Boardroom disputes are a fact of corporate life but, as a High Court ruling recently reviewed by Jonathan Leach showed, careful reflection on the basis of sound legal advice – rather than knee-jerk reactions amidst the heat of conflict – is the best way of restoring harmony.
The case concerned a company which had thrived under the management of three directors, who were equal shareholders in the business. Following a breakdown in relations, however, one of them was dismissed and excluded from any further role in the company’s management. He responded by launching proceedings under the Companies Act 2006, claiming that he had, due to his colleagues’ actions, suffered unfair prejudice as a minority shareholder in the business.
In upholding his claim, the Court found his colleagues guilty of serious breaches of their contractual obligations of good faith, contained within a shareholder agreement.
Due to their exasperation with him and their perception that he was not pulling his weight in the business, they had covertly decided to dismiss him without any prior warning and before disciplinary proceedings were even initiated. That decision was driven by personal antipathy and was wholly disproportionate.
They had thereafter imposed sweeping restrictions on his managerial role and had taken important business decisions – including paying bonuses and engaging senior staff – without consulting him. That was despite what the Court found was an extra-contractual understanding between them that he would be entitled to participate in the company’s day-to-day management, at least until he had been given the chance to remove his capital from the business on reasonable terms.
The Court accepted that the sacked director had himself breached the shareholders’ agreement in refusing to transfer his shares in accordance with the company’s articles of association. His misconduct was, however, substantially outweighed by that of his colleagues and their arguments that he was obliged to part with his shares at a nominal price were rejected.
The Court heard further argument as to the relief that should be granted as a result of its decision. However, it indicated that, on the face of it, the sacked director was entitled to an order requiring that his shares be bought back at a full market price to be assessed by an independent valuer.
If you have reservations about the activities of a director, partner or any other member of your management team, contact us for advice. Disputes of these types are normally better dealt with by negotiated settlement than expensive court action.