Directors vs Shareholders

Disputes can arise in a company for many reasons, such as:

  • the direction and development of the company;
  • poor personal relationships;
  • conflicts of interest (when one director has interests in another business);
  • the terms of a directors’ service contract; or,
  • concern over whether the board is meeting its legal responsibilities.

The resolution of these disputes often requires us to look at the company’s articles of association.

Who has the power over the other?

If the directors have power under the company’s articles to make the decision, and there is nothing in the company’s articles giving the shareholders power to overrule the directors, the shareholders may overrule the board of directors but not directly.

These are some options available to shareholders to act on:

  1. Shareholders with at least 5% of the voting capital can require the directors to call a general meeting of the shareholders to consider a resolution overruling the decision;
  2. Shareholders can try to dismiss a director or appoint new directors to the board;
  3. Shareholders can take legal action if they feel the directors are acting improperly;
  4. Minority shareholders can take legal action if they feel their rights are being unfairly prejudiced.

Can the shareholders dismiss a director?

Yes – shareholders representing at least 5% of the company’s voting rights can require the board to call a general meeting of the shareholders to consider a resolution to dismiss a director. Certain requirements must be met: the resolution must be passed at the meeting by more than 50% of the votes cast; the director must receive special notice of the meeting and can make representations. 

The Companies Act 2006 allows a director to be removed in this way regardless of their contract of employment or what is in the company’s articles of association.

However, as the procedure is not always straightforward and strict time limits apply, it is recommended that you seek specialist legal advice to ensure these requirements are met.

What can shareholders do if they consider the directors are not behaving properly?

Where the directors appear to be breaching their responsibilities or abusing their position, shareholders may want to consider taking legal action, such as:

  • asking the board of directors to take action in the company’s name against an individual director (because generally the shareholders cannot sue in the company’s name);
  • applying to the court for an order that the company is acting or has acted unfairly;
  • applying to the courts for the company to be wound up; or,
  • claiming against the directors by way of a derivative claim (for negligence, default, breach of duty and or breach of trust).

If you have found yourself in a company dispute or anticipate a dispute, it is vital to attain professional advice at an early stage. Contact LF Legal on 0203 146 3549 / [email protected]

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