Shareholder wants to step down as Director but keep shares!

[nicknock]

Hi

I went in to business with my partner around a year ago and we've gone from strength to strength. Unfortunately it's become too much for her to deal with as she has kids and she doesn't want the responsibility of running the business anymore and wants to reduce her hours to 3 days a week. That leaves all the operational and business responsibility to me.

We went in to it 50/50 and both own a share each.

She has said she is happy to take 40 % instead of 50!!! So obviously, that isn't fair and I'm presuming you can't just decide to go from being an active Director to essentially a silent one, no responsibility etc and take nearly half of the company?

Before I get proper legal advice, I just wanted to try and get a better understanding of where I stand.

Thanks in advance.

 

[STDFR33]

Of course they can retain their shareholding whilst stepping down as a director.

Being a director and a shareholder are to completely different things.

 

[nicknock]

I know they are, and of course on paper she owns half the company but if the agreement was based on 50 % responsibility, then that changes things legally? From what I've read, there are different levels of Directorship meaning you're entitled to different levels of shares.

Might need to add that it was my company that she bought in to, she's had her investment back now though.

 

[STDFR33]

Being a director has nothing, I repeat ... nothing to do with being a shareholder.

If I hold shares in Tesco, they don't expect me to do the odd Saturday on the checkouts.

It might be that you decide between yourselves to pay you a salary that covers the additional responsibilities. But there's no reason for her to relinquish any of her shareholding.

 

[Newchodge]

but if the agreement was based on 50 % responsibility

Do you have a shareholders' agreement that says this? If so, proceed in accordance with the agreement. If not, you have a problem. She owns 50% of the business. That has nothing to do with her involvement in running the business.

There are different types of shares Do you both own the same type of share or do you own different types of shares?

 

[nicknock]

No but if the agreement WAS that you would do Saturdays at Tesco for your salary and dividend then surely you can't just stop haha!

 

[Mr D]

Unless you buy the shares off her at a price set by her then she remains a shareholder.
Pretty common for people who are not active in the company being a shareholder. As a shareholder she doesn't get a wage - that's the difference between you.
She can remain a shareholder the rest of her life and not do a thing for the company - because that is entirely legal and accepted.

 

[UKSBD]

Pay yourselves accordingley

 

[DavidWH]

What does the shareholders agreement say such scenarios? Assuming you had one drawn up.

You each have 1 share each? So you would need to buy her share, or create more shares to own a larger majority than her of the company, to make it 'fair'.

 

[nicknock]

Unfortunately we don't have a shareholders agreement. Because its been going so well, this has come out the blue really and stupidly I know, we never got round to sorting a shareholders agreement because we were so busy and then you don't think these things will happen!

 

[STDFR33]

No but if the agreement WAS that you would do Saturdays at Tesco for your salary and dividend then surely you can't just stop haha!

If the shareholders agreement deals with the duties, then it should deal with what happens when the duties are assumed by the other director.
So what does the shareholders agreement say in that regard?

 

[nicknock]

We don't have one unfortunately, everythings been verbal, which I know is stupid, but you take these things as read don't you.

 

[STDFR33]

We don't have one unfortunately, everythings been verbal, which I know is stupid, but you take these things as read don't you.

What you have is an agreement that's worth the paper it's written on.

A verbal agreement is legally binding, don't get me wrong. Just a bit difficult to prove though aren't they?

If I were you, I'd keep on her good side, and negotiate a reasonable salary for the extra work you'll have to do.

 

[nicknock]

Well we do have a business adviser and an accountant that have witnessed the various conversations around what our responsibilities and roles in the company are. Don't know if thats helpful!?

 

[Newchodge]

Well we do have a business adviser and an accountant that have witnessed the various conversations around what our responsibilities and roles in the company are. Don't know if thats helpful!?

Not of any use whatsoever, no.

 

[STDFR33]

There's too much risk for either to confirm the verbal agreement. Their professional indemnity insurance would be in serious risk of a claim by taking a side ... I'd expect them both to say 'I do not recall what was agreed'!

 

[Newchodge]

Even if they confirm the agreement on roles and responsibilities, unless the discussions also covered what would happen to the share if things changed, it does not help.

 

[nicknock]

We're actually still at the negotiating stage, she has said she is happy to give me some of her shares but that isn't really the point. We agreed 50/50 in every sense, operationally, profits etc. Im just wondering if theres any way around it, winding the company down maybe?

 

[STDFR33]

We're actually still at the negotiating stage, she has said she is happy to give me some of her shares but that isn't really the point. We agreed 50/50 in every sense, operationally, profits etc. Im just wondering if theres any way around it, winding the company down maybe?

Well you can't force someone to work against their will.

If you don't want to do the work, that's a completely different issue.

You choice would be to wind the business down, or employ someone to pick up the work.
Nobody can advise you in that respect. Only you know and your business partner knows what is best for yourselves and the business.

 

[Gordon - Commercial Finance]

winding the company down maybe?

You want to wind the company down because your partner doesn't want to work as much? I thought it was going well?
Sit down with your partner and have an open conversation, with your advisers present. They've already indicated that they would be happy to adjust shareholdings - a good suggestion might be that the company issues some more shares to you to dilute their shareholding, and that your respective salaries and adjusted to reflect the difference in time commitment. As has already been mentioned above, shareholdings and directorships are two very separate things.
Above all else, seek professional advice and take this opportunity to put agreements in place to cover how things will work in the future.
It goes without saying that doing business on trust is admirable, but not sensible. Even if you currently have the best relationship possible with someone, things change fast, and business and friendship rarely go hand in hand. Always document and agree everything in writing. It may feel a bit daft initially but will save time, money, embarrassment and heartache in the future.

 

[nicknock]

It is going well, I just meant wind down the current company and put it under a new business name. Ultimately, I already feel worried and resentful that I am now shouldered with all of the responsibility while she hands it over, does her 3 days a week but takes the same money.
I completely understand that being a Director and a shareholder are separate things, BUT I also thought that you can't just relinquish responsibilities as an active shareholder.
I appreciate that yes, these things need documenting ASAP and it was foolish to go on trust. Hindsight is wonderful eh

 

[BTON Agency]

Hi NickNock,

I understand your anger, would upset me also.

Sorry some of the above are a little rude and blunt to you must be stressful enough.

The honest answer by the sounds of what you have laid out she is able to do this, and also the offer of a reduction of 10% share capital is fairer than some may have offered.

If you have not worked out from some of the above, a shareholding does not mean the hours you work or put in. Just gives you a profit (or loss) of in your case up to 50%.

Unless you have identified the role of each director (not shareholder) she is within her right to keep the full 50%

As for winding down, depending on the business and if you care about your relationship with her could be easy. Do you have a lots of assets? Do you need the name / telephone number? easy to start again?

 

[STDFR33]

It is going well, I just meant wind down the current company and put it under a new business name. Ultimately, I already feel worried and resentful that I am now shouldered with all of the responsibility while she hands it over, does her 3 days a week but takes the same money.
I completely understand that being a Director and a shareholder are separate things, BUT I also thought that you can't just relinquish responsibilities as an active shareholder.
I appreciate that yes, these things need documenting ASAP and it was foolish to go on trust. Hindsight is wonderful eh

Why would you want to put in under a new business?

 

[Mr D]

It is going well, I just meant wind down the current company and put it under a new business name. Ultimately, I already feel worried and resentful that I am now shouldered with all of the responsibility while she hands it over, does her 3 days a week but takes the same money.
I completely understand that being a Director and a shareholder are separate things, BUT I also thought that you can't just relinquish responsibilities as an active shareholder.
I appreciate that yes, these things need documenting ASAP and it was foolish to go on trust. Hindsight is wonderful eh

Pay and dividends are separate.
Reduce her hours and reduce her pay. Does not affect shareholding.

By the sound of it there is no suggestion of relinquishing her responsibilities as shareholder. That is not the same as the responsibilities as director.

 

[Clinton]

Unfortunately we don't have a shareholders agreement.

Classic!

How often do we hear that on these boards?!

We don't have one unfortunately, everythings been verbal, which I know is stupid, but you take these things as read don't you.

No, we don't.

I completely understand that being a Director and a shareholder are separate things...

If you understand it's because of the posts made in this thread repeatedly explaining to you that there's no connection between one and the other (and I'm still not sure you understand this properly especially given your more recent posts suggesting you aren't distinguishing between salary and dividends).

Your OP said, "So obviously, that isn't fair and I'm presuming you can't just decide to go from being an active Director to essentially a silent one, no responsibility etc and take nearly half of the company?"

There were several mistakes in your understanding at that time. As has been explained to you, one can go from being an active director to a resigned director and retain (not "take") one's original shareholding whether that's, OMG, half the company or whether it's 90% of the company. And if you were wrong about all of that I suggest you consider whether you're also wrong about it being "obviously" unfair that she's relinquishing 10% of the company to compensate. I think she's being very generous.

If I were advising her, I would caution her against giving up even 1% as that gives you 51% and a lot more power. The most valuable share, and the share with the highest value in any transaction, is the share that gives away control. I would advise her to not give up shares but to accept that the business now needs to hire someone to fill the gap. That person needs to be paid, and both directors need to be paid proportionately to the amount of time they are spending. Any remaining profits should continue to be split in the current shareholding ratio of 50:50.

That's how things are done when they are done properly (instead of on a "you said, I said" basis)!

Before I get proper legal advice, I just wanted to try and get a better understanding of where I stand.

Hopefully, you know where you stand now and do get proper legal advice. But before you do that I suggest you take your new found knowledge - about the right of a director to resign without such resignation affecting shareholding - and use that to reach a compromise with your co-director.

But once you've reached such compromise, for goodness sake spend the money and get a proper Shareholder Agreement drawn up!

 

[obscure]

I completely understand that being a Director and a shareholder are separate things, BUT I also thought that you can't just relinquish responsibilities as an active shareholder.

Clearly you don't because there are no responsibilities as a shareholder other than own shares, received dividends and on occasion vote at the AGM/EGM. Nothing else, zip, zilch, nada.

Anything related to working at/running the company is the responsibility of the employees/Directors, who receive a salary/benefits for their efforts.

I appreciate that yes, these things need documenting ASAP and it was foolish to go on trust. Hindsight is wonderful eh

No, foresight is a wonderful thing. You set up a company without doing even the basic research necessary to find out what is involved; what the roles and responsibilities of Shareholders and Directors/Employers are and what the differences are. A minimal amount of research would have shown that companies often have to cope with changes due to alterations in the founders lifestyle/needs or the pressures of company failure or success; and, as such, it is vital to have documented processes in place to cope with these issue. You and your partner failed to do your jobs when setting up the company. If you had had foresight you wouldn't be using hindsight to look back at how you ended up in this mess.