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Is this legal, please help!

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DeveloperBloke

Hi there

I am after some advice please.

we have spent 4 years developing some software. last year we received investment from a company

They are the major share holder in our business . hindsight is an amazing thing and we realise now that they were not what they said they were, basically lied during the investment talks and could not deliver on nearly all areas they were responsible for.

on the board is myself, my two business partners and two directors from the company that invested in us. they are an established sales and training company. We are a software development company. We are all full directors (not non exec or other types)

Their accountant also manages our company accounts.

We requested accounts to be sent to us for January. We receive a management charge of about £1500 a month. For january, this has been increased to 72k!!, more for February!!

we called their accountant and have asked what this is for, and he says that the cost of th sales people has been moved from the sales and training company into our technology company! This has never been approved by us the directors at a board meeting, or even discussed, in fact this is the first we have heard of it!. One of their directors on our board simply decided to do this!

is this legal? wouldnt something like this have to be first be discussed at the board level, then voted on? we would ever agree to move this cost into our business, this 72k has meant that we had a 40k loss for February! we have a pretty good turnover and because we only have a staff of four, very low overheads. we have also got a lot of clients using our software so we have an excellent net profit each month. well we did anyhow!

this has left me and my two business partners bemused, untrusting and absolutely livid! being that there is 5 directors, two of thier people, and me and my two business partners, are we able to vote against decisions like this? can we vote them off the board? we are amazed that this has been done as without me and my two business partners, there is no business! do their directors have the power to pass decisions without consulting the board, or us?

I would be extremely grateful for any advice on this matter, this has left us extremely worried , potentially destroying our business which we have all spent 4 years working very hard to get it where it is.

many thanks

Dev bloke
 
No it isn't legal. However - what percentage shareholding do they own?

You can certainly get rid of the accountant, maybe threaten to report them to their professional body - but this seems like a typical case of a majority shareholder doing what the heck they want because (essentially) they can. If this means that your legal entity makes a loss for the year and hence no dividends to minor shareholders - they won't be at all bothered by this.

Help is available (and obviously you are in the right) - perhaps to help you decide whether you want to make a big thing out of this you can think about what would happen if you didn't have this investor (or they wanted to be bought out). I don't mean what would happen to your pride, but the effect on family/kids/mortgage.
 
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Hi there

many thanks for your response

my business partner has since spoken to him and he said he did this because he was short of cash in his other business

he owns 67% and we own the rest between three of us.

Dev bloke
 
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I'm about to be the bearer of bad news - brace yourself!

They are the majority shareholder - so they own the company. Provided that they act within the law they can do (almost) what they want. Agreeing any form of charge would be within their remit.
I agree politeness would have suggested discussing it, but as the owners of the business they are entitled to charge what they want provided that the charge is (or can be shown to be) attributable to the business. In this case he would argue that the sales team were working primarily on your product - so correct apportionment would be for your company to take a greater share of it.

Whilst I sympathise with the plight, I cannot see that he has done anything wrong and you are paying the penalty for allowing someone to have a majority share.

Any majority shareholding is dangerous.
I'm starting another venture in the autumn with 2 others. All 3 of us (yes, including me) agree that the best way is for shareholding to be 48 / 26 / 26 - thereby the other 2 could outvote me if they wanted to / needed to. Absolute power corrupts!
 
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well if it is that he can do this then he hs put the nail in his coffin. he also intends to do this for feb and march too meaning that our business finishes our financial year at -70k

his sales team sell 5 other products too, and also other services so they are not predominantly selling our software.But, id di read that if an ordinary resolution is passed and a director did not know about it, that they could reverse the decision, is this not right? what is the point of the board if he can move money like this. isnt it in his personal interest to move this money as he will be making money form the transaction and therefore something that would have to be approved by the board?

We are a technology business, and a very good one at that with very specialised skills. Our software is very specialised too, one of my business partners has all the industry expertise that is required to create our software.

The majority share holders other company cannot replace us in any form, they have no knowledge of our niche market and have no way of running a software business.

If the case be that he can do this, we will all resign and walk out tomorrow and set up a competitor immediately. i would rather walk away and ensure he failed.

we have a discussion with him shortly, this man is an idiot. It beggars belief as to why he would do this.
 
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Stephen Berry said:
I agree politeness would have suggested discussing it, but as the owners of the business they are entitled to charge what they want provided that the charge is (or can be shown to be) attributable to the business. In this case he would argue that the sales team were working primarily on your product - so correct apportionment would be for your company to take a greater share of it.

...I cannot see that he has done anything wrong and you are paying the penalty for allowing someone to have a majority share.
quote]

Sorry, it isn't a case of politeness it is a legal fact that you can't do what seems (we don't have full details) to have been done here. I am the director of a company with about £10 million in the bank. I am a signatory to the bank account. If I take the money - or part of it - without proper (board) authority I'll go to jail. Directors manage a company - not shareholders! If the shareholders don't like what the directors are doing they sack the. But shareholders don't run the company in the way that seems to have been done here.
Click to expand...
 
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Big caveat before I begin: if there is a shareholders agreement then a lot depends on what that says. But even then i doubt I covers what he has done.

1. Your company (Company A) has a contract with Company B. Company B is owned or controlled by, or has a common director with, Bad Director.

2. Company A and Company B have a contract that says (whether written down or not) Company B will provide certain services for a management fee of £1,500 per month. Presumably there is no provision that allows the management fee to be increased by several hundred percent.

3. Bad Director has caused Company A to modify the contract with Company B. There may be an argument even at this stage that Bad Director did not have authority to bind Company to a transaction with Company B - it is not like a bona fide transaction with a third party. If so the alleged modification of the contract would be invalid. This is an avenue worth exploring but probably not the main point of attack.

4. Bad Director has caused Company A to enter in a contract with Company B. It is a contract in which the law deems he is interested in. It depends on what you articles of association and any shareholders agreement say but chances are he will be in breach of the law here. In a nutshell, he could have done it had he disclosed it in advance to the appropriate organ of the company (board or shareholders depending on the circumstances) and obtained appropriate approval. Depending on what the articles/shareholders agreement say, he may or may not have been able to vote on that contract.

5. Because he has not done that and because what he has done is clearly not in the best interests of Company A he has breached several of the duties he owes to Company A under the Companies Act 2006. The good news is that since last year, section 239 of the Act means that he/his company can not vote to ratify his wrongdoing. Exclude the votes of the 66% shareholder in other words. So unless the other shareholders want to let him get away with it - he can't.

6. The board of directors (which you control 3/2) can decide to sue the director personally (and probably Company A) for breach of his duty. It would be great to say that is the end of it; but there are problems.

7. As Bad Director controls 66% of the vote he can remove the existing directors - through a process which takes time. Not immediately unless he has that right in a shareholders agreement. He could in theory then stop Company A's action against himself. If he did, then you would have rights to continue the litigation against him in the company's name - a 'derivative claim' under the Companies Act.

I suggest you get proper legal advice ASAP. When you meet the director it might be nice to present him with a letter of advice from the solicitor to the Company outlining 1 - 5 above and emphasising the personal liability of the Bad Director to the Company A.

PM me if you want me to recommend a good company lawyer.

Good luck.
 
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DeveloperBloke said:
last year we received investment from a company... They are the major share holder in our business
Click to expand...

Stephen Berry said:
Any majority shareholding is dangerous.
I'm starting another venture in the autumn with 2 others. All 3 of us (yes, including me) agree that the best way is for shareholding to be 48 / 26 / 26 - thereby the other 2 could outvote me if they wanted to / needed to. Absolute power corrupts!
Click to expand...

yorkshirejames said:
Go on, go 33/33/33 and give the dog the one left over!
Click to expand...

This reminds me of the hilarious share negotiation scene (warning contains some strong language) in the film Bad Santa (the big guy on the left of the table, Bernie Mac, the newcomer, wants in the other two guy's deal and wants half).
 
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As always I'm afraid, you need proper legal advice.

However, despite what many people think, Directors, even Directors that are major shareholders, can't do just anything they like to a the company they are a Director of - they have a legal fiduciary duty to it.

Not only that, if they are directors of another company too and if that company deals with your company, they must declare their interest before doing the deal.

So, I think you have a few avenues to explore before getting too despondent but you must get proper advice from a company lawyer - a specialist, not your average solicitor and preferably one under 60 years old!
 
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