Removal of director following fallout

[tricky_situati]

Hi there.

I'm one of 5 directors in my company, a UK Limited company. We are all shareholders (23.5%, 20.5%, 20.5%, 20.5% and 15%). None of us are salaried and take a dividend at the end of each year.

Some of our directors are related through marriage. One of our directors has used his position of authority in the business to conduct an extra marital affair with someone with whom the company had a working relationship. Unfortunately, the wife of the guilty party is the sister of the director who is the majority shareholder. The guilty party holds 20.5% shares. All shareholders (except the guilty party) consider that the situation is untenable and we wish to remove the guilty party as a director. Any financial offer relating to the shares held by the director to be removed would be dealt with separately.

Apart from the obvious rift that this is causing the related directors, we are keen to ensure that we do not leave ourselves open to any claims for unfair dismissal.

The director to be removed has been absent in the day to day running of the company for around 3 months and contact has been minimal.

The company has no other employees and the company is run by the remaining directors. Some work is carried out by freelance workers who invoice the company for their work.

Unfortunately, we have no Articles of Association or Shareholder Agreement in place.

The remaining directors all believe that the company cannot continue with the involvement of the director in question. However, no special meeting has yet taken place and no formal steps have yet been taken to seek to remove the director.

Are we leaving ourselves open to an unfair dismissal suit if we pursue the removal of the director based on his actions and the fact that, due to the enormous breach of trust and abuse of position, none of the remaining directors feel that they can move forward with their continued involvement?

This is a very new situation for us and we have found ourselves woefully unprepared in terms of having any procedures in place. We do have a draft Code of Conduct but recognise that this is not legally binding. It was never formalised by the company.

I would be incredibly grateful for any advice that anyone may have.

 

[WaveJumper]

The person you need advice form before doing anything is our forum member @The Resolver

 

[MikeJ]

@The Resolver

Hopefully he does marriage guidance too, but he'll advise on your options both on getting rid of the director and buying him out.

 

[Newchodge]

One of our directors has used his position of authority in the business to conduct an extra marital affair with someone with whom the company had a working relationship.

You mean they exercised coercive control and committed rape?

 

[Paul Norman]

As mentioned above, this is one for @The Resolver


Because, with no agreements in place, it is going to be about sitting in a room and negotiating a solution.

In any case, that would be my first move - to attempt to convene a meeting to have exactly that negotiation.

The circumstances behind the falling out, in the abscence of any fraud or crime, are relatively irrelevant, and a row about marriage breakups is not going to be the way forward, as far as the company is concerned.

 

[Paul Kelly ICHYB]

The other directors fire them for gross misconduct?

Do not confuse directorships and shareholding.

@TheResolver will probably start with the golden phrase 'shareholder agreement'....

 

[Newchodge]

The other directors fire them for gross misconduct?

Do not confuse directorships and shareholding.

@TheResolver will probably start with the golden phrase 'shareholder agreement'....

Is an extra marital affair gross misconduct?

Absent any agreements can directors fire other directors?

 

[Paul Kelly ICHYB]

Is an extra marital affair gross misconduct?

with someone with whom the company had a working relationship.

With a customer - bring the business into disrepute? If business has been lost, gross misconduct....

If the directors (who are also shareholders) are unhappy with the person, they have the power to remove them.

 

[Chris Ashdown]

You cannot relieve him of his shareholding
Whilst i understand some directors don't like the affair, they may need to consider the difference between Personal life and Business

 

[Newchodge]

With a customer - bring the business into disrepute? If business has been lost, gross misconduct....

If the directors (who are also shareholders) are unhappy with the person, they have the power to remove them.

But they do that as shareholders, don't they?

 

[Paul Kelly ICHYB]

Correct.

I believe directors can also remove them, however, not having articles makes it more difficult, but not impossible!!

 

[Frank the Insurance guy]

Hi @tricky_situati - do you have a Management Liability, or Directors & Officers Insurance policy? They will usually include legal advice, than you can use.

These types of policies, will cover claims made against the individual Directors, Or the Company in relation to any allegations of wrongdoing (eg. misconduct, unauthorised removal of director/shareholder etc).

 

[pentel]

Unfortunately, we have no Articles of Association

In my experience this would be very unusual

 

[tricky_situati]

Thanks for all of your replies so far!

Just to give a bit more background to why we definitely can't continue to work together... we work in the entertainment industry and each of us have a role in performing which requires travelling together as well as performing together.

The director in question has been replaced in the performances by someone freelance for now, and has stepped back from all duties, both of which he has agreed is in the best interests of the business "for now" but we cannot continue to operate this way long term. He is now not involved in the day to day running of the business, nor is he involved in any of the performances which are what generates all of our income. This has been the case for the last 3 months or so.

We know that removing him as a director has to be a separate process to how we deal with him as a shareholder, and have made him an offer to step away permanently but he has indicated his wish to delay this "indefinitely" which none of us want.

I'm now looking into our public liability insurance in case there is any support available to us through our policy.

 

[Paul Kelly ICHYB]

When you get them out as a director, you manage the shares to make his effectively worthless.

With all of the remaining directors and a majority of shareholders on board, this would be little more than an admin task.....

BTW, maybe now look at getting a shareholders agreement!

 

[MikeJ]

When you get them out as a director, you manage the shares to make his effectively worthless.

Please get proper advice before doing this.

 

[Paul Kelly ICHYB]

Please get proper advice before doing this.

Everything about this issue requires proper advice!

 

[The Resolver]

Being a Director is not the same as being an employee. Directors may be taken on as employees, which creates separate rights, but you said no shareholders are salaried in the company. You do not need any reason to remove him as Director. You cannot be guilty therefore of constructive or any other form of dismissal. All you could be guilty of is conducting the business in a way that is prejudicial to his interests as a minority prejudice . However the breach of trust from the events you have shared would likely protect you. But in any case he would have to be a very wealthy guy with a very deep litigation pocket to sue. Its always important when considering of someone can sue to consider if it is a realistic liklyhood. Most people cannot afford to go to court these days meaning there are cynical tactics to consider adopting.

However he might argue a case that removal was a breach of the contract whereby you all got together to form the company (and perform) . It was understood that you would all share the running by being Directors. However, the circumstances, as much as you have told us, would seem to give you good grounds to remove him.

Once he is not a Director he is no longer entitled to much information about the finances and trading of the company. save the full annual accounts (not the shortened version posted to Companies House)

To remove him there is a procedure whereby a shareholder(s) sends a Notice requiring a meeting of shareholders to be held to remove the Director whereupon the company then sends notice of a meeting to be held after at least 14 clear (excluding sending and meeting days) but which also must be at least 28 days after the first notice to the company. It just needs on the day a simple majority vote which you have. He is entitled to attend and have a statement explaining why he should not be removed circulated beforehand. He must be allowed to attend and speak at the meeting.

All this is subject to what is contained in the Articles of Association. You say you don't have one but you do. If none then you are automatically governed by the Model Articles. You can go to the Companies House Register and look up company information. Enter your company's name and scroll down to the first entry for its incorporation You will see if any other Articles were filed.

The major problem with not having a Shareholder Agreement is that you cannot force him to sell his shares. So he could hold onto them and as you issue dividends you must give him his percentage. Ouch! So will need to negotiate. Best for him to think you are not in a rush to have his shares.

Just a thought. The numbers mean that he cannot prevent a Special Resolution (75%) to amend the Articles of Association Have a bespoke set drawn up with a helpful provision for forcing a sale of shares.. However this is again subject to gifting him a minority prejudice claim. You could also cease issuing dividends but then you have limited options as to how to get paid. Maybe as a performance/director/technical fee? Probably result in higher tax .

By all means give me a call for a free 30 mn advice call if want to discuss further and in private. ...hey..no drama (groan)

 

[eteb3]

For my own 2p on this:

he might argue a case that removal was a breach of the contract whereby you all got together to form the company (and perform) . It was understood that you would all share the running by being Directors. However, the circumstances, as much as you have told us, would seem to give you good grounds to remove him.

I would say given the nature of the business (performing together) and his conduct (infidelity towards a fellow performer), the aggrieved parties have a good case that the affair is a repudiatory breach of any such contract, and they are entitled to treat it as having ended.

Were he to assert such an agreement in his own interests, that would seem to me to protect the majority from an unfair prejudice claim, too. He would struggle to show on balance that removing his shares (or rendering them worthless) is unfair, because such an agreement is prior to the articles - it is effectively the shareholders agreement. The courts will protect the “legitimate expectations “ of the parties, on the basis of what a reasonable person would conclude. He would be brave arguing that continuing in the company in the circumstances would be a legitimate expectation.

Things might change if he has put capital in the business. I’m betting not, given how performing arts outfits usually work .

To really keep the reasonable observer happy, you could consider a new class of shares called “working shares”, which get most of the profit, and then distribute a smaller proportion to the existing shares in view of the goodwill built up thus far, since he contributed to it. As time goes on, ongoing contributions to the goodwill eclipse the goodwill generated up to this point. So you can run down the profit distributed on the goodwill shares to nil.

But @tricky_situati give The Resolver a call. I just like thinking about these puzzles; he actually does something with them

 

[The Resolver]

Interesting thoughts. i cannot see trepudistory breach from the facts as we know them . Having an affair doesn’t indicate that in doing so he intended not to be bound by the contract to be made a shareholder and director in the Company.

Creating a new class for working shareholders has some merit if he cannot afford a minority prejudice action although even if he could there is argument that the whole venture was based on all shareholders being active performers snd generally working in the company. He might be then advised to go back to work or at least clearly offer to do so.

There are a number of alternative strategies here that could lead to reaching resolution. Getting him round the table is one

 

[MattDigger]

Hi there.

I'm one of 5 directors in my company, a UK Limited company. We are all shareholders (23.5%, 20.5%, 20.5%, 20.5% and 15%). None of us are salaried and take a dividend at the end of each year.

Some of our directors are related through marriage. One of our directors has used his position of authority in the business to conduct an extra marital affair with someone with whom the company had a working relationship. Unfortunately, the wife of the guilty party is the sister of the director who is the majority shareholder. The guilty party holds 20.5% shares. All shareholders (except the guilty party) consider that the situation is untenable and we wish to remove the guilty party as a director. Any financial offer relating to the shares held by the director to be removed would be dealt with separately.

Apart from the obvious rift that this is causing the related directors, we are keen to ensure that we do not leave ourselves open to any claims for unfair dismissal.

The director to be removed has been absent in the day to day running of the company for around 3 months and contact has been minimal.

The company has no other employees and the company is run by the remaining directors. Some work is carried out by freelance workers who invoice the company for their work.

Unfortunately, we have no Articles of Association or Shareholder Agreement in place.

The remaining directors all believe that the company cannot continue with the involvement of the director in question. However, no special meeting has yet taken place and no formal steps have yet been taken to seek to remove the director.

Are we leaving ourselves open to an unfair dismissal suit if we pursue the removal of the director based on his actions and the fact that, due to the enormous breach of trust and abuse of position, none of the remaining directors feel that they can move forward with their continued involvement?

This is a very new situation for us and we have found ourselves woefully unprepared in terms of having any procedures in place. We do have a draft Code of Conduct but recognise that this is not legally binding. It was never formalised by the company.

I would be incredibly grateful for any advice that anyone may have.

We have had almost exactly the same problem, but even worse behaviour. You will discover that shareholder, director and emplyee are all separate, but in the end you generally have to make a global deal to get out of the situation. It's all about the money. Buying his shares can be difficult and expensive. If the person is out of the business then no need to rush, take your time and reset your articles, contracts etc into your favour. You may need a lawyer, it cost us about £ 35 000 in legal fees due to shareholder agreement etc etc. Once he is gone, suggest write a Shareholder agreement. But even having a good SHA didn't save us from pain and costs. Basically its a bloody nightmare and waste of everyone's time. Good luck.

 

[The Resolver]

it cost us about £ 35 000 in legal fees due to shareholder agreement etc etc.

"Due to"?????? As the patron saint here of Shareholders Agreements I must ask if we can learn a little something about why the SHA led to such high fees. Do you mean it escalated to the court and the SHA didn't prevent that outcome much like an umbrella doesn't prevent rain ? A good SHA should should go a long way to prevent the dispute rising to that level or even getting close to a court. Its not just about mandating mediation but including within the SHA a detailed internal resolution process. Of course someone determined not to agree can only be forced ultimately through litigation but the SHA should help prevent that situation not cause it. Maybe I am reading too much into the use of "due to" ?

 

[Elliot Green]

Hi there.

I'm one of 5 directors in my company, a UK Limited company. We are all shareholders (23.5%, 20.5%, 20.5%, 20.5% and 15%). None of us are salaried and take a dividend at the end of each year.

Some of our directors are related through marriage. One of our directors has used his position of authority in the business to conduct an extra marital affair with someone with whom the company had a working relationship. Unfortunately, the wife of the guilty party is the sister of the director who is the majority shareholder. The guilty party holds 20.5% shares. All shareholders (except the guilty party) consider that the situation is untenable and we wish to remove the guilty party as a director. Any financial offer relating to the shares held by the director to be removed would be dealt with separately.

Apart from the obvious rift that this is causing the related directors, we are keen to ensure that we do not leave ourselves open to any claims for unfair dismissal.

The director to be removed has been absent in the day to day running of the company for around 3 months and contact has been minimal.

The company has no other employees and the company is run by the remaining directors. Some work is carried out by freelance workers who invoice the company for their work.

Unfortunately, we have no Articles of Association or Shareholder Agreement in place.

The remaining directors all believe that the company cannot continue with the involvement of the director in question. However, no special meeting has yet taken place and no formal steps have yet been taken to seek to remove the director.

Are we leaving ourselves open to an unfair dismissal suit if we pursue the removal of the director based on his actions and the fact that, due to the enormous breach of trust and abuse of position, none of the remaining directors feel that they can move forward with their continued involvement?

This is a very new situation for us and we have found ourselves woefully unprepared in terms of having any procedures in place. We do have a draft Code of Conduct but recognise that this is not legally binding. It was never formalised by the company.

I would be incredibly grateful for any advice that anyone may have.

This bit caught my attention for starters:

"Unfortunately, we have no Articles of Association or Shareholder Agreement in place." added emphasis

You sure about that? How did you manage to incorporate?

 

[The Resolver]

You sure about that? How did you manage to incorporate?

He probably meant that they did not submit a set of Articles not realising that If you don’t submit a set the Model Articles apply by default.

 

[Elliot Green]

He probably meant that they did not submit a set of Articles not realising that If you don’t submit a set the Model Articles apply by default.

Absolutely, which means the procedures for director removal exist through the Model Articles and the Companies Act.

 

[The Resolver]

You don't have to tell us, of course, but just wondering @tricky_situati if there is an update? Has he been removed from the Board yet?