Rights of Company Director/shareholder being asked to resign

forumhelp · Feb 3, 2008

I have a company of which I hold 33% of the shares. The split on the rest of the shares are 57% by directors of another company (split individually 35%, 17% and 5%) and another individual 10%. All of us are directors.

I work as managing director and the individual who owns 10% also works in the business. The other shareholders don't.

I have built the business up over the last 10 months (new start up) to a turnover of £700,000 (conservative). £100000 share capital was issued and is now pretty much spent up. I take a salary. The company will break even in the next 2 -3 months.

The directors who own 57% combined want me to resign as I am a cost to the company and buy out my shares. I do not want to do this as I have built a company from nothing to t/o £700000. The have offered to pay £1 per share (which is what I put in). I believe approx £25-£30k is needed to help cash-flow until we break even and start to make a profit. This will happen, even if sales don't increase within the next 3 months. I have offered to 'lend' this but they have refused. I have also offered to buy them out which they have refused.

I believe that they can 'force' me out by calling an ordinary meeting with special notice and dismiss me as a director? I believe they can do this by holding a majority (over 50%) shareholding?

I also believe they can get rid of me as an employee but am unsure on what grounds. As my employment stated on 20th March I cannot claim unfair dismissal as service is under 1 year.

I need some advice as to my rights. Do I have to accept this or have I any rights at all. Am I right in my beliefs as I have only found this much out by my own research today? I believe that if I am forced to leave the company then this is not in the best interests of the company going forward.

Any advice would be greatly appreciated!

Tungstone · Feb 3, 2008

I am unable to provide you details where you stand, but will post later once Ive gone through the steps that are required before the other Directors can have you removed.

Dailew2000 · Feb 3, 2008

Hi there, my name is Dave I own 51% shares in my company and my business partner owns 49%. I have a problem with him not comunicating as to his whereabouts and not taking an interest in the office side of the buisiness, although he is out and about, hes very illusive. For this reason and more I want him dismissed as a director. I have been told that all I need to do is to hold a directors meeting and cast a vote, I will vote him out and he's obviously going to vote him in, as I am the majority share holder I automatically win and hes out.

This is only what I have been told and Im not sure its correct any help or advice would be appreciated in this topic, I wish you luck as your situation is the same as mine but opposite.

Dave

Kent Accountant · Feb 3, 2008

Do you have a shareholders' agreement? (SA)

Do you have a director's service contract? (DSC)

This is one of the scenarios why we always witter on to everyone that they should have both

You have 3 separate issues

1. Removal as a director
2. Termination of employment
3. Disposal of your shares

I am not a lawyer and you should not therefore rely on my comments.

1. If you do not have an SA or a DSC, you can be removed as a director by a majority of shareholders
2. If you do not have a DSC you have the same employment rights as any other employee. Many, but not all, of those rights do not apply until you have 2 years' continuous service
3. They cannot force you to sell them your shares unless you have an SA that provides for it, except in very limited circumstances that are unlikely to apply. They can possibly dilute your shareholding by issuing additional shares

There is however legislation contained within the Companies Acts relating to the "oppression of a minority shareholder" which may help but the legal costs could be significant.

In conclusion, you need to speak to an experienced commercial lawyer who can give specific advice in the full knowledge of your personal circumstances

forumhelp · Feb 3, 2008

Kent Accountant said:
Do you have a shareholders' agreement? (SA)

Do you have a director's service contract? (DSC)

This is one of the scenarios why we always witter on to everyone that they should have both

You have 3 separate issues

1. Removal as a director
2. Termination of employment
3. Disposal of your shares

I am not a lawyer and you should not therefore rely on my comments.

1. If you do not have an SA or a DSC, you can be removed as a director by a majority of shareholders
2. If you do not have a DSC you have the same employment rights as any other employee. Many, but not all, of those rights do not apply until you have 2 years' continuous service
3. They cannot force you to sell them your shares unless you have an SA that provides for it, except in very limited circumstances that are unlikely to apply. They can possibly dilute your shareholding by issuing additional shares

There is however legislation contained within the Companies Acts relating to the "oppression of a minority shareholder" which may help but the legal costs could be significant.

In conclusion, you need to speak to an experienced commercial lawyer who can give specific advice in the full knowledge of your personal circumstances

Bob,

Thanks for your reply.

We do not have a shareholders agreement signed. We agreed allocation of shares by emails, which I have documented. I do not have a director's agreement only a contract of employment.

Does anyone know as managing director, what the timescales will be for the shareholders/directors to 'sack' me ie. I am guessing that a board meeting/meeting of shareholders will have to be made. How much notice to they need to hold such a meeting? What majority vote is needed to terminate my contract of employment? If I believe this is not in the interests of the company's future can I prevent this from going through?

Thanks

Tungstone · Feb 3, 2008

Company law changed last year , I will have to check the latest position.

Removal of a directors initiated by the director

Reg 81(d) Director can Retire or resign by giving notice to the company
File Form 288b

Reg81 There is automatic removal of a director because of:
prohibition
bankruptcy
mental incapacity
resignation by notice
absent from board meetings for 6 months without approval
and where directors resolve to remove the director

REMOVAL BY SHAREHOLDERS

Rotation regs 73-80
section 33 removal by ORDINARY resolution
-overrides articles
Give special notice
Requisition an EGM s368

Use s303 Removal of a Director

Check: is there a Bushell v Faith clause ?? in the articles?
I can explain a Bushel v Faith clause if asked

shibs · Feb 4, 2008

"I have also offered to buy them out which they have refused".

The above quote would imply they are not worried about the viability of this operation. They know this company will go from strength to strength.

I have read your post and it is unclear who came up with the original idea for this company.

I have a few ideas, but none of them would help your legal situation.

Please PM me.

Thanks

i.m. · Feb 15, 2008

There is quite a lot you can do, starting with making it clear to your fellow directors that you know there is quite a lot you can do! This is unfairly prejudicial conduct and you are able to take action about it. There is a clear procedure set out in the new Companies Act 2006 about it - and you can often secure an indemnity from the company for the costs of the entire exercise. Whilst that is not good news for the company overall, it does alter the bargaining position somewhat since your fellow directors will know that you have some support. Obviously, there must be issues as to whether your fellow directors/shareholders are acting in futherance of their fiduciary duties, particuarly if you were instrumental in the company's success. Get in touch if you feel like a chat about this.

Cheers

BR

Lawyer · Feb 16, 2009

Good advice above but I think the bottom line remains even under the CA 2006 that as they have more than 50% they can be rid of you. It is hard to challenge decisions such as - this company needs me so much that it is a breach of their directors' duties to be rid of me. I have a case in the companies court at the moment which is fascinating but they are complicated cases and risky and expensive. What you can do though is cause enough trouble perhaps that they rethink and next time you set up a business get a director service agreement and shareholder agreement agreed first.

If they do get rid of you then you will still be a shareholder and I have often had disputes usually where the shareholder wants to force the others to buy their shares but because there was no shareholder agreement and nothing in the Articles (read them) they are left stuck - shareholder, not an employee and no prospect of their shares ever been bought out. There is nothing in writing to say your shares will be bought back at £1 so that might help you - you can say I'm not giving up my shares. That means that in 5 years time when they sell out you get a share of massive future profits on that sale. That might concentrate their minds now. Presumably the employment contract says nothing about shares.

yorkshirejames · Feb 16, 2009

Special notice can be waved if (from memory) 90% of the shareholders agree in writing to waive notice.

Start planning worst case scenario.

HOWEVER - you started in March 2008 - if they give you one months' dismissal notice today, will that date expire AFTER your start date? If so they you have a case for unfair dismissal.

You are not obliged to sell the shares to anyone (in general) if you don't want to.

QVA - Emma · Mar 5, 2009

What if you are the sole Director of a company but there is a majority sahreholder that isn't you? How do you resign then? Just curious

mahutchinson · Mar 5, 2009

You resign by writing a letter to the company tendering your resignation and, normally, that you have no claims on the company (assuming that is true). The register of directors should be updated and a form 288b filed at Companies House. Of course, if you are the sole director most of this will probably not get done as you will have left already and technically you are leaving the company non-compliant as it has no director but you have no choice in this !

JGOffshore · Mar 5, 2009

mahutchinson said:
You resign by writing a letter to the company tendering your resignation and, normally, that you have no claims on the company (assuming that is true). The register of directors should be updated and a form 288b filed at Companies House. Of course, if you are the sole director most of this will probably not get done as you will have left already and technically you are leaving the company non-compliant as it has no director but you have no choice in this !

It is up to the shareholder(s) to appoint a new director. Normally if they don't do that within 6 months the company will be trading illegally and will be wound up - there may be charges against the shareholders but not the retiring director. A director has the right to resign his/her office at any time but that doesn't automatically mean they resign their employment.

mahutchinson · Mar 19, 2009

JGOffshore said:
It is up to the shareholder(s) to appoint a new director. Normally if they don't do that within 6 months the company will be trading illegally and will be wound up - there may be charges against the shareholders but not the retiring director. A director has the right to resign his/her office at any time but that doesn't automatically mean they resign their employment.

Only the director could be liable for charges, and then only likely if he acted illegally. If so, he could certainly be charged after resignation. The shareholder has no obligation to act in these circumstances and has no legal responsibility for the company's compliance.

maryjane · Apr 11, 2011

Hi
I was a director for a year with 2 other directors, all equal shares, all equal salaries. However they terminated my directorship, I didnt sign anything, wasnt consulted. They got me off the bank account then and i wasnt able to take my investment out? they are refusing to give it to me now.

does anyone know what I can do? anything?? The usual share agreements were in place.

i.m. · Apr 12, 2011

Lots you can do. When you started were you operating more like a partnership - all in it together? If that's the case then you could oin certain circumstances threaten to wind the business up. You should also be able to achieve a fair value for your shares. What's the business worth?

mahutchinson · Apr 13, 2011

To remove you as a director requires a board meeting (to which you should be invited) and at which a majority of directors resolve to remove you. Regarding your shares, no-one can take these away from you and you are entitled to any dividend declared going forward. Having said that, if there is a shareholder agreement in place it, or the articles, may state some completely different requirements - impossible to say without reading it. You mention "usual share agreements" - there's no such thing. Either there is a shareholder agreement or there isn't. If there is, those terms apply but more usually there isn't and so you have to fall back on the terms of the articles which are probably fairly standard as I describe at the beginning of this post.

The Resolver · Apr 13, 2011

They may be blanking yolu for now but there are many powerful reasons why they will want to try to negotiate with you to buy your shares:-

* They cannot issue dividends in future (and gain the tax benefits that result) without having to opay one third to you,

* As you say you were not consulted, they may have breached the rules on dismissal of a director (Special Notice and your right to attend to argue for non-dismissal) and thus the dismissal may not be valid,

* As you worked on salary for a year and were not consulted you may have a claim for compensation for unfair dismissal (unfair procedure),

* As you retain one third shareholding they are not capable , without your agreement, of passing a Special Resolution (required to change the name, articles etc),

I help clients resolve these problems at www.boardroomresolve.com and you are welcome to call me for an initial no charge chat of how I do this. But making sure all parties understand the separate reasons why reaching an agreed resolution is far more advantagious than ignoring it is part of the methodology. As with all disputes, reaching a common understanding removes most of the self-imposed barriers.

Alan R Price · Apr 18, 2011

maryjane

What form was your investment in? Was it shares or loans or a mixture? In addition to the comments here about shares, if you lent money to the company you may be able to demand repayment.

I certainly think it's also worth pursuing the unfair dismissal angle, as the Dispute Resolver suggests. He is a qualified lawyer and a regular poster on this forum - he talks a lot of sense.

harrietmoore · May 4, 2011

We have traded as a limited company for 6 years and now my co-director wants to wind up our company, he has walked out of the office and not been working for the company for the past 5 months. I would like to keep the company going so have continued to run the company on my own and would like him to resign as a director, we own 50% of the shares each.

After 4 years of healthy profits the company has made a loss over the past 2 years but I we are on target to make a profit this year and he is now dragging his feet over resigning as a director, we have several large debtors (from the time he was still working here) and I have now managed to get some of these paid he now wants 50% of this money and a guarantee that he will get a proportion of all our other bad debts recovered.

Does anyone know what rights he or I have over the company money?

Free Lance · May 4, 2011

The simple answer is that neither you nor he has any rights over the money. It belongs to the company. Cash in the bank account and debts that come in are all those of the company and neither of you can automatically take it back from the company.

Unfortunately, the simple answer leads to more questions. The absent director is only entitled to one of the following from the company:

(1) Salary or consultancy fee. Unless there is a specific agreement that he should receive this then he has no right to either. Even if he had, it sounds like he resigned as an employee or consultant several months ago.

(2) Repayment of loan. Is he owed money by the company. Either because he purchased things on behalf of the company and needs repaying (e.g. expenses) or because he lent money to the company (perhaps when he originally invested). If he is owed money then he can ask for that to be repaid.

(3) Dividends. If you pay yourself a dividend then he is entitled to 1/2 since dividends are split pro rata amongst shareholders.

That's pretty much it. You are in a typical stalemate situation and the best result might be for you to buy his shareholding (at which point he agrees to resign as director). The value of his shareholding is whatever you put on it might be possible to agree the amount by reference to debts and cash - but remember that ordinarily it would be you buying the shares from him and NOT the company doing that.

PS You should repost your reply as a new post on the board otherwise it will be missed.

Alan R Price · May 4, 2011

First, I am assuming you don't have a formal written shareholder agreement. My comments are based on this assumption.

Your co-shareholder is not directly entitled to anything. As a shareholder he is entitled to his share of any dividends declared but this does not mean he is entitled to any moneys the company collects in from its debtors. The directors decide whether to declare a dividend/pay bonuses/salaries/award pay rises etc. It would be usual for you to have equal voting rights at board meetings.

You say he "walked out" of the company and has not worked for it for five months. He may therefore be guilty of misconduct/dereliction of his duties as a director, in which case, can you simply dismiss him? I'm not sure but it seems possible. If you or your company is a member of the FSB you should be able to get free legal advice for something like this. If not, then I suggest you see a solicitor.

As a 50% shareholder, neither of you can force the company into liquidation (winding up).

My suggestion? Assess how much you think it is worth to you to have him out of the business. Then see if you can arrange a "without prejudice"
meeting to agree terms for him to go and offer to buy his shares in turn for his resignation.

Be prepared to be tough. In the final analysis he is not entitled to any salary if he is not working and can only receive dividends if the board votes them, which it will not. Yes, he has nuisance value and you will undoubtedly have to be prepared to pay him off to get rid of him - even if only as a shareholder. How much you want to pay depends on the perceived value to you of his shareholding.

If you reach a complete impasse and the figures are large enough it might be worth going through some sort of alternative dispute resolution procedure - The Dispute Resolver should be able to advise you on this.

harrietmoore · May 4, 2011

thank you both Alan R Price & Free Lance, I have re-posted the question as a new post so save any confusion

jules12345 · May 5, 2011

What does your company make ...?

I there an IP angle ?

paddyg8599 · Feb 24, 2012

This post id for I.M really could you please shed some light:
I have read with interest your thread on this topic and would like some advice, i am an equal share director in a small company in the security sector; we have completed our 1st year end, and to my surprise i have found, from the other directors, transmitted data information relating to the lessening of my role, and i suspect my demotion as a director, with possible move for removal.

there are no dereliction of duties, or conflict of interests that would indicate this move to demote my status and position in the company.
currently i have provided all the documentary IP for the running of the company and also provide 80% of the working and statutory experience needed to progress the business drive.
we have a standard mem of Art indicating the equal share and positional distribution of the company directorship.

I would like to understand and know what steps i could take to head off this evolution with necessarily exposing myself, is there a type of cease and desist instruction, that if needs be i could utilise to abait this potential threat.

i look forward to your reply
p.s: if you need i could forward a copy of the mem of art

paddyg8599 · Feb 24, 2012

I have read with interest your thread on this topic and would like some advice, i am an equal share director in a small company in the security sector; we have completed our 1st year end, and to my surprise i have found, from the other directors, transmitted data information relating to the lessening of my role, and i suspect my demotion as a director, with possible move for removal.

there are no dereliction of duties, or conflict of interests that would indicate this move to demote my status and position in the company.
currently i have provided all the documentary IP for the running of the company and also provide 80% of the working and statutory experience needed to progress the business drive.
we have a standard mem of Art indicating the equal share and positional distribution of the company directorship.

I would like to understand and know what steps i could take to head off this evolution with necessarily exposing myself, is there a type of cease and desist instruction, that if needs be i could utilise to abait this potential threat.

i look forward to your reply
p.s: if you need i could forward a copy of the mem of articles and an SA also i am sure

stuart321 · Jul 2, 2012

How did you get on with this?
Members of my family are in similar positions, their employment has been terminated one after the other. I cannot believe this can happen! They are now both in very difficult financial positions. And with all money tied up in the business it becomes very difficult to fund solicitors fees. Is the any help out there, has anyone formed an alliance against this type of behaviour, it is discusting.

Do you have any advice or contacts? I hope you come off better than my family.

Thanks for you time.

forumhelp said:
I have a company of which I hold 33% of the shares. The split on the rest of the shares are 57% by directors of another company (split individually 35%, 17% and 5%) and another individual 10%. All of us are directors.

I work as managing director and the individual who owns 10% also works in the business. The other shareholders don't.

I have built the business up over the last 10 months (new start up) to a turnover of £700,000 (conservative). £100000 share capital was issued and is now pretty much spent up. I take a salary. The company will break even in the next 2 -3 months.

The directors who own 57% combined want me to resign as I am a cost to the company and buy out my shares. I do not want to do this as I have built a company from nothing to t/o £700000. The have offered to pay £1 per share (which is what I put in). I believe approx £25-£30k is needed to help cash-flow until we break even and start to make a profit. This will happen, even if sales don't increase within the next 3 months. I have offered to 'lend' this but they have refused. I have also offered to buy them out which they have refused.

I believe that they can 'force' me out by calling an ordinary meeting with special notice and dismiss me as a director? I believe they can do this by holding a majority (over 50%) shareholding?

I also believe they can get rid of me as an employee but am unsure on what grounds. As my employment stated on 20th March I cannot claim unfair dismissal as service is under 1 year.

I need some advice as to my rights. Do I have to accept this or have I any rights at all. Am I right in my beliefs as I have only found this much out by my own research today? I believe that if I am forced to leave the company then this is not in the best interests of the company going forward.

Any advice would be greatly appreciated!

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Rights of Company Director/shareholder being asked to resign

Tungstone

Dailew2000

Tungstone

i.m.

mahutchinson

mahutchinson

maryjane

i.m.

mahutchinson

jules12345