Having disagreements with shareholders is a normal part of business and these can arise for a number of reasons, the most common being having a fall out over the management or direction of a company, personal problems souring relationships, conflict of interest or values, or shareholders not pulling their weight.
Broadly speaking the management team of a company is split into two groups, directors and shareholders. Directors are responsible for the day to day running of the business under a fixed term contract. Shareholders are the owners of the company and have voting rights at general meetings to determine important decisions.
A shareholder can also be a director. In small businesses shareholders are commonly also directors.
Removal of directors by shareholders
The ability to remove a director from his office is the ultimate sanction shareholders have against a director. Under s.168(1) Company Act 2006, a company (i.e. the shareholders) may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in any agreement between the company and that director.
Under s.168(2) Company Act 2006 special notice is required of a resolution to remove a director.
Technically, shareholders can remove any director they want as long as at least 50% plus 1 of the votes vote in favour. Statute does not have a set list of reasons to remove a director, that decision is up to the shareholders.
Director’s rights to protest removal
Directors have the right to protect their removal. Directors can set out reasons why he feels he should not be removed in writing and have that memo circulated to all members of the company before the general meeting takes place. If the representations are not circulated, they should be read out at the general meeting.
The director has a statutory right to be heard i.e. to speak in his defence at the general meeting, whether or not he is a shareholder (s.169(2) CA 2006).
In the situation where a director leaves or loses his position, the company may wish/agree to pay him compensation for loss of office due to the specific circumstances involved.
Section 994 of the Company Act 2006 allows a shareholder to bring an action on the grounds that the company is being run in such a way that he or she has suffered unfair prejudice.
Unfair prejudice may arise where directors are granting excessive remunerations to themselves, or withholding dividend payments to shareholders. In these situations shareholders can apply to the court for an order on two grounds
The success rate of unfair prejudice is extremely low. If you want to hold directors accountable it is recommended that you speak to a solicitor familiar with company and corporate law.
Just and Equitable Winding Up
The right for a disgruntled shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so arises under s.122(1)(g) Insolvency Act 1986.
This is a drastic solution because it means the company will be brought to an end. If you are applying for a winding up it is the courts discretion to approve.
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