It is highly common in Small and Medium Enterprises (SMEs) that directors and shareholders are the same people who split the shareholding, sit on the board of directors, and also receive a salary. The overlapping roles and identities of individuals within a company can complicate corporate relationships, particularly where the responsibilities and interests associated with each position differ significantly. This can create a layered and complex dynamic that requires careful consideration when assessing the nature of those relationships.
Does removal mean loss of shares?
Even if a director is removed, it does not affect their status as a shareholder. Therefore, their rights to receive dividends and vote on company decisions remain unchanged. Nevertheless, certain company constitutional documents may contain provisions requiring a director-shareholder’s shares to be transferred or acquired following their resignation or removal as a director. The application and enforceability of such provisions will depend on the specific terms contained within the company’s articles of association or any relevant shareholder agreement. Directorship and share ownership are separate legal capacities, meaning an individual may cease to be a director while retaining their rights as a shareholder, unless specific contractual or constitutional provisions provide otherwise.
Quasi-partnership
Where a company operates as a “quasi-partnership”, internal relationships may give rise to particular legal complexities. These companies are often characterised by close personal relationships, mutual confidence and an understanding that each participant will contribute to the management of the business. When those expectations are disrupted, disputes may arise over the rights and interests of those involved. For example, family businesses, small businesses, and shops run by acquaintances or partnerships where directorship and shareholding is held by only two people. In these circumstances, the removal of a director is usually more than a simple company process; it affects the foundations of the company itself because every single member is imperative to the operation of the company.
Under these circumstances, it is reasonable for members to have their shares purchased from them once they resign or are dismissed from their directorial roles. It is not uncommon in quasi-partnerships for there to be specific clauses within the company’s Articles that are triggered upon the dismissal/retirement/removal of a director-shareholder where their shares will be acquired by the company or the individual shareholder.
In the absence of any contractual or constitutional provisions addressing such circumstances, a former director who continues to hold shares in the company may seek relief by bringing an unfair prejudice petition under Section 994 of the Companies Act 2006, where they believe the company’s affairs have been conducted in a manner that unfairly prejudices their interests as a shareholder. The court has wide-ranging powers when granting relief in unfair prejudice proceedings. Where a shareholder’s position as a director has ended and the parties’ relationship has become untenable, one potential remedy may be an order requiring one shareholder to acquire the other’s shares at a value determined to be fair and appropriate in the circumstances.
In circumstances where the breakdown of confidence and trust between partners is so thorough and severe that it is unlikely that continued operation of the company would be just or possible, a petition to wind up the company under the Insolvency Act 1986 would be available.
If you need advice or assistance, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.