So.. Here's a Fun One!

[ItsComplicated]

So... I co-own a small business. We develop properties in the USA in JV's with HNW investors. I started the business in 2011 with my then partner (life and business), and in doing so I made ALL of the usual mistakes! I basically ran the business, from project development through project management, handled all investor relationships and partner relationships, created all of our documentation, structured our projects, raised the money, created all of our marketing collateral and content etc. She basically handled banking and corporate admin! As we were in a relationship that was committed I made the fatal error of having no control of, or access to our banking, and I also recently found out that she never sent the forms off to enrol me as a Director. So essentially I guess I have been a shareholder and an employee without a contract for 4 and a half years.

Clearly the inevitable has happened and we split up, we have tried running the business together but it has become impossible. It is now at the point where I have no choice but to end it all, and therein lies my problem.

I have no idea of my rights. There is no contract, shareholder agreement or anything like that. The business has little cash but I am not concerned about having that - she can take it. What I want to do is take my clients, and the body of work I have created for the business (web content, brochures, reports etc) and my projects, and start over. But can I? Can I just take my clients and content and leave? Does my existing Limited company have any rights over them, or me? With no agreements anywhere defining ownership of anything how do I go about taking what I believe to be my property and do it legally?

Now, I know full well that there are serious lessons to learn here about doing things properly from the outset (contracts etc), and believe me I am learning them fast. Nothing like a bit of pain to teach a lesson! So what I am seeking from you lovely people is some insight into my rights and those of my ex partner. If anyone can help I would be eternally grateful.

Technicals:
It is a UK limited company
I own 50% shares
Sole Director is my partner (although I have the signed form to send to companies house if it helps for me to be a director)

Help, for the love of all that is sweet and pure!

 

[The Byre]

We develop properties in the USA in JV's with HNW investors.

As I had no idea what that meant, I went away (to have a P in the WC) and thought about it - but no, I still have no idea what that means!

I basically ran the business, from project development through project management, handled all investor relationships and partner relationships, created all of our documentation, structured our projects, raised the money, created all of our marketing collateral and content etc. She basically handled banking and corporate admin!

i.e. YOU are the entire creative side of the company!

She was supposed to do admin, but failed in some aspects.

Who owns what is easy! 50:50!

A director is just a role.

You could make some lawyers happy and help them meet their boat-payments by indulging yourselves in expensive and time-consuming litigation. As the months turn to years, the company assets and goodwill will become worthless. You will blame her and she will blame you. In the process you will regard her to be a pig and she will think of you as a pig.

But trust me - you will both come out as sausages!

So you two have a choice. You can either destroy what you have, or sit down and discuss what you expect to get out of the break-up. A mediator might help here!

 

[ItsComplicated]

Thanks for you reply - much appreciated.

JV = joint venture with High Net Worth investors...

You are quite correct in saying I was the creative side, also the commercial side. Pretty much everything other than paying invoices.

There is no negotiation to be done sadly, I wish there was, I really truly do. I have suggested leaving, letting her keep the cash and even paying her a disproportionately large sum of money as a handshake, with an alternative of me leaving and the business therefore being entirely worthless to her... the result was unrepeatable.

I am left with figuring our whether I can do new business with my clients on my own account legally, or whether I cannot approach them. There is no contract or agreement to say I can't but I don't know the statutory laws relating to that kind of issue. Also the same with taking the content of my reports and brochures etc and rebranding them.

If anyone else can shed light on those specifics I would, again, be eternally grateful.

 

[Newchodge]

If you aren't a director and there is no contyract preventing you contacting them, then you can.

 

[Supercoach]

You were not a director and have no contract stopping you from approaching clients so there is no problem there.
Who owns the brochures? This could be argued either way but she has to take action from stopping you and that will take money - quite a bit of it!
So, just walk away, set up again (properly) and leave the other party with the problems.

 

[Free Lance]

It's not that simple I'm afraid. First of all, best to try to negotiate a walk away. But you need to know where you stand before you do that.

A director is a director by whatever name called (section 250 Companies Act). If you acted as a director then you were one. For example, did you sign the accounts, sign contracts, actually hold board meetings?) If the form was not filed at Companies House that's a technicality. You would be what is known as a de facto director.

If you are a de facto director then you are subject to duties owed to the company in exactly the same way as if you had been validly appointed. That duty includes not setting up in competition (whatever the reason). So, if you are a de facto director then you cannot just walk away with the clients and contacts and set up a newco in competition. If you did the old company could sue you £ for £ that you make. Your ex would have the right to bring a 'derivative claim' against you and it's a strong remedy (but expensive). (See other posts by me on derivative claims)

Even if you were not a director then you would have owed some duty of confidentiality to the old company (by virtue of being an employee or simply because some of the information you hold would be, by its nature, confidential). Old company could sue you for taking customer lists, etc.

All very expensive and time consuming. Try to negotiate buying out her shares but don't just threaten to walk away and set up again as that could be used against you.

 

[Chris Ashdown]

Food for thought but not legal advice just a possible route

Is she shown as a director on the books if so just signed her a resignation letter by recorded delivery and one to the companies registered address, There must be one director at least so if not you then i guess it is her

If neither are shown as a director fill in the forms and make yourself the director and then resign the next day and follow the spongbob plan

 

[Supercoach]

Doubtless Free Lance has valid points; however, you say there is no negotiation possible and if that is the case you have very little option but to walk away.
Having left the company officially (keep your documentation) you are no longer a director, de facto or not.
If the monies involved in these disputes are big enough all manner of legal arguments can be bought up but (if I read you right) this does not seem to be the case here. The real world suggests that she has the problems and will have to pay for a lot of advice with absolutely no guarantee of getting anywhere.
If you want an additional level of protection, write to your clients explaining that you have left oldco and tell them they have a choice of who to deal with newco or oldco.
If you have the relationship they will stick with you.

 

[The Byre]

I'm afraid Free Lance is dead right, hence my pig/sausage remark. The reality is, you are/were a director and owe a duty to act in the interests of the company. Your own description of your tasks and duties within the company are those of a director.

And as Free Lance has pointed out, you don't necessarily have to be a director to be obliged to act in the interests of the company. Walking off with all contacts is the precise opposite of acting in the interests of the company.

Bringing a derivative suit against you would indeed be both expensive and by the time the dust has settled, probably destroy the business you have created. Yes, your ex-partner could show a prima facie case and therefore initiate litigation. I have no idea what sort of costs are involved in such an action, as I have never been in that situation - but it sure do smell expensive!

You may think that such up-front costs could possibly protect you, but if you rub salt into existing wounds by waltzing off with all trading partners and customers, she may just be annoyed enough to risk it. And then you would have to stump up to defend such a case!

So you have a choice of three possible ways forward -

1. Risk the wrath of a woman scorned.
2. Set up a totally new company outside the UK.
3. Mediation.

1 is risky; 2 is awkward and may still leave you vulnerable if not structured correctly; 3 is the one I would go for.

 

[Chris Ashdown]

Why are you saying he cannot leave the company, is he stuck for life in you version just as he has acted as a director or manager,

There must be a director on the books who would presumably be the other person, who by the title must be the managing director and therefore in charge, so I dont understand how he can be in never never land and just not able to resign

If nobody was on the books as a director I could understand where you are comming from but must be able to resign somehow

 

[Gyumri]

"you are/were a director and owe a duty to act in the interests of the company. Your own description of your tasks and duties within the company are those of a director."

Ahem! logic tells me that if a director / de facto director "walks away" or resigns, why would that person by bound to act in the best interests of the company if he no longer represents the interests or the company? What duty of care could he possibly be under to Old Co simply by setting up shop elsewhere as New Co and persuading whatever customers he can to follow him?

To suggest that he would still owe a duty of care to the old company in the absence of any particular agreement not to set up in competition seems to be stretching things and would also mean that the "free market" would have no sense.

Where such agreements have been made to bind a former director from operating in a certain market they have been enforced, sometimes using a "springboard injunction".

However, it would be good to look at some of the authorities on the matter before we pontificate further.

Gerrard ltd V Michael Reed 2001 might be a good place to start.

 

[Free Lance]

It depends on the context and circumstances. The law is quite developed in this area and it favours the company very much. It's all about corporate opportunities. A director cannot resign then (leaving aside questions of confidentiality) start contacting his old company's clients the day after. Or the week after. Or the month after. Or longer. It depends. If the director leaves then does something else then comes back to his old industry 2 years later that's at the other end of the spectrum. It's a question of intent and degree. Being stuck in a 50/50 situation does not permit the director simply to bail out and leave the old company behind.

 

[The Byre]

Dear OP, the fact that you state that mediation is now impossible, tells me that no real attempt has been made at mediation. If she hates you and can't stick the sight of you at any price, just asking her to settle things amicably is doomed to failure and a silly thing to do.

You need a professional mediator.

 

[Chris Ashdown]

It depends on the context and circumstances. The law is quite developed in this area and it favours the company very much. It's all about corporate opportunities. A director cannot resign then (leaving aside questions of confidentiality) start contacting his old company's clients the day after. Or the week after. Or the month after. Or longer. It depends. If the director leaves then does something else then comes back to his old industry 2 years later that's at the other end of the spectrum. It's a question of intent and degree. Being stuck in a 50/50 situation does not permit the director simply to bail out and leave the old company behind.

Many directors leave and inform their customers they are leaving the company and thanking them for their support over the past years

If the customer then approaches him with new business then that's fine as i understand it, taking a sales list or price list is definitely against the law though or any other company documents.

You must admit that's what happens especially with sales staff all the time unless they have restrictions in their contracts which does not seem to be the case here

As far as i can see he resigns and either keeps his shares or gives them back to the other half and starts afresh, is not the question of if he acted as a director just a red herring, whatever his position he can resign, he just cannot take anything from the company

 

[Free Lance]

It's surprising how far the law favours the company in these kind of situations. I accept that directors leaving and setting up in competition is commonplace but the law, if enforced, is vicious on this point.

A leading case is IDC v Cooley where (off the top of my head; I've not double checked the facts), the director left with no intention of competing. A customer of oldco approached him to say, "please do this contract for us. We will not use oldco because it's you we want". The former director took on the contract but was liable for what is now a derivative claim: he took a maturing business opportunity away from his old company: he should either have declined to take the work (even though the company itself would never get it!) or got approval from the oldco.

It's harsh but there are other cases where the court has upheld that principle to "encourage the others", i.e. its intended to be deterrent to breaches of fiduciary duty/s.172 (CA 2005).

Long and short of it: if a director/former director takes a maturing business opportunity from a company he can only do so with prior approval - usually of the shareholders. Harsh but I can see the logic.

 

[The Resolver]

A director is a director by whatever name called (section 250 Companies Act). If you acted as a director then you were one. For example, did you sign the accounts, sign contracts, actually hold board meetings?) If the form was not filed at Companies House that's a technicality. You would be what is known as a de facto director.

That is not correct. s250 refers to people who are registered as a director but give themselves another title. s251 is the relevant one that defines what is a "shadow director" (there is no recognition of the term "de facto director"). This is someone not registered as a director but , because of his conduct, still has all the duties and liabilities of a director. The examples of conduct given by Free Lance are not enough to make someone a "shadow director". However what Its Complicated does is sufficient for one part of the test . However, it is likely he is not a "shadow director" and thus does not have such liabilities, as the second part of the test in s251 fails ie being that he needs to be:-

"a person in accordance with whose directions or instructions the directors of the company are accustomed to act."

In other words "shadow directors" control and direct what the other directors do. They are in charge! It looks here that ItsComplicated has no such influence.

I am a shareholder mediator (my specialism) so you are welcome to call me for a free 30mn heads up on your options and risks. See my sites in my sig.

 

[The Byre]

The trouble with that case (IDC v Cooley) is that the defendant was still employed when the customer approached him. He then resigned under false pretences and took on the job.

There may be a way around this, by using a well established instrument of jurisprudence known as lying -

Two girls I know who worked for an agency, were approached by a large customer with a massively lucrative project. They were told, they personally could get the gig, if they resigned and started their own agency, a part of which the customer would then own, in exchange for a stream of contracts and a lower agency cut (5% instead of 10%).

They resigned and set up their agency. The customer then approached the first agency a few months later and pitched the project, asking for the two girls. "What! They're not here any more! We'll have to think about this!"

The customer then did the deal with the two girls. Nearly 20 years on, they are today extremely successful.