shareholder rights post director resignation

[Anon_2011_2011]

Hi
I am in the process of considering leaving a business and would be very grateful of any advice.

I joined up with a couple of guys that I've known for many years and they had set up a consultancy and development business about 4 years ago. They approached me to join them about a year ago and I bought into the 2 business. 1 is the main business where the consultancy work is run through and the second is where a development project is being progressed.
There are some issues in the business that I'm not comfortable with and looking to leave but wanted to understand the risks around my investment.

I paid a fairly significant sum into both business to obtain an equal share. Mostly this was into the development business where there is a project which we are funding a planning application at our cost but realise a significant windfall by way of a promotion agreement (payable over 4 years) if we achieve planning approval.

We are about to submit the planning application but the costs are much higher than previously indicates and the main business does not currently have sufficient funds to cover this so it may be delayed until there is sufficient consultancy income or borrowing to pay for the remaining costs to make the application.

If after I have left and the planning application is unsuccessful then clearly I have lost my investment which was my measured risk when I made the investment. However, if the application is successful I would want to at least recover my initial investment.

I currently have a very good relationship with the other guys but we have no shareholder agreement although we have had one drafted, which is based on if you leave the main consultancy business you are obliged to offer your shares back for sale at market value and the development business you can retain your shares as that in theory is not an operating business and more of an investment vehicle. However, this is not completed.

My question is;

If I resign as a director, how do I protect my investment. If the guys are unhappy with me leaving, I can see that they would look to not pay me the upside 4 year staged payments if planning is successful and could maybe do this by moving money out of that business as they see fit without paying dividends but just move it into the consultancy business and pay salaries or something else other than dividends. Am I best to not resign as a director but go and get another job and wait for them to make an offer. I know there is a short term cash flow issue so they won't be able to buy me out now. Is there anyway I can ensure I see a benefit from a successful planning decision even if I don't see the full upside as I appreciate that doesn't seem equitable if I'm not in the business but at least recover my initial investment. I appreciate it's difficult when you are no longer in the business but I wonder if there is anything I should do to improve my chances before breaking cover? I understand that finalising the shareholders agreement would be a solution but it's not a priority of the other partners and I may have an opportunity with another role in the short term that I don't want to forego before the shareholder agreement is completed.

Any advice appreciated.

 

[nelioneil]

Because the shareholders agreement was not signed, you can simply keep your shares and share a proportion of the profits if a dividend is paid. The other shareholders woule have to buy you out.

If directors would be trying to move money out of the business when there is cash flow problems then they are technically breaching one (or more) of their duties as a director.

 

[Anon_2011_2011]

Thank you for the feedback.

I am wondering if it is better to resign as a director of the consultancy business but retain the directorship and shareholder of the development company.

My concern is that if I am merely a shareholder and not a director of the development business they could pay themselves salaries rather than dividends in the future or merely move the windfall from the development company to the consultancy company just by decision of the directors.

I can't see I have much leverage to stop this.

I see a better solution is to agree something on exit that is palatable for both sides which could be a lower proportion of any future upside by firmer commitments on payment.

At present the relationship is good but I can see when I am out of the business it may be natural over a period of years to construct something such that I don't receive any future benefit as I am no longer contributing to business performance.

 

[Mr D]

Thank you for the feedback.

I am wondering if it is better to resign as a director of the consultancy business but retain the directorship and shareholder of the development company.

My concern is that if I am merely a shareholder and not a director of the development business they could pay themselves salaries rather than dividends in the future or merely move the windfall from the development company to the consultancy company just by decision of the directors.

I can't see I have much leverage to stop this.

I see a better solution is to agree something on exit that is palatable for both sides which could be a lower proportion of any future upside by firmer commitments on payment.

At present the relationship is good but I can see when I am out of the business it may be natural over a period of years to construct something such that I don't receive any future benefit as I am no longer contributing to business performance.

Would you not have similar leverage whether a director or not?

 

[Anon_2011_2011]

My understanding is that as a director you can influence day to day decision making of the business but obviously also responsibilities. Whereas as a shareholder you are not as able to influence business decisions as such but benefit or not from the performance of the business.

 

[Mr D]

My understanding is that as a director you can influence day to day decision making of the business but obviously also responsibilities. Whereas as a shareholder you are not as able to influence business decisions as such but benefit or not from the performance of the business.

And you are currently influencing day to day decision making of the business?

 

[Anon_2011_2011]

Yes, but I am still a director of the business. My query was around if I resign as a director but retain share ownership I am no longer able to influence day to day decision making around how monies are dealt with inside the business. My understanding is that being a shareholder (without a shareholder agreement) is quite a weak position on its own, if you are looking to recover an investment.