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Court acts to protect the majority in shareholder dispute

Much is said and written about the protection of minority shareholders through the articles of association, shareholders agreement and legislation.  A recent court decision serves to remind us that the majority may need protection as well.

In the case of Smith v Butler and another, Mr Smith was a director and majority shareholder (68.8%) and Mr Butler was also a director and owner of the remaining shares (31.2%).  Mr Harris was a director but did not hold any shares. Messrs Butler and Harris ran the business on a day to day basis with Mr Smith only attending once or twice a week.  Mr Smith had reservations about the way the Company was being run and announced his intention to use his majority shareholding to appoint a new Chief Executive Officer (CEO) to take over the running of the business.  Messrs Butler and Harris objected.

Mr Smith had sufficient shares to appoint a new CEO to the board however the articles provided that no business could be carried out other than through validly held board meetings and shareholder meetings.  To be valid at least 2 persons entitled to attend and vote at the meeting needed to be present.  This is where Mr Smith hit trouble because Messrs Butler and Harris simply refused to attend any such meetings thereby preventing any resolution to appoint a new CEO being considered.

Mr Smith had no option but to apply to the court for an order authorising a meeting of the members to be held with a quorum of one so that he could appoint a new CEO.  He succeeded in his application, not however without a great deal of time cost and expense and of course disruption to the company.

This issue might have been anticipated and provisions included in the articles or a shareholders agreement providing a resolution without the need to resort to court proceedings.

Contact Richard Cripps, partner at Gullands, for advice if relations between your board and/or shareholders are causing you concern or if you do not have a shareholders agreement in place.