Removal of Director/Shareholder

[DaveSmart]

Hi I was hoping someone could give me some advice on the following situation.


There are 4 shareholders with 25% each, of which 2 are directors.

There is no Shareholder agreement.

It's turned into a 50/50 situation, with the 2 director/shareholders on one side and we the other 2 shareholders on the other.

Communication has completely broken down between the 2 sides and we have not been given access to any information. And we have evidence to suggest that the directors are syphoning business off into another business setup by one of the directors wife.

1. Can we remove the directors at an EGM under breach of fidicuiary duty or conflict and what evidence would be needed?

2. Can the directors vote for themselves on a resoution to remove them? as they have are 25% shareholders?

3. Can we appoint ourselves as directors and take control or could they block this?

4. Are we required to give them a reason for removal at an EGM or AGM?

5. If the directors are removed how quickly do they need to hand over accounts/keys etc? can this be done with immediate effect?

6. If both directors are removed and they block us from being directors, what happens then? does the court decide as there will be no officers?

7. Can we appoint an auditor to get the company affairs investigated,how does this work who chooses which auditor?

Thanks
Dave

 

[Free Lance]

I have answered your questions below. The answers make bleak reading but skip to the end to my new question 8 for the better news.

1. Can we remove the directors at an EGM under breach of fidicuiary duty or conflict and what evidence would be needed?

A: Sorry no. To remove the directors requires more than 50% of the votes at shareholder level who attend the meeting. There is a procedure under the Companies Act to go through but if bad directors/shareholder turn up to the meeting then they can block the vote.

2. Can the directors vote for themselves on a resoution to remove them? as they have are 25% shareholders?

Yes. The directors can vote at shareholder level on a resolution relating to their removal - hence the deadlock.

3. Can we appoint ourselves as directors and take control or could they block this?

No you cannot appoint yourselves or take control unless you have a court order (see below) or a right to do so under the articles of association or shareholders agreement. I assume that you do not have that built in to an agreement as it looks like you have looked into the issues a bit already.

4. Are we required to give them a reason for removal at an EGM or AGM?

Yes. But that is irrelevant now. For completeness, the process to remove a director is set out in section 168 of the Companies Act. It involves notice TO the company and then the calling of a general meeting.

5. If the directors are removed how quickly do they need to hand over accounts/keys etc? can this be done with immediate effect?

N/A

6. If both directors are removed and they block us from being directors, what happens then? does the court decide as there will be no officers?

N/A

7. Can we appoint an auditor to get the company affairs investigated,how does this work who chooses which auditor?

No. Unless you have a right to do so in your articles or shareholders agreement - unlikely.

8. WHAT CAN YOU DO?

The problem is that the person who is affected by the wrongdoing of the directors is the company and not yourselves directly. This is a very common problem. As such it is the company who must take the action against the directors - but of course it never would because the bad directors control the company through their seats on the board.

The law has a remedy for this. The legal bit is that the affected shareholders can apply to court to bring a claim against the bad directors on behalf of the company - a so called "Derivative Claim". The good news is that diverting business to a wife of a director is a very clear breach of duty and is pretty much indefensible by the bad directors - the court would order a £ for £ payment back to the original company of any profits/opportunities diverted.

The bad news is that that is an expensive and time consuming process.

Other options which I am sure other posters will refer to are Unfair Prejudice claims. That is where you, as minority shareholder, say that the actions of the bad directors are affecting your shareholding. The usual remedy for that is a buy out of your shares for a fair value ordered by the court.

The practical bit is that you need to get advice, get a strongly worded solicitors letter to them to put a marker down that their conduct is unacceptable. After that it is almost always best to negotiate one side buying out the other.

The above is general advice only. If you need a decent solicitor who knows their stuff please PM me for a recommendation.

Good luck

 

[thevaliant]

7. Can we appoint an auditor to get the company affairs investigated,how does this work who chooses which auditor?

The first reply states you can't. And in this specific case (ie, the investigation of suspected irregularities) you cannot get an auditor appointed to look specifically for things you believe have happened.

Even if you could, I will be honest and say no auditor would truly accept what you are looking for (they *might* accept it to get fees, but they wouldn't then do the work you wanted).

However, that said, if the company does not need an audit by law because it is under size limits, as holders of >10% of the shareholding, you can write to the company requesting one.

Problems however would include:
1. The directors might ignore this request (and I do not know how to enforce it, except by lengthy legal action).
2. Even if they did, they would decide the appointment of the auditor.
3. If an auditor is appointed, you can pretty much guarantee they will walk once they find out the extent of the dispute.
4. If, by some miracle, an audit is undertaken, you can pretty much guarantee you won't get any report detailing any issues because an audit is a worthless exercise that very rarely results in anything being said because auditors, more than anything, don't want to rock the boat, and don't want to threaten fee income.

DON'T suggest auditors. It's a waste of time and money.