Advise on small limited business with 3 directors

[balios]

Can anyone advise me on an issue we are currently having. My husband and I with a friend purchased a cafe which we took over in July. We set up a limited company with an equal share each. My husband and our friends are both employed by the company and are both paid the same salary. I am not employed by the company, however, I have to role of company secretary and do all the accounts and administration work and will receive a profit share at the end of the financial year.

However, in the 3 months since we have taken over the business there are been a number of issues with our other director. 2 weeks ago I had a meeting with this director and discussed the fact that we wanted to make changes and invest money. He said he did not have the funds to do this and and the resulting conversation ended up with me asking him if he wanted us to buy his share for the amount of money he had put into the business, this included the business price, accountant cost, solicitors cost etc. As we were still only 3 months into the business we felt this was a generous offer which meant he would not be out of pocket at all.

This meeting took place at his home with his wife present and myself. When i offered him this deal he immediately said "yes" i was so shocked at his instant reaction that i asked him again to clarify that he was "ok with this" and even talked about the possibilities of us employing him on a part time basis.

Following this meeting i emailed our accountant saying that my husband and i were going to buy this directors share and would then have 50% each and how did i go about changing the company information. On the next working day this director also without me asking gave me his company debit card and said " i will not be needing this anymore"

On this directors verbal agreement to sell us his 1/3 my husband and I arranged for work to be carried out immediately and started sourcing suppliers for new items for the business.

A few days later when i asked this director, who was going on holiday for 2 weeks to confirm the money agreed so i could arrange the cheque ready for his return so that his directorship and employment finished on the 30th September as we had discussed and agreed in our meeting he informed me he was not sure now what he was doing and did not and was not going to discuss this until his return from his holiday.

While he has been away we have spent a substantial amount of money from our own pockets on the business as we had agreements with people to carry out this work and he was aware of this before he left for his holiday.

He has today come to the business and has stated he is not selling to us in his words "yet" as he needs to find another job and as he has taking out a loan to invest in the business then he has the issue of interest.

My husband and i now feel we cannot work with this director due to his actions. My husband as contacted him today and asked to meet with him tomorrow, i will not be at the meeting due to previous commitments and also do not wish to meet with him at all as he has in my eyes broken our agreement.

If anyone can give us advise on what action we should take as we wish to continue with the business, however, if this director says he is staying until its now convenient for him then my husband has said he will inform this director that we will put the business on the market for sale as we cannot work with him.

Can we as 2 directors out of 3 do this if he does not agree?

Any help on this issue would be really appreciated

 

[PaulCCS]

Generally the majority can take this decision although you cannot sell his shares without his permission of course.

 

[kulture]

It is always better to negotiate a settlement rather than go for the nuclear option.

As you two effectively control the company, you can call a shareholders meeting and have a director removed. You cannot force him to sell unless the shareholder agreement says otherwise. regarding his continued employment, this is a different matter. I suspect that as the period of employment is less than a year, you can dismiss him, BUT get proper advice first.

If you cannot get agreement, then he will continue to own shares, and continue to receive 1/3 of any dividend payable. You will in effect be working for his benefit. He need do NOTHING.

 

[mahutchinson]

The issues of his directorship and shareholding are entirely separate. Shareholders can dismiss a director by ordinary resolution but this needs to be at a general meeting and a number of requirements need to be strictly adhered to. You can far more simply just resolve that he resigns at a board meeting. A simple majority at the board meeting (of which he must be given notice) suffices.

 

[oldeagleeye]

Kulture when you say this other director need do nothing as a shareholder to enjoy dividends your missing out on some very important points.

1) The directors and majority shareholders can choose NOT to pay dividends and I doubt that in a cafe they would exceed the £40K or so mark wages each that would take them into the higher tax band.

2) Likewise they could also issuse more shares diluting the ex directors shareholding.

3) Another altertnative that would make the ex directors shareholding virtually worthless is to issue another type of share lets say 'income shares' whereby dividends are only paid to working directors.

The bottom line is that it is extremely easy to cut this other guy out of the loop if he won't play the game and stick to his word.


Rob

 

[David Griffiths]

Kulture when you say this other director need do nothing as a shareholder to enjoy dividends your missing out on some very important points.

1) The directors and majority shareholders can choose NOT to pay dividends and I doubt that in a cafe they would exceed the £40K or so mark wages each that would take them into the higher tax band.

2) Likewise they could also issuse more shares diluting the ex directors shareholding.

3) Another altertnative that would make the ex directors shareholding virtually worthless is to issue another type of share lets say 'income shares' whereby dividends are only paid to working directors.

The bottom line is that it is extremely easy to cut this other guy out of the loop if he won't play the game and stick to his word.


Rob

It depends on the articles of the company, but normally there is a provision that any new shares must be issued to all shareholders pro rata to their existing holding. The articles can only be amended by special resolution - 75% majority - so it couldn't be done in a three person company without the agreement of all members.

There are also provisions to prevent the unfair treatment of minority shareholders, so it is far from extremely easy to cut this other guy out

Certainly the board can decide not to pay dividends, but they would then have to remunerate themselves by way of salaries, with a total 23.8% NI burden. That's actually more than the difference between basic and higher rate tax!