.
Practical issues on sale of shares
Even if a value can eventually be agreed or determined, the remaining shareholder will have to see whether this is affordable. Real issues can arise in practical terms if the price cannot be paid immediately. A decision needs to be made as to when the title to the shares will be transferred.
In addition, the remaining shareholder will be looking to ensure:
- That the departing shareholder confirms that he has no claims against the company. It may be necessary to prepare a compromise agreement in respect of his employment status.
- That the other resigns his position(s) as director and secretary;
- That all company papers and property have been returned to the company. It may also be necessary to arrange for the transfer of company property which may be held in the name of the departing shareholder (e.g. domain names, websites, intellectual property) so as to ensure that that is properly assigned to the company before the deal is finalised.
Other options
It can be difficult to negotiate these arrangements without understanding the legal implications and without understanding what the alternative is to a negotiated agreement. Court proceedings should generally be avoided as there may be uncertainty as to the outcome, particularly if the Articles have been poorly drafted and there is no shareholders agreement.