Disputes between directors, shareholders and business partners can raise a whole range of legal issues.
In the first place the director may be an employee and therefore have rights not to be unfairly dismissed and to not be discriminated against etc. In addition, they will have rights and obligations as directors, those obligations being contained in the Articles of Association of the company and set out in the Companies Act (insofar as the Articles have not amended the statutory provisions). By way of an example, removing an executive director will involve consideration of the terms of their contract, and the right to remove a director might be governed by the Articles (giving an express power to the Board to remove them). Otherwise the power sits with the shareholders who are required to convene a Special Meeting on Special Notice (under the Companies Act) and secure a majority decision of those taking part in the vote.
Where the director is also a shareholder, they will have rights as a shareholder either under a Shareholders Agreement (if one exists) or under the Companies Act including minority shareholder rights (the right not to be subject to oppressive behaviour by the majority).
A Shareholders Agreement should set out the rights of each shareholder, in relation to voting, and provide pre-emption rights (the right to acquire or offer for sale shares to existing shareholders). Good Leaver and Bad Leaver provisions (if the shareholder is an employee) will be contained in the agreement, and are likely to give a shareholder fewer rights if they choose to resign as an employee or if they are dismissed for cause. There will also be “tag along and drag along rights” i.e. if others are selling their shareholding the right to require that the shareholders’ shares are bought at the same time.
The company’s Articles of Association coupled with a Shareholders Agreement are likely to govern many areas of dispute where an employee is also a shareholder and director, but it is important to link these provisions with the rights of the individual under their contract. All of the agreements need to anticipate the consequence of a shareholder ceasing to be an employee or director.
Whilst the contract of employment is likely to contain restrictive covenants, the ambit of those covenants is likely to be more narrowly drawn than will be the case under a Shareholders Agreement. It is well established that the rights of shareholders to restrict the activity of other shareholders is greater than the right of employers to restrict the activities of an ex-employee (especially in the case of a sale where, in contrast with an employee’s restraints which might be for up to 12 months from the termination date, the shareholder might be restricted for two or even three years – see Restrictive Covenants).
This page was updated on the 1st August 2018.
Posted on 24/10/2018 in Legal UpdatesBack to Knowledge