Removal of Director

[jayintheuk]

Dear forum members,
Need your advice on the following:
Background: I have set up a limited company with a friend X and Y. X and Y are not known to each others. All three are Directors in the company. I am 50% share holder while other X is 30% and Y is 20%. We have developed serious differences with X, and feel that the relationship is at the verge of breakdown. we are model articles of association, but no shareholders agreement. Y is in full support of me. My Questions are:

1. Given that X and Y were not known to each other prior to setting up this company, could our comapny still fall under the provision of 'quasi-partnership?' given that there is an element of mutual trust and faith between me and X and me and Y, and that all three of us are involved in running the business?
2. In this situation, my intention is to remove X as director. However, I am afraid that in case our company gets classified as 'quasi-partnership,' then X can claim 'unfair prejudice' in the court, which i would not want to happen.

3. If i put in place a share-holders agreement before initiating any steps to remove X from directorship, will it avoid getting the company classed as 'quasi-partnership?' I have read somewhere that if there is well crafted shareholders agreeement, it will be quite difficult for courts to class a company like ours as 'quasi-partnership' . The reason I am asking this is because the removed director cannot claim unfair prejudice in the case of purely a limited company; which avoids costly legal battle in case the removed director appraches courts. Also, in such situation, the value of his shares can be discounted heavily.

Please advice.
thanks

 

[Scalloway]

Given that X and Y were not known to each other prior to setting up this company, could our comapny still fall under the provision of 'quasi-partnership?' given that there is an element of mutual trust and faith between me and X and me and Y, and that all three of us are involved in running the business?

From what I can read there is not a chance of it being a quasi partnership. You have only got together to form a company, you are not three mates who have decided to form a company together.

Get a shareholders agreement drawn up as soon as possible for the day you and the remaining partner fall out.

 

[John Hemming]

I have seen a dispute about "unfair prejudice" and I did not see that it required something to be considered as a quasi partnership. However, this is a complex area of law and I may be wrong.

 

[Chris Ashdown]

Its often good news that there are differences of opinion in the board so that all future decisions are made after considering both sides of the argument.

You say you can do this but its not you the articles would be a board decision and any decision should not prejudice one person who is a shareholder in the company, you need to tread very carefully and take expert legal advice

Removing him as a Director he still retains his 30% of the company

 

[Frank the Insurance guy]

We have developed serious differences with X, and feel that the relationship is at the verge of breakdown.

If this is the case I can't see X signing a shareholders agreement unless it is heavily weighted in X's favour!

 

[The Resolver]

Here is an excellent commentary on Quasi Partenrships

A far more important matter to address initially than whether or not there is a quasi-partnership is whether the breakdown in the relationship is capable of repair, if not directly, then through mediation. Secondly whether such breakdown is sufficient , in the interests of the company, to justify removal from the Board.. Happy to give some advice privately if you were to call me.

 

[Andrew Marsden]

Dear forum members,
Need your advice on the following:
Background: I have set up a limited company with a friend X and Y. X and Y are not known to each others. All three are Directors in the company. I am 50% share holder while other X is 30% and Y is 20%. We have developed serious differences with X, and feel that the relationship is at the verge of breakdown. we are model articles of association, but no shareholders agreement. Y is in full support of me. My Questions are:

1. Given that X and Y were not known to each other prior to setting up this company, could our comapny still fall under the provision of 'quasi-partnership?' given that there is an element of mutual trust and faith between me and X and me and Y, and that all three of us are involved in running the business?
2. In this situation, my intention is to remove X as director. However, I am afraid that in case our company gets classified as 'quasi-partnership,' then X can claim 'unfair prejudice' in the court, which i would not want to happen.

3. If i put in place a share-holders agreement before initiating any steps to remove X from directorship, will it avoid getting the company classed as 'quasi-partnership?' I have read somewhere that if there is well crafted shareholders agreeement, it will be quite difficult for courts to class a company like ours as 'quasi-partnership' . The reason I am asking this is because the removed director cannot claim unfair prejudice in the case of purely a limited company; which avoids costly legal battle in case the removed director appraches courts. Also, in such situation, the value of his shares can be discounted heavily.

Please advice.
thanks

You must be very careful before seeking to dismiss a fellow shareholder from his position as a director. If it was agreed or understood (even implicitly) that for so long as he was to hold his shares he should be entitled to be a director then dismissal of him might well involve unfairly prejudicial conduct and you might be compelled to buy his shares at their “fair value”.

 

[KAC]

I am an experienced commercial barrister. I help to resolve disputes between people in business together. The issues arising out of the circumstances you describe are precisely within my field of specialist expertise. You must be very careful before seeking to dismiss a fellow shareholder from his position as a director. If it was agreed or understood (even implicitly) that for so long as he was to hold his shares he should be entitled to be a director then dismissal of him might well involve unfairly prejudicial conduct and you might be compelled to buy his shares at their “fair value”. If you contact me I can let you have a detailed free guide to the law in this area. All best

Hi @Andrew Marsden It would be helpful to other forum members if you were able to explain that advice on the forum or maybe a link to the advice when you have sufficient post count ... and welcome

 

[Andrew Marsden]

I actually do publish a comprehensive guide to the law in this area and would happily post a link to it but I am not able to do so as a new member of this forum. Please do feel free to visit my Commercial Chambers website to download a copy

 

[KAC]

I actually do publish a comprehensive guide to the law in this area and would happily post a link to it but I am not able to do so as a new member of this forum. Please do feel free to visit my Commercial Chambers website to download a copy

Chambers here
Guides here

 

[Andrew Marsden]

Thank you KAC

 

[John Hemming]

Thank you KAC

I had a quick glance at these. I am quite an experienced LiP and lay advisor having won cases in both the Criminal Court of Appeal and Civil Court of Appeal with some experience with international courts of settlement.

What I would say is that they are very useful to the specialist. However, if you are doing direct access you would need a lower level explanation.

 

[KAC]

I had a quick glance at these. I am quite an experienced LiP and lay advisor having won cases in both the Criminal Court of Appeal and Civil Court of Appeal with some experience with international courts of settlement.

What I would say is that they are very useful to the specialist. However, if you are doing direct access you would need a lower level explanation.

Having now read one of the articles, I don't disagree with you as the individual seeking direct access would not have access to the citations listed. Having said that, the narrative is an useful read for anyone interested in the subject

 

[WaveJumper]

This defiantly sounds like a tread very carefully situation to me. I would really try to get round the table and thrash out the issues you obviously all had some common interest in the beginning and as suggested above if this fails try some form of mediation.

I would hope all three of you are going to realise the alternative to not working out the differences are, its going to get expensive very quickly, if you are not careful the only winners will be the lawyers.

I hope you can all come to some amicable way forward

Andrew a warm welcome to the forum thanks to your links I now appear to have a lot of bedtime reading ahead of me

 

[jayintheuk]

From what I can read there is not a chance of it being a quasi partnership. You have only got together to form a company, you are not three mates who have decided to form a company together.

Get a shareholders agreement drawn up as soon as possible for the day you and the remaining partner fall out.

Thanks for response. My understanding from reading on the net and on speaking to few people (including a solicitor) is that for a limited company to be classed as quasi-partnership, following things should be there (Ibrahami case):

• An association formed or continued on the basis of a personal relationship involving mutual confidence
• An agreement that all or some (there may be sleeping members) of the shareholders will be involved in the conduct of the business
• Restrictions on the transfer of a member's interest (i.e. on disposal of shares)

Accordingly, since me and X have been friends (though X and Y are not) for few years prior to starting our company, I fear this would establish 'personal relationship and mutual confidence'. Plus all three all involved in running the business and the understanding was that if anyone of us was to leave the business, the shares would be offered to the remaining partners. Based on these points, i feel that our company is highly likely to be classed as 'quasi-partnership.' any further thoughts?

please check : clough-willis.co.uk and search when-is-a-company-not-a-company

 

[jayintheuk]

If this is the case I can't see X signing a shareholders agreement unless it is heavily weighted in X's favour!

Yes, you are absolutely right. But my dilemma was- should I even try to put in place a shareholder's agreement before bringing the fight out in open?

 

[jayintheuk]

You must be very careful before seeking to dismiss a fellow shareholder from his position as a director. If it was agreed or understood (even implicitly) that for so long as he was to hold his shares he should be entitled to be a director then dismissal of him might well involve unfairly prejudicial conduct and you might be compelled to buy his shares at their “fair value”.

Thanks. I know I have to be very careful. yes, it was agreed that so long a person has shares, he will be Director, though it was all verbal. However, his behaviour and attitudes have been of such nature that it has become impossible to tolerate him anymore. He has been negligent of his role and has not put his 100% in the business, which has caused deep resentment inside me and Mr Y. In this situation, it seems highly unlikely that we call all three work togather.

 

[jayintheuk]

I actually do publish a comprehensive guide to the law in this area and would happily post a link to it but I am not able to do so as a new member of this forum. Please do feel free to visit my Commercial Chambers website to download a copy

Thanks Andrew. Will do. Am I able to speak to you on phone on this matter?

 

[jayintheuk]

This defiantly sounds like a tread very carefully situation to me. I would really try to get round the table and thrash out the issues you obviously all had some common interest in the beginning and as suggested above if this fails try some form of mediation.

I would hope all three of you are going to realise the alternative to not working out the differences are, its going to get expensive very quickly, if you are not careful the only winners will be the lawyers.

I hope you can all come to some amicable way forward

Andrew a warm welcome to the forum thanks to your links I now appear to have a lot of bedtime reading ahead of me

Thanks Wavejumper. very nice piece of advice. unfortunately, the resentment has now set in so deeply that I donot see a chance of reconcilliation, but of course I will try my best to find an amicable way out

 

[The Resolver]

Andrew just had a quick flip through your guide which is extremely useful. I mediate/negotiate rather than litigate but your guide will help me more easily identify relevant caselaw that could help in identifying litigation risk. Many thanks for this and to KAC for providing the links.

If its not too cheeky, any chance you might be considering a similar one on breach of directors' duties (s172-175) and also on winding up by court of solvent companies under the Insolvency Act 1986 on the just and equitable basis when shareholders fall out. These can all be relevant when shareholders fall out of love.