Guest post: Directors behaving badly

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Often in family companies the shareholders are also directors of the business. When things are going well this is not an issue, but if a dispute arises it can get complicated!

That is exactly what happened in a recent case, where a minority shareholder director had been excluded from the company and denied access to financial information by another director – who was also the majority shareholder.

The minority shareholder brought a claim for unfair prejudice to his shareholding as well as alleging breaches of directors’ duties against the majority director. The court ultimately found in favour of the minority shareholder and ordered the director/majority shareholder to buy their shares, which is the usual remedy in these cases.

Interestingly the minority shareholder was not squeaky clean. The court agreed that because they had used money from the company for their own use without the necessary degree of transparency the director/majority shareholder was entitled to exclude them.

Despite this, the court ultimately found that the director/majority shareholder had breached their duties as a director because they had also deployed company resources for personal gain to such an extent that it had subordinated the interests of the other shareholders. The claim for unfair prejudice was therefore upheld.

It is clear that even if there is bad behaviour on both sides, the court will still side with someone.

Understand your duties

If you are both a majority shareholder and director you need to understand your duties in both roles. As majority shareholder you need to consider your actions in light of the potential of causing unfair prejudice to a minority shareholder. On top of that you will also need to consider your duties to the company under the Companies Act 2006.

What should you do if a dispute arises?

The key thing is not to sit on it and hope it will get better. If you feel you are being excluded from a business you have a lot of rights, especially if you were a director.

It is important not to compromise your position. It is easy to react quickly and respond in a way which will make things worse. Take advice early – a good lawyer will help you to keep a level head and make clear decisions.

Be mindful that it may not be appropriate to take advice from your company solicitor as you will need independent legal counsel.

Doing business on a handshake and good faith is a risky move. In the long term it is always advisable to set things up properly with a sound shareholder’s agreement. I am advising on an increasing number of corporate disputes and the ones that are quickest and easiest to resolve usually have shareholder agreements in place.

Toby Claridge is partner and head of dispute resolution at Stephens Scown LLP. Toby advises businesses and individuals, dealing with a variety of commercial and corporate disputes including shareholder and partner disputes, professional negligence, financial and property claims. To contact Toby, please call 01872 265100, email [email protected] or visit www.stephens-scown.co.uk