At the start of an exciting business venture, there is good will on all sides and often it is decided that the shares in the company will be divided on a 50/50 basis
Most businesses in England and Wales are run as private limited companies. Frequently, the same people within the company will be directors as well as being shareholders.
If there are only two directors and both are 50% shareholders, deadlock leading to paralysis of the company, even over minor disagreements, is a very real danger. If the company has used the standard articles of association, which state directors need to take decisions collectively and there is no shareholder agreement in place setting out possible ways to resolve it, the deadlock could be terminal.
Neither director can remove the other, as that requires a vote from 51% of the shareholders. Neither can overrule the other, as that requires an 80% vote from the shareholders.
So, what options are available in these circumstances?
One option would be for the wronged party, in his capacity as a shareholder of the company, to bring an action on behalf of the company, known as a derivative claim, against the other director and shareholder.
A derivative claim is brought on behalf of the company against a party that has caused damage to it, such as a director. Such a claim can be brought in relation to an act, proposed act or omission and based on negligence, breach of trust, breach of duty or another matter. For example, if one director is taking funds out of the company without the permission of the other, a derivative claim could be brought against that director for breach of his duty to act in the best interests of the company.
Another option would be for the wronged party to bring an unfair prejudice petition. The Companies Act 2006 offers relief, to members of a company when the interests of those members are affected by unfairly prejudicial conduct. Members may petition for relief in the following situations:
- where matters concerning the company are being or have been conducted in a way that causes prejudice to the interests of the members of the company, or
- there has been an act, proposed act or omission of the company, which is deemed to be unfair.
To read more on unfair prejudice petitions and the procedure involved see HERE
If a dispute has already arisen it may already be too late, but if both directors/shareholders can work out how best to run the company, amendment of the articles of association and a shareholders@ agreement can help avoid disputes. To see more about shareholder agreements see HERE
If you are a director and 50% shareholder of a company and you want more information on how to take control of the business or recover the true value of investment, then please contact us.