Directors at Loggerheads

[Bailey123]

Sorry for the long thread,
I set up a limited company 50/50 partnership 5 years ago, I put my own funds to set the company up and signed the lease in my name as the business wasn't trading or incorporated at the time, ultimately taking on all of the risk if the business failed.
My role is all of the financials, wages, contracts, etc etc, but the day to day in the business is run by the business partner who receives 3 times my income to compensate for extra time etc, over the past couple of years the other partner has been forcing for significant pay rises and threatening to reduce hours if demands are not met, I have given in although my accountant advised otherwise as this is crippling the business, My income has always been minimal to help support the business. Now more demands and invoices are being made for extra hours being spent in the business.
Initially a full time job now 3 days a week on more than double the salary...
I have offered to sell my share in the business at a greatly reduced rate so I can walk away and let the business continue without me, Initially this was moving forward but now the business partner is backtracking and wanting it by trying to force me out without any payment, trying to exclude me from information relating to the business and being underhanded.
I cannot see a good outcome unfortunately, the lease is due for renewal soon and I am not confident in signing again when things are so fraught..
Any Advise would be Greatly appreciated..

 

[Ozzy]

Can you confirm if your use of the term "partnership" is specific, as in is the business a partnership or is it a Limited Company in 50/50 share split? You mention selling your shares which implies a Limited Company, but a Partnership is a different type of business with different legal liabilities associated with it.

I feel I know the answer to this; do you have a Partnership Agreement or Shareholder Agreement?

Also, what is the worse that could happen if you took your accountants advice and didn't agree to the salary increase? This person could be breaking the law by acting in a way that is not in the interests of the business and brings it into difficulty, worth keeping in mind.
Tagging @The Resolver

 

[Bailey123]

Hi Thanks so much for your response, So the salary has been increased 3 times and now further worked hours are being submitted to me for payment.
I feel now that I have already given in to the demands its hard to backtrack, I could of course up my salary but this would have a negative affect on the business even though business partner doesn't seem to understand there repercussions
Yes indeed a Ltd Company, no shareholder agreement in place
Things are becoming increasingly tense, no communications being responded too.
How can I walk away without being taken advantage of...
@The Resolver

 

[brucegreig]

As Ozzy says, there are laws which require directors to act in the interests of the company (Google "director fiduciary duty"); and laws which require shareholders to not screw over other shareholders (Google "unfair prejudice"). @The Resolver can advise you on these.

There is also a good, very short summary here:

50/50 Shareholders Disputes - Christopher Burgon

If you ever find yourself stuck in 50-50 shareholders disputes, don't feel lost or discouraged, there are many ways to handle a dispute.

www.christopherburgon.co.uk

Any actual legal action is likely to be extremely expensive (tens of thousands), but the threat of legal action means the other side has a reason to negotiate, because defending a claim will be expensive for them too. The fact that you still control the lease is also something which can feature in the negotiations. Presumably that is a problem for the company if their rights to use the premises are unclear.

I usually see cases like this after both sides have racked up those tens of thousands in legal fees. My strong recommendation is to spend a much smaller sum on good legal advice (maybe something like £2k), make sure you understand it 100%, encourage the other side to get their own advice, then negotiate. Use a mediator like me to help manage the negotiation if you want to, but IMHO the crucial thing is for both sides to have a crystal clear understanding of what's likely to happen if you don't reach a negotiated settlement, then a settlement becomes much easier.

 

[Deleted member 335660]

Hi Bailey,

I have to say that I think you were very generous at the very beginning to put up all the funding and let them have 3 x the salary. As a shareholder they get a share of the profits too.

I had a similar situation where by the key shareholder had designed the idea but I and a third director put the funds in. I ended up leaving but keeping my shares.

How critical is the lease to the business? Could you not sign the lease and then he would have no business to run and will loose all his income and then may be willing to talk sensibly.

Would someone else be willing to buy the shares and work with the other person?

Bearing in mind his current attitude your relationship seems over and even if you resign as a director you can keep the shares. He will then have to run the wholes business and sign a lease himself. Reality may well lead him to the table.

 

[Lisa Thomas]

I would consider resigning as a director but retaining your shares (although The Resolver will probably recommend differently!) then he will be left to deal with obtaining a new lease.

As a shareholder you will be entitled to a share of the profits. If he wants you gone he will have to pay what you want for your shares.

 

[Bailey123]

Hi Bailey,

I have to say that I think you were very generous at the very beginning to put up all the funding and let them have 3 x the salary. As a shareholder they get a share of the profits too.

I had a similar situation where by the key shareholder had designed the idea but I and a third director put the funds in. I ended up leaving but keeping my shares.

How critical is the lease to the business? Could you not sign the lease and then he would have no business to run and will loose all his income and then may be willing to talk sensibly.

Would someone else be willing to buy the shares and work with the other person?

Bearing in mind his current attitude your relationship seems over and even if you resign as a director you can keep the shares. He will then have to run the wholes business and sign a lease himself. Reality may well lead him to the table.

Hi

Thanks so much for your reply

Yes I feel very let down after offering so much initially, the lease is currently in my sole name and not the company and so I can I think renew the lease direct with the landlord as I have a good relationship with him, the business partner is desperately trying to contact the landlord to sign the lease independently ultimately disregarding myself.

 

[Bailey123]

I would consider resigning as a director but retaining your shares (although The Resolver will probably recommend differently!) then he will be left to deal with obtaining a new lease.

As a shareholder you will be entitled to a share of the profits. If he wants you gone he will have to pay what you want for your shares.

Thanks for your reply its much appreciated.

I guess I'm worried that the business would be dissolved and set up independently ultimately getting me out without paying anything

 

[Bailey123]

As Ozzy says, there are laws which require directors to act in the interests of the company (Google "director fiduciary duty"); and laws which require shareholders to not screw over other shareholders (Google "unfair prejudice"). @The Resolver can advise you on these.

There is also a good, very short summary here:

50/50 Shareholders Disputes - Christopher Burgon

If you ever find yourself stuck in 50-50 shareholders disputes, don't feel lost or discouraged, there are many ways to handle a dispute.

www.christopherburgon.co.uk

Any actual legal action is likely to be extremely expensive (tens of thousands), but the threat of legal action means the other side has a reason to negotiate, because defending a claim will be expensive for them too. The fact that you still control the lease is also something which can feature in the negotiations. Presumably that is a problem for the company if their rights to use the premises are unclear.

I usually see cases like this after both sides have racked up those tens of thousands in legal fees. My strong recommendation is to spend a much smaller sum on good legal advice (maybe something like £2k), make sure you understand it 100%, encourage the other side to get their own advice, then negotiate. Use a mediator like me to help manage the negotiation if you want to, but IMHO the crucial thing is for both sides to have a crystal clear understanding of what's likely to happen if you don't reach a negotiated settlement, then a settlement becomes much easier.

Hi

Thanks so much for your reply and useful links.

I agree the legal route would be just too expensive.

 

[The Byre]

Yes indeed a Ltd Company, no shareholder agreement in place
Things are becoming increasingly tense, no communications being responded too.
How can I walk away without being taken advantage of...

With great difficulty!

This situation seems to come up here on a daily basis! Partners and no written agreement. The answer will be hidden in the details.

My role is all of the financials, wages, contracts, etc etc,

And that is where the details will be lurking. You need to sit down with someone who has a good knowledge of company law and the wrinkles around company law and go through which contracts you have signed and what your role in the financials actually is. Somewhere in all that lot, the answer to your problem may be sleeping, waiting to be woken up!

 

[Bailey123]

On another note can I just sell my 50% of the business to someone other than my business partner if they refuse to buy it.

 

[2020Lawyer2020]

Start by looking at if the company has any value. If not simply do not renew the lease and walk away leaving your shareholding in your name and resigning as a director.
If the company could be sold or has lots of assets, cash, stock then you should try to negotiate a split with your fellow shareholder/director as you cannot afford to litigate.

As yo do not have over half the shares you cannot sack the other director (do however check the company's Articles - at companies house - as they may say something unusual or different (unlikely but check).

You agreed however reluctantly to your partner having the higher pay etc so not much can be done about this.

You both cannot work together and he will not buy your shares. Would he let you buy h is shares then as another alternative? Is there anyone else - a third party - willing to buy your shares or threaten to do so? Tht might bring the business partner back to negotiating with you. You could possibly threaten to wind it up on the just and equitable ground given the total failure of the relationship between the two of you. You have the lease in your name and currently let the company use the premises presumably under some kind of unwritten arrangement rather than a formal sublease but again check all the paperwork. If so I suppose you might terminate the company's right to use the premises but that might destroy the company and you have a legal duty to act in the company's best interests so that is unlikely to be lawful.

Never start a business again with another person unless you have a written shareholders' agreement signed before you start any work at all or put anything into it.

 

[The Byre]

Never start a business again with another person unless you have a written shareholders' agreement signed before you start any work at all or put anything into it.

I disagree!

Just never start a business with another person.

The exception is if you have been married to that person for a few decades and have already been through thick and thin together. If you know all their darkest secrets and they know all your darkest secrets - well, then maybe you might just be able to go into business together. But never before!

Another exception could be your own children and you are going to give them the company in the long run anyway. (And that's give - not sell!)

Or as Warren Buffett said, "It is infinitely preferable to have a friendship based on business, than a business based on friendship."

 

[Deleted member 335660]

Hi

Thanks so much for your reply

Yes I feel very let down after offering so much initially, the lease is currently in my sole name and not the company and so I can I think renew the lease direct with the landlord as I have a good relationship with him, the business partner is desperately trying to contact the landlord to sign the lease independently ultimately disregarding myself.

Seems a good way to get back some control.

 

[Lisa Thomas]

I wouldn't renew the lease unless and until you have come to an agreement, otherwise you might commit yourself to a liability for a premises where the company does not or cannot trade.

 

[The Resolver]

....trying to exclude me from information relating to the business

Can you be more precise as to the 'information being denied'?

You should refer him to s388 (1) (b) of the Companies Act 2006 which requires

that accounting records

"must at all times be open to inspection by the company's officers."

You as a Director are an 'officer'.

Accounting records are more than the accounts and extend to assets , liablities, stock etc . See definition in s386

Once again this is a classic case for mediation. See my page on Shareholder Mediation