company law & shareholders
Discussion
Folks, i'm after some help on the legal side of things here:
Ltd company set up 6 years ago, with 5 equal 20% shareholders. One director leaves after 6 months, retaining his shares, but gets his existing clients to cancel business (which he had originally written while with us, & was paid in full) leaving us with a £25k loss. Also has an outstanding directors loan for £6k which he has never paid.
Over the years he has made himself a general pain in the ass & is now demanding company accounts & meeting minutes etc. I realise the law says we should provide this, but he is now employed by a direct competitor of ours & our auditor/accountant says that there is no way he should be given access to sensitive company information.
Is there any way we can legally refuse to supply on the grounds that he is out to harm our company? As directors i believe that we have an duty to protect the interests of the company (& our own). If anyone is up on company law & could point me in the directon of a legal "
you", i would be most grateful.
Ltd company set up 6 years ago, with 5 equal 20% shareholders. One director leaves after 6 months, retaining his shares, but gets his existing clients to cancel business (which he had originally written while with us, & was paid in full) leaving us with a £25k loss. Also has an outstanding directors loan for £6k which he has never paid.
Over the years he has made himself a general pain in the ass & is now demanding company accounts & meeting minutes etc. I realise the law says we should provide this, but he is now employed by a direct competitor of ours & our auditor/accountant says that there is no way he should be given access to sensitive company information.
Is there any way we can legally refuse to supply on the grounds that he is out to harm our company? As directors i believe that we have an duty to protect the interests of the company (& our own). If anyone is up on company law & could point me in the directon of a legal "
you", i would be most grateful.Ouch, what nightmare situation.
I strongly recomend that you get 'proper' legal advice as to what your options are. Not sure if there are any lawyers lurking on PH, but having had an 'issue' with a minority shareholder myself, I know exactly how emotive these situations can get.
Did you not have a shareholders agreement when you first set up? Would he not sell you the shares back? What do the articles of association say in regards to pre-emption rights?
There are so many if's and buts that in my view a lawyer would be money well spent. (and get a good one!)
Sorry I can't be any further help
Jason
I strongly recomend that you get 'proper' legal advice as to what your options are. Not sure if there are any lawyers lurking on PH, but having had an 'issue' with a minority shareholder myself, I know exactly how emotive these situations can get.
Did you not have a shareholders agreement when you first set up? Would he not sell you the shares back? What do the articles of association say in regards to pre-emption rights?
There are so many if's and buts that in my view a lawyer would be money well spent. (and get a good one!)
Sorry I can't be any further help
Jason
sorry not very helpful was itEric Mc said:
Exactly.
Wind up the current company and start up again with a new one - even using the same name if necessary.
Wind up the current company and start up again with a new one - even using the same name if necessary.
We could, but we are a regulated financial services entity. Could we just start a new company (same name same everything, right down to the stationary?) & transfer all of the assets from the old & the dissolve?
That would make a difference - as you need to be aware of all the additional regulations surrounding businesses operating under regulatory bodies such as the FSA.
A normal trading company would be able to swap names around and various other tricks to switch from one entity to another.
A normal trading company would be able to swap names around and various other tricks to switch from one entity to another.
Issue shares.
If you still have pre-emption rights in the company's articles (most likely, although you can hold an EGM to have these modified, not sure if you have a quorum with 4 out of 5 members, I think it depends on your Mem & Arts, extremely rusty with this so do your due diligence), then you will need to offer them to him too, to ensure he keeps his 20%. If he continues to buy into the company, issue more (assuming that this company is important to you, given you have FSA authorisation). The bigger his investment in the company, the more he has to lose.
If he doesn't take up his share offers, you can dilute his holding, to, I believe, 90% and go for a compulsory share purchase. IIRC the 90% holding shareholder will need to be one entity, so perhaps a restructure with a new company as your single shareholder, with each of you owning a 25% stake in the new company that purchases the shares of your old one.
Speak to a professional in this field and motion their advice, although you can present to them a scenario such as the above as a suggestion. My experience with shareholdings is rusty at best, and for a valuable company spend the money to ensure it is done correctly.
Good luck.
If you still have pre-emption rights in the company's articles (most likely, although you can hold an EGM to have these modified, not sure if you have a quorum with 4 out of 5 members, I think it depends on your Mem & Arts, extremely rusty with this so do your due diligence), then you will need to offer them to him too, to ensure he keeps his 20%. If he continues to buy into the company, issue more (assuming that this company is important to you, given you have FSA authorisation). The bigger his investment in the company, the more he has to lose.
If he doesn't take up his share offers, you can dilute his holding, to, I believe, 90% and go for a compulsory share purchase. IIRC the 90% holding shareholder will need to be one entity, so perhaps a restructure with a new company as your single shareholder, with each of you owning a 25% stake in the new company that purchases the shares of your old one.
Speak to a professional in this field and motion their advice, although you can present to them a scenario such as the above as a suggestion. My experience with shareholdings is rusty at best, and for a valuable company spend the money to ensure it is done correctly.
Good luck.
darreni said:
Eric Mc said:
Exactly.
Wind up the current company and start up again with a new one - even using the same name if necessary.
Wind up the current company and start up again with a new one - even using the same name if necessary.
We could, but we are a regulated financial services entity. Could we just start a new company (same name same everything, right down to the stationary?) & transfer all of the assets from the old & the dissolve?
Do NOT do this. Minority shareholders have certain rights, and if he wanted to get heavy, he could sue you for it. Also a company director has a responsibility to run that company in all of the shareholders interests. Transferring assets to another business is not in all of the shareholders interests.
In the current climate of corporate governance, I would be very careful. I have taken recent legal advice on a similar situation, and again I recomend you do the same. A few hundred quid for a hour or so with a lawyer could save you thousands further down stream.
maven said:
Issue shares.
If you still have pre-emption rights in the company's articles (most likely, although you can hold an EGM to have these modified, not sure if you have a quorum with 4 out of 5 members, I think it depends on your Mem & Arts, extremely rusty with this so do your due diligence), then you will need to offer them to him too, to ensure he keeps his 20%. If he continues to buy into the company, issue more (assuming that this company is important to you, given you have FSA authorisation). The bigger his investment in the company, the more he has to lose.
If he doesn't take up his share offers, you can dilute his holding, to, I believe, 90% and go for a compulsory share purchase. IIRC the 90% holding shareholder will need to be one entity, so perhaps a restructure with a new company as your single shareholder, with each of you owning a 25% stake in the new company that purchases the shares of your old one.
Speak to a professional in this field and motion their advice, although you can present to them a scenario such as the above as a suggestion. My experience with shareholdings is rusty at best, and for a valuable company spend the money to ensure it is done correctly.
Good luck.
If you still have pre-emption rights in the company's articles (most likely, although you can hold an EGM to have these modified, not sure if you have a quorum with 4 out of 5 members, I think it depends on your Mem & Arts, extremely rusty with this so do your due diligence), then you will need to offer them to him too, to ensure he keeps his 20%. If he continues to buy into the company, issue more (assuming that this company is important to you, given you have FSA authorisation). The bigger his investment in the company, the more he has to lose.
If he doesn't take up his share offers, you can dilute his holding, to, I believe, 90% and go for a compulsory share purchase. IIRC the 90% holding shareholder will need to be one entity, so perhaps a restructure with a new company as your single shareholder, with each of you owning a 25% stake in the new company that purchases the shares of your old one.
Speak to a professional in this field and motion their advice, although you can present to them a scenario such as the above as a suggestion. My experience with shareholdings is rusty at best, and for a valuable company spend the money to ensure it is done correctly.
Good luck.
Is this anything like putting a "call" on the shares? If i've understood our mem & arts correctly, we could call on shareholders to invest further funds into the comapany (say 20k each), knowing that our pain in the ass won't do this. The mem & arts then state that any shareholder who does not comply with a call within 14 days will be liable to forfeit their shareholding back to the company. As the rest of the shareholders are all directors, we would be happy to do this.
I agree that we will need to seek legal advice though. I just don't want to spend 10k on advice to save 5K, if you know what i mean.
darreni said:
Is this anything like putting a "call" on the shares? If i've understood our mem & arts correctly, we could call on shareholders to invest further funds into the comapany (say 20k each), knowing that our pain in the ass won't do this. The mem & arts then state that any shareholder who does not comply with a call within 14 days will be liable to forfeit their shareholding back to the company. As the rest of the shareholders are all directors, we would be happy to do this.
I agree that we will need to seek legal advice though. I just don't want to spend 10k on advice to save 5K, if you know what i mean.
I cannot say I am certain on the terminology you have used, i.e. a "call" but the procedure sounds very similar. A shares issue is made, and any shareholder not taking up the shares offer will forfeit and it is offered to other shareholders. He cannot offer it to a third party as pre emption rights state he has to offer it first to the existing shareholders.
With the right number of shares his holding will be diluted and you can compulsory buy his shares. I am uncertain whether him having a less than 90% total stake means you can initiate the compulsory buy out, or whether it is necessary for one entity to have a minimum of 90% holding. If it is the latter, then you can transfer all of your shares to a new holding company, with a similar structure of shareholding, and initiate the buy back that way. Although this may be unnecessary if single 90% holding is not a requirement, this is something to check with a solicitor specialising in this field.
I understand your concerns on the cost of solicitors, and I think the measure presented by me here should be successful, but obviously do not simply take my advice. It should work out to be inexpensive if you present this idea to a solicitor and ask him to help out on semantics and correct conduct.
Muncher, the individual is no longer a director but remains a shareholder.
maven said:
[I understand your concerns on the cost of solicitors, and I think the measure presented by me here should be successful, but obviously do not simply take my advice. It should work out to be inexpensive if you present this idea to a solicitor and ask him to help out on semantics and correct conduct.
The one potential concern arising out of this is whether it might expose the majority shareholders to a claim from this joker that it is a considered and deliberate course of action that is design to unfairly prejudice him as a minority shareholder.
Two issues arise, neither of which I'm immediately sure about as it's been a while since I had to look at this:
1. Can it be considered to be prejudicial even if he is afforded the opportunity to buy the newly issued shares? I have a vague recollection that there is caselaw that says that it can, if the majority know he can't afford to, or won't, buy into the new issue. I'm not at all sure though.
2. Is it sufficient that no one shareholder holds a majority, but that effectively four with 20% each gang up against one, so in effect giving raise to a majority -v- minority position. I think the answer to that is yes.
Anyway, minority prejudice claims are notoriously long-winded and expensive so he may not have the stomach for a fight. You should be aware that it's a risk, however.
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