Removing a minority shareholder

[olp12]

I set up a limited company 4 years ago with a business partner with 50/50 shares in the company. Due to personal circumstances, the other director/shareholder decided to leave the company and became a 20% shareholder and i am now majority (80%)shareholder and sole director of the company. The company is still operating at a loss and i have offered to buy the remaining 20% shares (which are worthless in value) but our professional relationship has turned sour and they are refusing to do so and have also refused meditation. The only resolution I can see now is to wind up the company and transfer the assets to another company - am I able to set up a new limited company in the same industry and then stop trading in the old company and dissolve it after a few months. Can I use the same branding of the current company for the new company? Could any legal comeback come from this?

 

[ethical PR]

I set up a limited company 4 years ago with a business partner with 50/50 shares in the company. Due to personal circumstances, the other director/shareholder decided to leave the company and became a 20% shareholder and i am now majority (80%)shareholder and sole director of the company. The company is still operating at a loss and i have offered to buy the remaining 20% shares (which are worthless in value) but our professional relationship has turned sour and they are refusing to do so and have also refused meditation. The only resolution I can see now is to wind up the company and transfer the assets to another company - am I able to set up a new limited company in the same industry and then stop trading in the old company and dissolve it after a few months. Can I use the same branding of the current company for the new company? Could any legal comeback come from this?

If you are trading insolvently, speak to an insolvency practioner. Close company down - you shouldn't trade whilst insolvent.; You will probably be able to buy back company assets. I don't believe you can use the branding but ask your insolvency practioner.

 

[DontAsk]

You will probably be able to buy back company assets. I don't believe you can use the branding

Why not? Assets can include IP.

 

[Chris Ashdown]

Why not? Assets can include IP.

The other shareholder could outbid you for the assets, I presume the liquidator would have to contact all shareholders to liquidate the company
The other person took the risk in investing either time and or money into the business and you now want them out, put yourself in there position and think how you would act

 

[eteb3]

am I able to set up a new limited company in the same industry and then stop trading in the old company and dissolve it after a few months.

You'd have to tread very carefully here.

If OldCo is still alive and well, and even for some time after its wound up/ceases trading, a director "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". Your duty to the company and your personal interests must not conflict. (Put another way, your decisions as a shareholder and your decisions as a director are fundamentally different.)

You must "account to" (reimburse) OldCo for any profit that comes your way personally from an advantage your position as a director gives you (eg, knowledge of OldCo's client list). This applies even if OldCo couldn't have made the profit itself.

There's an exception if the directors of OldCo have authorised the conflict; but if you attempted to authorise yourself to set up NewCo you'd be a conflicted director, and I suspect you'd be opening yourself to an unfair prejudice petition.

 

[olp12]

You'd have to tread very carefully here.

If OldCo is still alive and well, and even for some time after its wound up/ceases trading, a director "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". Your duty to the company and your personal interests must not conflict. (Put another way, your decisions as a shareholder and your decisions as a director are fundamentally different.)

You must "account to" (reimburse) OldCo for any profit that comes your way personally from an advantage your position as a director gives you (eg, knowledge of OldCo's client list). This applies even if OldCo couldn't have made the profit itself.

There's an exception if the directors of OldCo have authorised the conflict; but if you attempted to authorise yourself to set up NewCo you'd be a conflicted director, and I suspect you'd be opening yourself to an unfair prejudice petition.

Yes all sounds very difficult and costly! Another thought ... could i force a buyout of the shares through my majority?

 

[Newchodge]

Yes all sounds very difficult and costly! Another thought ... could i force a buyout of the shares through my majority?

Only if it is in the shareholders' agreement.

 

[olp12]

Only if it is in the shareholders' agreement.

Ah sorry i forgot to say that we don't have a shareholders agreement so the plan would be to update the articles of association as 80% shareholder

 

[Newchodge]

Ah sorry i forgot to say that we don't have a shareholders agreement so the plan would be to update the articles of association as 80% shareholder

I expect you can update the articles but you cannot create a shareholders' agreement without the agreement of all the shareholders. The clue is in the name.

 

[Ozzy]

Ah sorry i forgot to say that we don't have a shareholders agreement so the plan would be to update the articles of association as 80% shareholder

Be careful with this line of thought because you could be opening yourself up to legal action, is it worth it?

If you cannot resolve the dispute (@The Resolver may have some input here) then winding up will likely be the cleanest option. You can then buy any assets from the IP, including the brand if need be, but the IP will be obligated to get the most value for the assets so the other shareholder could out bid you as mentioned above - but would they really bother to do that?

Or call a board meeting, and agree as both shareholders on who is to be the new director to take over the business running as you are resigning to go your separate way. You remain majority shareholder, but as shareholders you need to decide who will run the company for the both of you.

As a 20% holder they are still a PSC, so have significant rights and control.

 

[eteb3]

could i force a buyout of the shares through my majority?

Nope, no more than you can force Mr 20% to sell his house.

in a shareholders’ agreement You would expect a drag-along clause if you were to sell the shares to someone else, but not if you just want to force someone out. (Tho of course an agreement could say more or less anything you all agree to)

 

[eteb3]

the plan would be to update the articles of association as 80% shareholder

any differential treatment as between you and ?him would introduce class rights, and would need to be accepted by 75% of votes by each class - and since you’re proposing two classes of one shareholder each, you’re in the same position if you try that route

 

[japancool]

Before anyone else says it...

What does your shareholder agreement say?

This sounds like a job for @The Resolver.

 

[Ozzy]

Before anyone else says it...

What does your shareholder agreement say?

This sounds like a job for @The Resolver.

11:49am called and it wants your comment back; (commented here)

??

 

[olp12]

Before anyone else says it...

What does your shareholder agreement say?

This sounds like a job for @The Resolver.

Thanks all! We don't have a shareholders agreement in place (lesson learnt) but I have arranged a call with The Resolver on Monday.

 

[japancool]

11:49am called and it wants your comment back; (commented here)

??

Bah humbug, foiled again.

 

[eteb3]

As a 20% holder they are still a PSC, so have significant rights and control.

Not a PSC: can’t block a special resolution (which is the relevant test in this case).

 

[fisicx]

Just to confirm, this other person is only a shareholder. They aren’t a director anymore.

If so you can wind up the company whenever you want. They get 20% of the asset sale (I believe) and after that you never have to talk to them again.

 

[Ozzy]

Not a PSC: can’t block a special resolution (which is the relevant test in this case).

Sorry yes you are correct, it’s 25%+ to be a PSC

 

[Chris Ashdown]

You state you are still making a loss, so does that mean you are insolvent and if so after 4 years why do you want to buy the assets, what part of the asset do you want and why. a totally fresh start with your new found experience may be a far better option.

 

[olp12]

I'm gradually building up a client base now and worked hard on building an online reputation - we were hit by Covid so was making a loss there but the potential is there - the debt that sits in the company is the Bounceback loan. If i did liquidate insolvently and start over, I'd be rebuilding a brand an reputation from scratch since i can't have a similar sounding name or branding (probably what the other shareholder intends as an all or nothing). I have offered a more than generous amount for the shares, which i'd have to pay out of my personal funds, but they don't deem it suitable due to their 'personal sacrifices' (we set up the company together 4.5 yrs ago and they left after 5 months ) and have counteroffered 10x more than my proposed offer which obviously isn't in the company.
The shareholder has said they will ask for an audit of the company which i know they're entitled to do as +10% shareholder but where do i stand with this if there aren't any funds in the company to do this?

 

[Chris Ashdown]

I'm gradually building up a client base now and worked hard on building an online reputation - we were hit by Covid so was making a loss there but the potential is there - the debt that sits in the company is the Bounceback loan. If i did liquidate insolvently and start over, I'd be rebuilding a brand an reputation from scratch since i can't have a similar sounding name or branding (probably what the other shareholder intends as an all or nothing). I have offered a more than generous amount for the shares, which i'd have to pay out of my personal funds, but they don't deem it suitable due to their 'personal sacrifices' (we set up the company together 4.5 yrs ago and they left after 5 months ) and have counteroffered 10x more than my proposed offer which obviously isn't in the company.
The shareholder has said they will ask for an audit of the company which i know they're entitled to do as +10% shareholder but where do i stand with this if there aren't any funds in the company to do this?

Everyone always state there is potential there, but if so why have you not used it. If you liquidate the company you also cancel the bounce back loan ( as long a used correctly) which would remove i assume a large burden