Sacking a director.

[noodlemad]

Hi,

Firstly, I am aware of an older thread on this topic (sorry, I can't post a link to it but it's thread 19523, entitled "Sack a director" in this forum), from 2006 but I am aware there have been changes in law since then. I have a slightly different problem but still involving a non-contributing director.

There were four of us who came up with the idea of forming the company whilst we were at university (we all graduated in August 2010). We all had skills from former employments which would be an asset to the company. However, by this September when it came time to form the company, it was patently obvious to three of us that the fourth was not contributing, either materially to the intellectual property of the company or financially to the various start-up costs we were incurring.

We set the company up as a Limited company with shares being split 25% each.

We were fortunate enough to win some funding from an enterprise scheme that the university are involved with and that included an induction training programme. Our fourth director was meant to be a financial whizz (from his own claims) yet during basic accounting lessons he messed up what were fairly basic cashflow calculations. This caused us all some real concerns, as we were hoping he would redeem his lack of input in the form of his claimed financial expertise. It's important to note, that he did not offer any measurable input into the development of the initial business plans and the sales forecasts were prepared by another director.

The funding takes the form of ongoing help with company overheads (not salaries) and represents around 75% of our anticipated minimum overheads for our first year's trading.

Two days after the scheme induction where this chap had embarrassed himself by cocking up some basic finance calculations, we received an email from him telling us that although the venture was "his first commitment" he had enrolled (without telling us) on a full time postgraduate course that started the following Monday (three days later). We are aware that this particular course typically requires 30+ hours per week of commitment. Consequently, we all felt that there was no scope for him to be able to contribute an equal share of effort into the venture.

We voiced our concerns and invited him to come to discuss the situation. We had already arranged formal directors meetings for each day the following week to discuss important structural details. Because of his postgraduate studies, he failed to attend any of these sessions. We have since then (over a month ago) not seen him and not had any input from him.

He avoided a meeting to discuss the issue for several weeks, at which time he made it clear he intended to be as awkward as possible over the matter and specifically stated he intended to keep hold of the shares and "cash in on a dividend" at the end of the first year's trading. We have also heard this is what he has been telling others too.

What can we do? We are aware we, as directors, can dismiss him and remove him as a director with a 288b. However, what process should (if any) we follow? Is it the same as employment law where he has minimal rights prior to completing 12 months continuous service, or is a directorship more (or less) stringent?

Dissolving the company is not an option. We have spent literally thousands of pounds in set up costs, marketing materials, plus affiliation with entities in connection with our industry sector which we will lose. To wind the company up would also mean a waste of hundreds of hours of work.

Also, anything that involves altering the Articles of Association is potentially too expensive for us at this stage (we have a fairly standard set of documents provided as a 'package' by our accountants).

We have also had it suggested to us that we can hold a shareholders meeting and water down the ordinary share issue and replace them with a new class of shares. It appears the Companies Act 2006 has many provisions to allow the dissolution of share issue.

So, does anyone know if any of this is possible? What pitfalls are there in simply dismissing him?

Any help would be much appreciated!

 

[ANOTHER REBEL]

I presume that he is not receiving a wage, and therefore he is not an employee of the company.

There are therefore no implications to removing him as a director.

Removing him as a shareholder, or diluting his shareholding is a different matter.

Before suggesting the best course of action, further information would be required.

What is the share capital of the company and is this fully paid up?

Has he contributed anything that can be quantified in money?

How much have the other 3 of you put in individually?

Presumably the other 3 of you are actively involved, and would therefore qualify if you do not do so at present to take a salary from the company?

 

[noodlemad]

I presume that he is not receiving a wage, and therefore he is not an employee of the company.

There are therefore no implications to removing him as a director.

Removing him as a shareholder, or diluting his shareholding is a different matter.

Before suggesting the best course of action, further information would be required.

What is the share capital of the company and is this fully paid up?

Has he contributed anything that can be quantified in money?

How much have the other 3 of you put in individually?

Presumably the other 3 of you are actively involved, and would therefore qualify if you do not do so at present to take a salary from the company?

Hi,

In order, the answers are:

Share capital would be £400 based on £1 per ordinary share (if this is what you were referring to). No, we have not paid this up as yet.

He has not contributed one red cent. In fact, when we were in the "discussions" phase, he even took £10 off one of the other directors who politely offered him some money for petrol when he shared a lift with him one day when we came to view what later turned out to be our offices!

I cannot think of a single thing he has contributed materially, aside from travelling to the above viewings on a couple of occasions (which we all equally did). Not one document or policy we have created has had any alteration by his input whatsoever.

The remaining three directors have each contributed between £500 and £800 depending on the circumstances of when we've needed to buy things and the money has been due. Two of us have a 70 mile round trip to the office which costs a considerable amount in fuel (which we have previously agreed, along with salaries, will all be reimbursable once we have the funds). We have also consistently put in around 40-60 hours effort each week on the various tasks the set-up has required.

Yes, the three of us would all qualify for a salary based on our individual efforts.

 

[ANOTHER REBEL]

Realistically could he come up with £500 if by not doing so he either lost his shares, or his shareholding of 25% was diluted to 5%?

 

[noodlemad]

If he thinks he could be in line for a share of our predicted profits then we reckon he'd come up with up to £10k if pressed for it. We really want to avoid having to share out one penny of our hard-earned cash to someone who has done absolutely nothing to get it.

 

[kulture]

The problem is that unless you buy his shares from him, then the company as -is is owned 25% by him. So he gets 25% of all the dividends. It does not matter how much or little he has worked.

 

[Chris Ashdown]

Just to confirm you cannot reduce his 25% holding as previous said, but you can issue new shares and offer them at the same ratio as the previous share holding, these new shares can be say £5000 each, if he declines the offer then his shares would be reduced as a % of overall shares, But an Big But he may subscribe

 

[ANOTHER REBEL]

Just to confirm you cannot reduce his 25% holding as previous said, but you can issue new shares and offer them at the same ratio as the previous share holding, these new shares can be say £5000 each, if he declines the offer then his shares would be reduced as a % of overall shares, But an Big But he may subscribe

The reason for my questions, was to find out how feasible it would be to have a rights issue, which if he did not take up would dilute or reduce his % shareholding.

Perhaps a better option is for the three of you to set up an new company.

Call a shareholders meeting and pass a motion to sell the existing company to the new company for the par value of the shares.

The new company would then own the business. He would be entitled to the amount received for his shares £100 less what he owes for them £100 = £0

 

[Williams lester]

The reason for my questions, was to find out how feasible it would be to have a rights issue, which if he did not take up would dilute or reduce his % shareholding.

Perhaps a better option is for the three of you to set up an new company.

Call a shareholders meeting and pass a motion to sell the existing company to the new company for the par value of the shares.

The new company would then own the business. He would be entitled to the amount received for his shares £100 less what he owes for them £100 = £0

But, unless there is a shareholders agreement in place to do this, the new company can only buy 75% of the shares (those of the shareholders wishing to sell), so nothing will change.

 

[noodlemad]

Via some parallel enquiries to this thread, I believe that the new legislation allows for a 75% majority shareholding to vote to amend the articles of association and effectively introduce an agreement for sacked (or otherwise departing) directors (or their beneficiaries) to be compelled to sell to the remaining shareholders.

So, the process would be:

1. At a shareholder meeting, a 75% majority resolves to amend the articles to the effect that any departing director must sell their shares to any remaining directors on departure for face value. This must have a 28 day period before becoming effective within which time any objecting shareholder may challenge the amendment via the courts (apparently they pay costs regardless of the outcome).

2. After 28 days, change the Articles of Association to reflect the decision.

3. Dismiss the useless Director by vote of the working directors.

4. Buy his shares from him (currently worthless) less the amount owed for them.

If anyone can see a problem with any of that, to the effect that you *know* of any pitfalls, please comment!

** Just to reiterate, this director has made NO material contribution whatsoever - the original idea for the business was that of one of the remaining three directors. It does now appear that this individual has sought all along to convince us of his intention to be involved whilst all the time plotting to do postgraduate studies and have those studies funded by a dividend on the shares he was given based on his promise to be involved in the day-to-day running of the business. He has done no work whatsoever. **

 

[jim_price]

Beware the law of unintended consequences. If you change the Articles in such a manner then consider what may happen if you fall out with the remaining directors and are forced out.

Ensure you follow the correct procedure in removing the director, i.e. he is given notice of, and is entitled to attend, the meeting at which his removal is to be discussed etc.

An alernative scenario could involve the 3 working directors setting up another limited company (NewCo) with NewCo charging the existing company for the provision of your services. You then take profits out of the existing company which can be drawn as dividends from NewCo. That would prevent him participating income wise but you would still need to force a sale or dilute him at a later date.

 

[noodlemad]

Good advice Jim. Yes, it is always a case that an action has a consequence. However, I think the three of us who are making an effort have no qualms about putting that mechanism in place as we are all committed to pulling our weight and not the kind of people to take advantage of the generosity of others.

We would still always be able to sack directors under company law as nothing in the articles will prevent that, and I think that a "fair price" for the shares to the estate/disposed director is equitable. There are always other remedies available in the future once the employment status is established.

Right now we just need to shed a parasite.

 

[jim_price]

Take care with the terminology used. In your earlier post you referred to face value, you are now talking about fair value which could be very different things. I agree that fair value would generally give an equitable result.

 

[noodlemad]

I think the "fairest" way of getting a value is by way of our nominated accountant. Naturally, with no clients as yet and the only asset being a well designed operations manual and back office system (neither of which have received any input from the departing director) with debts to the existing directors of several thousand pounds, I would assume the only "fair" price would be zero.

As it is, if the shareholders could be liable for debts, then he would have to chip in over £500 to make them worth nothing, so getting nothing for them is a saving of £500 (I know it doesn't work like that, but all the same it does put the matter into perspective).

 

[Chris Ashdown]

directors are liable for the debts not shareholders

Quite honestly there is absolutly no reason for and wise person to sell their shares unless offered a large insentive,

Much better to close down the company and start again with a new company and good shareholders agreement, let the new company buy the assets at a fair price

 

[noodlemad]

directors are liable for the debts not shareholders

Quite honestly there is absolutly no reason for and wise person to sell their shares unless offered a large insentive,

Much better to close down the company and start again with a new company and good shareholders agreement, let the new company buy the assets at a fair price

I know shareholders aren't liable, which is why I said "IF".

The whole point of the discussion here was because we've done way too much work setting up the company and registering with various bodies at considerable expense to wind the company up. At this stage, we simply couldn't afford to do it all over again. He knows this, which is why he's being such an arse about it all.

We've been advised that an acceptable method is a written resolution to amend the articles so that a dismissed or departing director or their estate must offer his shares to the remaining shareholders for a reasonable period at the price that was paid for them. This has to be via 75% majority, which we have.

Then, immediately as the amended articles are formally accepted we can sack him. He has no protection from an employment law perspective, and we have more than enough justification on account he has done absolutely nothing and failed to attend over five formally called directors meetings.

 

[MikeJ]

I'm no expert, but that can't be right.

On that basis, let's pretend that the company has done really well, and is now worth a million quid. You're suggesting that the three of you would be able to gang up on the fourth and buy his 25% share of the company for the original value?

 

[noodlemad]

Yes, that's right.

Don't forget that he does have the right to challenge any of this in court, which is where the maxims of equity ought to come into play. Basically, he did nothing to get the shares (except make a promise to work with us on a joint basis, all the time knowing he had no intention of doing so), has done nothing as a director since getting the shares, has not paid up his capital for the shares, and the company is worth less than zero.

This revolves around company law and contract law. We are all agreed that the articles are our collective contract, subject to the limits of company law. Additionally, we all agreed at the outset that in the interests of the business we would all work for five years or forego our stock. Our articles, and therefore the terms we all work under, can be amended by majority vote, subject to statutory notice periods and the right to challenge in court.

Not all shareholders usually agree to the direction they want the company to head. Many objected to the recent demutualisation of Standard Life, for example, but it went ahead on a majority vote.

Out of interest, what do you think a judge is likely to say he is owed for his shares, if he were to argue his case before a court?

 

[Chris Ashdown]

Whilst I can understand you getting together and ammending the shareholders agreement, I don't believe you can act on existing shareholders in this way, but only those who have signed up for it and new shareholders

Hundrens of thousands of shareholders have no involvement in companies except to collect any dividends going, you cannot force someone to sell something they own

 

[noodlemad]

But this is specifically geared around directors who are also shareholders. The essence of it is that the directors only hold (ordinary) shares because they have a vested interest in the success of the company. If they don't want to work for the benefit of the company, then they get sacked and lose their shares. It's an incentive, which all directors subscribe to.

The articles will be amended, by a majority decision, to state that any company director leaving or being dismissed from the company is to offer their shares to the remaining shareholders at the price they paid for them. Dismissal can be challenged, but I don't think a challenge can be made to the amendment of the articles. This is just a means to an end.

 

[Chris Ashdown]

Still disagree to retrospect action it would be challenged

Also the three or four of you build up the company to say a four million pound value and then the remaining directors dismiss one as a director for any reason good or bad (maybe has a breakdown and cannot work anymore), he gives back his shares for £1

Get real and see a lawyer and stop talking rubbish

 

[noodlemad]

Still disagree to retrospect action it would be challenged

Also the three or four of you build up the company to say a four million pound value and then the remaining directors dismiss one as a director for any reason good or bad (maybe has a breakdown and cannot work anymore), he gives back his shares for £1

Get real and see a lawyer and stop talking rubbish

Well, Chris Ashdown, it's sorted:

1. Articles amended, passed with a majority shareholding and lodged with Companies House.
2. Director formally notified of the intention to dismiss him with the reasons for the intention.
3. Meeting held (to which the director was invited and failed to attend) and motion passed by the remaining board for dismissal.
4. Companies House notified of the dismissal after the required appeal period had passed.
5. Shares transferred as per the Articles.
6. Shares dissolved.

So, not rubbish at all, because it is all real and it happened without any hitches.

Like I've said all along, the dismissed director has the opportunity to have the actions challenged in the courts, where they would take an equitable view on any damages he may be awarded. His dismissal is all above board, and the removal of his shares, even if considered unfair, would only have a remedy in equity (which is where I had previously said he would be entitled to a fair price for them). Equity would look at the conduct of all parties and he knows as well as we do that in our case the court would find he is entitled to nothing.

Situations like this need positive and decisive action, which is why we asked if anyone else had ever had knowledge or advice regarding the SAME situation to deal with. We had already discussed the matter on a legal basis and knew what we had to do legally, we just wanted to know if anyone else with experience had been in a similar situation and invited comment from their practical experiences rather than being insulted.

So, thank you to all of the others who posted positively in this thread. I just wanted to let you know that our problem had a relatively straightforward solution in the end.