Paying off a director when no contributions have been made

[TomBag]

We started a company which has been trading for 2 months. We have three directors - one of which wants to leave.

The business has invoiced 12k none of which has been paid. Me and another director have put forward 8k set up costs, 4k of which has been used to cover the other directors salary.

The other director wants to leave - but won't hand back shares without a good offer.

Also - the new business now only has one client paying 1.9k a month.

With the business currently 8k in debt, myself and the other direct a) having not taken a salary and b) put ALL the money in to set it up - what would be a fair offer?

valuing the company and giving him a third would surely not take into account the fact he's had money plus put in no money?

Again - no directors agreements are in place.

Any advice on how to handle this would be appreciated.

[CertaxBexley]

The details of share disposal, directors resignation or removal should all have been put in place when the Company was formed.
The Horse has now bolted :(
Broadly speaking the shareholders call a meeting, for all shareholders, pass a resolution to remove said director (assuming they are the majority)
Notifications must be sent by registered post to registered offices
NB that is a very basic outline A google search will reveal more explicit instructions.

Whether the Director has made any contribution is immaterial.
The shares are valued on the assets of the business, & possibly future earnings.
If two Directors loaned the Company £8K in 'very broad terms' the current assets are; £12k sales, less expenses, less £8k directors loan which probably doesnt leave a lot, if anything.
So you can remove the Director then set abour the share valuation.

PS Paying a Dir.salary of £4k in 2months on this business would seem excessive.

[wecandobiz]

Two things spring to mind:

1) Directors and shareholders are different entities. A shareholder olds equity of course, but a a director is appointed by the shareholders to represent the. Preumably when you started you all effectively appointed yourselves to represent you own interests. That's fine, but now one wants to leave, do you mean he no longer wished to work for the company, no longer wishes to be a a director, or no longer wishes to hold his shares? He can do all three, but he could also do the first two but keep his shares. This may be the only option if you don't wish to buy then from him;

2) Did you not define how share sales would be handled in your Articles of Association and stuff when you started the business? If not then I think you are stuffed. That said, if you don't make an offer, what can he do? And what difference does that make to you?

IH

[TomBag]

We do not have any Articles of Association which I now understand is a little niave.

He wants to leave but won't had other the shares for nothing. I'm looking for advice on how best to resolve this as a) I'm not paying over £500 considering the business is in debt and I paid for all the set up costs b) I have another business which is my primary source of income and would not be overly concerned if I had to disolve this business.

If I refuse to buy these shares and he leaves to work else where I assume he's only entitled to a dividend at some stage?

He's looking at different ways a company can be valued and is getting back to me - but I understand that there is not one set way of evaluating this.

Just want to convince him that £500 is good all things considered.

Thanks for your help

[wecandobiz]

I would suggest that you all mutually agree a single accountant, which you all pay something towards (split costs), to undertake a valuation. It may not be what he has in mind, because he is probably looking at what it could be worth down the line. But of course you and your other partner could give up and he could find it worth nothing.

So agree an accountant that is suitable to all parties to come up with a valuation of the company and therefore his shares. You then have a realistic value of what they are worth -- certainly what anyone else would pay for them. You and he can then decide if you deal at that value.

If he won't then I guess it is possible it could all go kaput with you and the remaining partner needing to start again. I would ready yourself for that eventuality.

HTH

IH

[TomBag]

Thanks again for the advice.

I spoke to my account who advised that the business really worth nothing based on the fact that it is £8,000 in dept with only 1.9k potentially reoccurring revenue over the year.

So 12k over the year, minus two directors salarys, then factor in that with him leaving we would need a new staff member perhaps, to deal with the work, the website still needs building so call that 2k, so factoring those costs based on 1.9k a month any evaluation of the business would surely come to the conclusion that it's not got any value.

That's my position anyway.

[wecandobiz]

Given the precarious position of the company it might be sensible for the shareholders to add more capital. In other words, suggest that yoru accountant has advised that shareholders should put money in and if he wishes to retain his share then he will be required to do so, or his shares will be diluted.

That should flush him out!

IH

[mikecollins]

Given the precarious position of the company it might be sensible for the shareholders to add more capital. In other words, suggest that yoru accountant has advised that shareholders should put money in and if he wishes to retain his share then he will be required to do so, or his shares will be diluted.

That should flush him out!

IH
What do you mean by diluting his shares? If he is a shareholder and will not sell his shares at any price how then can the other directors protect themselves. If they ever declare a dividend then the rougue director will be entitled to a 'share' even tho he may never contribute to the potential success of the company. I have a similar situation, the Company Articles state that a Director on resignation must offer his shares up for purchase by the other shareholders. He is not doing so at present and is effectively holding others to ransom, a dividend cannot be declared unless we wish to pay him. He is acting contrary to the Articles, what to do?

[wecandobiz]

What do you mean by diluting his shares? If he is a shareholder and will not sell his shares at any price how then can the other directors protect themselves. If they ever declare a dividend then the rougue director will be entitled to a 'share' even tho he may never contribute to the potential success of the company. I have a similar situation, the Company Articles state that a Director on resignation must offer his shares up for purchase by the other shareholders. He is not doing so at present and is effectively holding others to ransom, a dividend cannot be declared unless we wish to pay him. He is acting contrary to the Articles, what to do?

Let's say the share capital is worth £300 and was contributed in equal measure by all three parties. If you are required to put more in to the company to prop it up, it is required in equal measure. Otherwise, the two contributors of, say, an extra £100 each will then have £200 each of share capital, and the obstinate director only £100.

Of course, such a thing would need the majority vote of shareholders. If the OP had Articles they MAY have said unanimous support, but seeing that they didn't then maority would probably be good enough.

The departing director would still have a share, but ever diminishing as you add more capital.

A lawyer or accountant may wish to step forward and correct me.

IH

[The Dispute Resolver]

To clarify diluting shares, in the example given by wecandoabiz, the company had passed a resolution increasing the authorised share capital to £600, ie double, with each shareholder given the option to double their shares by paying £100. If the third shareholder did not pay then he would have one fifth of the company not one third as originally. If the others just paid £150 each m the third shareholder goes down to one sixth.

It is for this reason that a Shareholder Agreement is so vital to protect shareholders who do not have funds from the risk of aggressive tactics by investors who, seeing the business is going to succeed part way down the track, argue that more investment is needed first and thus use this to gain greater share for when the success arrives.

If the company is not trading successfully, then maybe the answer,if he doesn't sell, is to liquidate. You uneed advice especially as to any assets you may wish to secure for a new company.

You say you had no Articles but every company has Articles. Usually you will have adopted what is known as Table A. Check the paperwork when the company was formed. Its the Shareholders Agreement that is often overlooked.

[mikecollins]

To clarify diluting shares, in the example given by wecandoabiz, the company had passed a resolution increasing the authorised share capital to £600, ie double, with each shareholder given the option to double their shares by paying £100. If the third shareholder did not pay then he would have one fifth of the company not one third as originally. If the others just paid £150 each m the third shareholder goes down to one sixth.

It is for this reason that a Shareholder Agreement is so vital to protect shareholders who do not have funds from the risk of aggressive tactics by investors who, seeing the business is going to succeed part way down the track, argue that more investment is needed first and thus use this to gain greater share for when the success arrives.

If the company is not trading successfully, then maybe the answer,if he doesn't sell, is to liquidate. You uneed advice especially as to any assets you may wish to secure for a new company.

You say you had no Articles but every company has Articles. Usually you will have adopted what is known as Table A. Check the paperwork when the company was formed. Its the Shareholders Agreement that is often overlooked.
Thanks for your response Graham, I am not sure if you are responding to my thread or the original. The company in my case does have articles, the problem is the other shareholder' now ex Director' will not offer his shares to the other 'Director' as stated he should do in the Articles should he resign. so to re-iterate 'He is not doing so at present and is effectively holding others to ransom, a dividend cannot be declared unless we wish to pay him. He is acting contrary to the Articles, what to do? Mike

[TomBag]

For some reason the other director is dragging his heals and won't sign the form saying he's stepping as director. I've taken some advice and basically the company has no value plus we are in our rights to take the costs of running the company, setting up a new website and appointing a new staff member off any profit forcasts for the company, effectively eliminating any value it could possibly have.

If he won't step down - can we simply disolve the company and let that be the end of it?

[The Dispute Resolver]

Before advice can be given you need to establish:-

1. That Table A has been adopted by the company - most likely but check the papers when it was formed.
2. What amendments/additions to the template Table A have been made at the time.
3. Check if there was a shareholder agreement signed

You said earlier (or maybe I misunderstood) that he only wants £500. Also you said there was £12K owed and a revenue of £1.9K a month. In the wider context, I suggest you assess what it is likely to cost you in professional and other fees to prepare a close down and then add on the cost of starting up a new company in the future . My guess is that it will be a lot simpler and a lot less costly to just pay him the £500 and preserve your options. If I am wrong on the figure he requires then still do the maths.

You are welcome to PM me to chat further.