No longer a director but still own 50% of the company — feeling stuck and worried

[hazzard a guess]

I’m looking for some advice, please.


There are two of us in the business, both equal partners (50/50). I’m approaching retirement, and we agreed on a buyout sum for my share of the company.


We have a van on a finance lease that’s coming to an end, and a balloon payment is due. The plan was for my business partner to take out finance for this, with him standing as guarantor (I didn’t want to, as I’m stepping away from the business).


On his suggestion, I stepped down as a director — he is now handling the finance application in his name. However, since then, he’s started renegotiating the buyout price we already agreed on, and now he’s also saying he wants to let the shop lease expire and just run the business as a mobile operation.


My concern is that if the shop goes, the value of the business will drop, and I might not get the fair amount we agreed upon.


I’m now really worried — have I made a mistake by resigning as a director? Do I now have no say in what happens to the company, even though I still own 50%?
can i go back on as a director or does he have to approve it?


He’s not behaving as I expected, and I’m genuinely concerned that I might be left vulnerable. Any advice on what rights I still have or what I should do next would be greatly appreciated.

 

[Michael Loveridge]

Do you have a shareholders' agreement (and why do I have a sinking feeling that the answer will be `No'!?)

 

[hazzard a guess]

Do you have a shareholders' agreement (and why do I have a sinking feeling that the answer will be `No'!?)

your sinking feeling is correct

no agreement

 

[fisicx]

Was the buyout sum written down and notarised by a solicitor? In other words: was it all formal.

If the other director is being awkward you need to engage the services of @The Resolver (a really nice bloke. He brought me a beer).

 

[WaveJumper]

I have a feeling to the answer above it is going to be a big fat NO. A good lesson hopefully for other in the future reading this. Unfortunately there's (in nearly all cases) no friends when money comes into the equation and always yes always get proper advice (legal) before agreeing or putting your name to anything.

and @The Resolver call is good advice

 

[Lisa Thomas]

One for the resolver, or a solicitor.

 

[Michael Loveridge]

Whilst it’s easy to be wise after the event, it was a serious mistake to resign as a director without having finalised the buyout deal, as this has left control of the company with your fellow director (who I'll refer to as `Fred' to keep it simple). Assuming the articles of association are in the standard form then with only 50% of the shares you can’t reappoint yourself as a director and it’s inherently unlikely that Fred would agree to reappoint you. However, there’s no harm in asking, and it would be sensible to put your request in writing, with a view to using his response (or lack thereof) as evidence.

You could always try to argue that there was a binding agreement in respect of the buyout, as it’s quite possible to have a legally binding agreement even without anything in writing. The difficulty is one of evidence – if it’s simply your word against his then you would have an uphill struggle.

Do you have any extrinsic evidence at all about the price agreed, such as emails, WhatsApp messages etc?

On the same lines, you could argue a case of promissory estoppel. This is a legal principle that says if you have acted to your detriment (resigning as a director) in reliance upon a promise made by someone (Fred's promise to pay you a specific sum for your shares) and it would be unfair to allow the person making the promise to renege on it you can enforce it as a binding agreement. Again, however, you face the problem of proving what the agreement was.

One possible threat that you could make would be to issue a winding up petition against the company on the basis that you are 50-50 shareholders and have reached a complete deadlock. This situation is known as a quasi-partnership, and sometimes the court will allow a winding up order to be made if there is no other solution. However, it’s a drastic remedy, and although the threat of taking this step might bring Fred to his senses actually proceeding with it should be seen as very much a last resort.

There is also an alternative procedure under section 994 Companies Act 2006 where you can issue an `unfair prejudice' petition. This is basically saying to the court that you are being unfairly treated as a shareholder, and requesting the court to come to your assistance.

The court has the power to order Fred to buy your shares at a price to be set by the court. Again, however, such petitions are notoriously expensive and complicated and as I’m assuming the assets of the company are only fairly modest the legal costs would almost certainly be disproportionate. But as with the threat of a winding up petition it’s possible that the mere threat of such a petition would produce a result.

If you think that Fred would be amenable to negotiation then mediation may be an effective remedy. I was involved in a very similar situation to your own a few years ago, with two shareholders unable to agree anything at all. The case was listed for a two week trial, but on the Friday before the trial was due to start we had a full day mediation. The mediator was extremely effective, and we managed to reach a buyout agreement at 8:30 on the Friday evening, thereby saving something in the region of £100,000 in costs.

But it’s important to realise that mediation can only operate effectively if both parties have a genuine wish to resolve the issue.

 

[Daybooks]

Whilst it’s easy to be wise after the event, it was a serious mistake to resign as a director without having finalised the buyout deal, as this has left control of the company with your fellow director (who I'll refer to as `Fred' to keep it simple). Assuming the articles of association are in the standard form then with only 50% of the shares you can’t reappoint yourself as a director and it’s inherently unlikely that Fred would agree to reappoint you. However, there’s no harm in asking, and it would be sensible to put your request in writing, with a view to using his response (or lack thereof) as evidence.

You could always try to argue that there was a binding agreement in respect of the buyout, as it’s quite possible to have a legally binding agreement even without anything in writing. The difficulty is one of evidence – if it’s simply your word against his then you would have an uphill struggle.

Do you have any extrinsic evidence at all about the price agreed, such as emails, WhatsApp messages etc?

On the same lines, you could argue a case of promissory estoppel. This is a legal principle that says if you have acted to your detriment (resigning as a director) in reliance upon a promise made by someone (Fred's promise to pay you a specific sum for your shares) and it would be unfair to allow the person making the promise to renege on it you can enforce it as a binding agreement. Again, however, you face the problem of proving what the agreement was.

One possible threat that you could make would be to issue a winding up petition against the company on the basis that you are 50-50 shareholders and have reached a complete deadlock. This situation is known as a quasi-partnership, and sometimes the court will allow a winding up order to be made if there is no other solution. However, it’s a drastic remedy, and although the threat of taking this step might bring Fred to his senses actually proceeding with it should be seen as very much a last resort.

There is also an alternative procedure under section 994 Companies Act 2006 where you can issue an `unfair prejudice' petition. This is basically saying to the court that you are being unfairly treated as a shareholder, and requesting the court to come to your assistance.

The court has the power to order Fred to buy your shares at a price to be set by the court. Again, however, such petitions are notoriously expensive and complicated and as I’m assuming the assets of the company are only fairly modest the legal costs would almost certainly be disproportionate. But as with the threat of a winding up petition it’s possible that the mere threat of such a petition would produce a result.

If you think that Fred would be amenable to negotiation then mediation may be an effective remedy. I was involved in a very similar situation to your own a few years ago, with two shareholders unable to agree anything at all. The case was listed for a two week trial, but on the Friday before the trial was due to start we had a full day mediation. The mediator was extremely effective, and we managed to reach a buyout agreement at 8:30 on the Friday evening, thereby saving something in the region of £100,000 in costs.

But it’s important to realise that mediation can only operate effectively if both parties have a genuine wish to resolve the issue.

An excellent reply.

 

[The Resolver]

A great detailed overview by @Michael Loveridge. All I would add is that there may also be a derivative action you could take in the name of the company against the Director for closing the shop (with evidence of as fall down in sales). This would be argued as a breach of his duty as Director under s172 of the Companies Act 2006 :-

"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole......"

The problem is that he has not done this as yet and so how do you present the evidence that a mobile service would not be as successful It may be that despite a reduction in sales through a mobile service, the reduction in overhead leads to an increase in profit.

If you were to succeed with a derivative action he would be ordered to pay the damage sustained into the company, but then this increases the value of your shares.

The problem as ever with pursing your legal rights through the court is the huge cost .

It is usually useful in negotiation to be seen as able to control the plot a little. So one action you could take is to formally call a general meeting of shareholders to consider the threat he is making of changing the nature of the business to a mobile service. There is a notice you as shareholder can serve which forces him as Director to take steps to call the meeting. Her cannot refuse (although he could fail to attend thus preventing a quorum.) This will perhaps at least make him realise that he is at risk if he tales that step without approval of the shareholders.

Do you have login access to Companies House? That could become useful.

There is a tactic that might be available to you to control the vote. That requires you to transfer one of your shares (if possible under the Articles) to someone you can totally rely on for support (say family member). If you both attend the meeting you could vote yourself back on the Board on a head count even though you together only have 50%. To work that requires him to have ignorance of the default voting rules and as a result to fail to say 5 magic words. .

You would then seek to in this way pass a resolution appointing yourself back on the Board perhaps also with your family member to give you full control.

Whilst once he realises how you managed in law to pass the Resolution he would use the 5 magic words in future so any more Resolutions would require his support. But he could not in that way pass a Resolution to remove you and your family member. He would then be insistent that you go through with the share purchase from you.

I think the first step is to take advice on whether you could prove the existence of a binding contract to buy your shares at an agreed price,

You are welcome to avail yourself of my free 30mn advice call at https://www.seeyououtofcourt.com/book-online