Tactfully remove/relegate another director?

[Zephyr]

Hello all,

I'm hoping some of you will be able to offer some advice?

I am co-owner and co-director of a business that my business partner (BP) and I started some 5 years ago. We both own 50% of the shares each. 2 years into the business my BP completely stopped taking an interest in our business and found other full time employment, leaving me to run the show. 3 years into the business my partner (P) became involved and has started to work very hard alongside me in keeping the business afloat. Recently my P and I began to head into another area with the business, hoping to expand it and generate more profit.

Now my BP says they want to take a more active role in the business, but I can't see how this is going to work - BP already has a full time job elsewhere and we don't earn enough money to pay BP any salary/dividends.

My friends, family and P have warned me that BP will swoop in when the business me and P have worked very hard to build becomes more profitable, and start extracting salary/dividends. I'm not sure what BP's intentions are but it has got me quite concerned.

What are my options here? Should I ask BP to resign as director since they no longer take an active role in the business? Should I ask if I can buy BP's shares? As is often the case, BP is a very dear friend of mine and I don't want to jeopardise our friendship in this process. Does anyone have experience of being in a similar situation?

Thank you in advance

 

[Bob]

You could speak to @The Resolver , a long term member on here who may be able to give you guidance. His website is here

 

[Zephyr]

Hi @Bob, thank you for the recommendation.

Having emailed him earlier I just took a phone call from @The Resolver during which he came up with some potentially very useful points relevant to my situation. If any readers of this thread are dealing with an ownership/shareholder dispute or issue I would recommend giving him an email and seeing what he has to say.

 

[Voicebooth]

Hi Zephyr,

I have just finished going through almost exactly what you've described - friend and I started the firm four years ago, I sacrificed two years worth of my own time and potential salary to get a lot of technology developed, all in the meanwhile my business partner kept his full-time job, and helped at certain points in the development of it all.

Once the technology was developed, we started getting customers on board, but I still couldn't get more of his time due to other commitments. This went on for a further year and a half, where I simply couldn't get him to commit.

With the company having licensing revenue for very little investment of time (it ticks along nicely with the occasional feature or fix), the company was left running whilst I focused on replenishing bank supplies.

At the beginning of last year I started developing a new software service, which I recently launched. At this point, there was a conflict of interest, in that I had entirely developed the new service under the current company, but he was still a 50% shareholder, so legally entitled to 50% of any revenue from it.

I initially floated the idea back in October to buy him out, and I explained about what I was intending to do with the new service, but the offer I made him was too small (even though this was never said out loud). It dragged on for several months until I finally made him an offer that covered his share of all profits for the last four years, as well as a share of profit for the next 12 months projected.

In the end, it cost a lot of money to buy him out, leaving company funds almost depleted, but the buyout offer had to be attractive enough that he would take it.

Over the last two years, I've had a strong feeling that things were somewhat unfair, since I had sacrificed so much time and money, and I ended up doing the day-to-day running of the business, so I was quite relieved when he accepted the offer - it never feels good to have someone else benefiting solely from your hard work.

I'm now left with the company solely in my name, allowing me to run things as I want them to, with licensing revenue that's exclusively mine for usage in salaries and in marketing/operations of the new service.

 

[Raw Rob]

Recently my P and I began to head into another area with the business, hoping to expand it and generate more profit.

At this point, you should probably have started a new company with just you and P. Is it still possible to do this? Keep the old company active too for now, but do all new stuff through the new company.

 

[The Resolver]

What both of these cases show is how vital it is to have a Shareholders Agreement drawn up and signed. For companies like these in which the founding shareholders agree to work together to build the business, then it would be wise to have provision within the Shareholders Agreement that would require resignation from the Board and selling of the shares to the remaining shareholder(s) at an independent valuation once one shareholder ceases to work for the business.

However, even without such a provision there sometimes are steps that can be taken to persuade the other party to sell.

Raw Rob, doing what you say is likely to expose the shareholder , if a director, to a court Order to compensate the company for lost profit. Resigning from the Board is no answer as that loses you shared control/veto rights over, and right to infornation from the first company.

 

[Raw Rob]

Raw Rob, doing what you say is likely to expose the shareholder , if a director, to a court Order to compensate the company for lost profit.

Even if it is in a different area? (The OP didn't specify exactly what they meant, using the phrase "another area with the business", it would need some clarification.)

 

[The Resolver]

Raw Rob - OP seems to be saying this is another area they are already pursuing in the business so to then start operating under a second company would be a breach of duty to the first company.

In general its not a breach to set up another company and do business ofa totally different nature such as could not have been an obvious direction jnto which to lead the first company nor ever discussedas a planned expansion for the future.However it might be a breach of an employment contract