Alcoholic director

[Dava]

Hi all,

I am looking for some general advice.

I am currently involved in two businesses with 4 directors (each have 25%). Being trading for 4 years and two years ago a director and I (that were originally partners) found out a fellow director was and is a alcoholic.

Since then the alcoholic director has had roughly 13 months sick leave, completed awful work and taken additional money from the business that came to light at the end of year accounts.

We want to terminate this directors employment (gross misconduct; drinking at work, driving under the influence etc) and his directorship by the 75% majority shareholders.

The part I most worried about is his right to money included in his directors loan account (as we all introduced hefty goodwill figures into the Ltd co.) and reducing his shareholding. Am I right in thinking I can reduce his shares by simple issuing more shares to the remaining 3 directors?

Any help would be greatly appreciated.

 

[Williams lester]

The part I most worried about is his right to money included in his directors loan account (as we all introduced hefty goodwill figures into the Ltd co.) and reducing his shareholding. Am I right in thinking I can reduce his shares by simple issuing more shares to the remaining 3 directors?

Any help would be greatly appreciated.

Do you have a shareholders agreement? If not you are unlikely to be able to get his shares back.

New share issues must be offered to all existing shareholders in proportion to their existing holdings.

 

[Dava]

No, no shareholders agreement, as we were all firm friends for 10 years and didn't see the need. Big mistake.

So we can't dilute his shareholding?

Looks like a settlement is required.

 

[BrendaD]

It might be extremely frustrating for you to try and run your business with one of the directors being an alcoholic and I can really appreciate that but at the end of the day he is suffering from an illness. It is only fair and proper to reach a settlement with him so that you can part on an amicable basis. I just hope that he gets the treatment he needs to be able to make a recovery and get his life back on track.

 

[jim_price]

With a 75% vote you could probably pass a special resolution for pre-emption rights to be disapplied, meaning directors could issue shares as they see fit. The 25% shareholder could attempt to block that on the grounds that it is unfair prejudice - which it is. Whether he would be moved to do that I don't know but you would have to give appropriate notice of the meeting at which the resolution is to be discussed.

I would always explore an amicable settlement first in any event, as there is a good deal of company law and employment law to consider in simply squeezing him out.

 

[Dava]

It might be extremely frustrating for you to try and run your business with one of the directors being an alcoholic and I can really appreciate that but at the end of the day he is suffering from an illness. It is only fair and proper to reach a settlement with him so that you can part on an amicable basis. I just hope that he gets the treatment he needs to be able to make a recovery and get his life back on track.

Understand that completely, we have given him two years in which to take rehab appointments, as many days off holiday (full dividend and salary) and generally helped as much as we possible can.

Unfortunately the business have moved on, my former partner and I have driven it forward and rescued it from the rubbish that would have caused it fail.

In my opinion the alcoholic director deserves no further financial reward (he has received full dividends and salary for the last 2 years) for a business which has passed him by.

 

[Dava]

With a 75% vote you could probably pass a special resolution for pre-emption rights to be disapplied, meaning directors could issue shares as they see fit. The 25% shareholder could attempt to block that on the grounds that it is unfair prejudice - which it is. Whether he would be moved to do that I don't know but you would have to give appropriate notice of the meeting at which the resolution is to be discussed.

I would always explore an amicable settlement first in any event, as there is a good deal of company law and employment law to consider in simply squeezing him out.

I am more than willing to come to some form of settlement, but will his service to the company be taken into account? rather than his 25% stake.

He has only worked 11 months in the last 2 years, caused us to lose many clients, was seeing clients under the influence (we were not aware) and DUI. We have transformed a company that 2 years ago made very little, into a very profitable company WITHOUT this director. It seems very unfair that he could receive a better valuation because of the transformation while he wasn't working!

 

[jim_price]

Whether his level of input is taken into account rather depends on the parties involved. As things stand you are one party and your offer will, no doubt, take account of his contribution, he is the other party but I cannot say if he will be contrite on that point. What I would say is that I can't see why he would accept anything less than full repayment of his director's loan.

 

[Lease4Less]

Having been thriugh a similar situation 2 years ago my best advice would be to offer settlement, take it in the chin and move on. At your next AGM you could vote him off the board of directors, but you would have to oay him his loan account back. Any change in the way dividends are paid would lead to him claiming persuction of the minor shareholder.

Legal action would be very expensive, and if your company is growing he will be entitled to any additional profits.

From experience this is so time consuming and prevents you from focusing on running your company. Pay him off and move on.

Hope this helps.

 

[kulture]

You really asked two questions and people have been concentrating on one.

You say that the alcoholic director is being paid both by dividend and salary. Well, If his behaviour has been that bad then you will have a case for dismissal and thus terminate his salary. Naturally you will have to ensure that you follow proper disiplinary procedures.

Dividends have to be shared equally between shareholders. Bonus payments do not. And can be paid baised on whatever incentive scheme you can reasonably detail, or in equal shares to WORKING management.

With a 75% majority holding I am sure that you can come up with a fair and reasonable salary, dividend, bonus scheme that appropiately rewards all concerned.

Further you say the director has been taking money from the business. How is this being done. Why can you not remove his authorisation from the bank accounts and remove any credit card? I do not know of any law that allows a shareholder unfettered access to a companies bank account?

The best thing to do however is to agree a way of purchasing his shareholding. Do it sooner rather than latter as if the business continues to grow that so will the value of the shares. It really does not matter how little a share holder contributes to the growth. This is why companies PAY directors and managers and give them bouses to reward hard work, then ALL shareholders gain equally from any increase in value.

 

[The Legal Mango Team]

The directors service contract and the shareholding bring two different sets of issues:

1) Shareholding:

As Jim says, you'll need to be careful as to how you deal with pre-emption rights as they're a statutory protection (also usually reflected in any shareholders agreement - worth also checking the company's atricles) intended to prevent the dilution that you describe.

A buy back of shares can be effected by the company in certain circumstances, so it doesn't necessarily have to cost the shareholders anything.

Does the shareholders agreement contain any good leaver / bad leaver provisions? If it does, buying back the shares could be fairly cheap if the outgoing shareholder can be classed as a bad leaver.

2) Directors service contract:

You'll have to check whether this says anything around being a 'fit and proper' person to act as a director (linked to Companies Act provisions) etc and whether any express rights of termination exist for any of the circumstances that you describe.

There may be a catch all provision that allows the contract to be terminated for one or more of the circumstances that you have described.

As with termination of any employment contract, termination of a directors service contract needs to be effected correctly otherwise the company may become the subject of unfair dismissal and / or discrimination claims to name a couple, particularly in light of the circumstances that you have described.

We're not a firm of solicitors - the above is intended as general guidance only. If you do need any help, check out our website and one of our solicitors firms will be pleased to assist.

 

[The Resolver]

This clearly neesd to be resolved as quickly as possible on an amicable basis. You, and the other two, have a number of options as referred to by others, but for each fo you to understand the comparative costs and values is the first step to take otherwise you are negotiatng in the dark. Remeber every hour spent in trying to reach the solution is an hour lost to the business.

I can sort this out for you all through our boardroom mediation service. The process involves me talking confidentially to each 'side' ie ,the three shareholders jointly and the other individually. Each conversatioin (which can take place in person, by phone and also online on our dedicated online mediation platform) is confidential and not passed on to the other 'side'. In this way I see the whole picture from everybody's perspective and not just the one side as I would have done previously as solicitor. Each side will be advised in confidence of their rights and options under company and employment law and what would happen if no agreement is reached. I then encourage and assist all parties to brainstorm potential solution packages and try to help them create a package that all parties are content to sign up to. With the platform, and with trust and co-operation, this can all take place within days. Nothing is decided upon without your full agreement .If no mutual solution then your rights are preserved and any unilateral options remain available. Nothing suggested or offered within the boardroom mediation can be revealed subsequentely eg to a tribunal or court. So there is nothing to lose but everything to gain.

 

[The Legal Mango Team]

We agree with Dispute Resolver in that litigation should always be viewed as a last resort, with a negotiated settlement being preferable.

Since the interests of the parties involved may be polarised, you may wish to obtain independent legal advice so that you fully understand the legal options / issues that you may have / face during the mediation process if you are minded to give it a try.

We're not a firm of solicitors, so the above is intended as general guidance. If you need any help, check out our website and our panel of solicitors firms will be pleased to assist.