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Directors’ duties and responsibilities: Shareholders in dispute

Directors’ duties and responsibilities: Shareholders in dispute

Friday 12th February 2016

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Corporate Matters - Issue 10

In this series of articles looking at directors' duties we previously examined "Directors duties under the Companies Act 2006". In this second edition we examine the duties owed by directors where the shareholders of a company are in dispute.

The Non-Shareholder Director

The role of a non-shareholder director of a company where the owners are in conflict can be particularly difficult. In such circumstances, a director will invariably come under pressure to take sides in the dispute. In these circumstances it is important for a director to remember their duty to exercise independent judgment. Directors must make their own decisions on what they consider to be in the best interests of the company and must avoid substituting their judgment for that of one of the conflicting shareholders.

Directors each have a duty to promote the success of their company for the benefit of its shareholders as a whole. Directors must avoid adopting a course of action for the company which is unfairly prejudicial to a particular shareholder or group of shareholders. Such action (for example, awarding a large bonus to one of the conflicting shareholders without justification) is likely to give rise to a claim for unfair prejudice from the aggrieved shareholder.

The Shareholder Director

While the role of the non-shareholder director may be unenviable, the position of a shareholder director involved in a shareholder dispute can be even trickier.

A shareholder director needs to remember that they have two distinct and separate roles in the company, one as an owner (in the form of shareholder) and one as a director. Shareholder directors need to take care to ensure that a dispute in their ownership capacity does not improperly prevent them from discharging their duties as a director. 

As with non-shareholder directors, a shareholder director is obliged to promote the success of the company for the benefit of its members as a whole and will be in breach of their duties if they seek to take action which promotes only their position. Further, a shareholder director needs to be particularly mindful of their duty to avoid conflicts of interest. Directors must also remember their duty to act within the limits of their power and authority, particularly in line with any restrictions imposed by the company’s articles of association. Where a director is in breach of their duties, an aggrieved shareholder can bring a derivative action (where they stand in the shoes of the company) to bring a claim against the defaulting director.

Where a shareholder director is in conflict, it is often tempting for that director to consider diverting business opportunities away from its original company to a new business entity. Such an action is a breach of the duties that director owes to his original company and could lead to the company bringing an action for all of the profits lost from the diversion of the business opportunities.

Shareholders’ Agreements

It is often beneficial (in order to avoid shareholder conflicts and to set out rules for resolving them if they arise), to put in place a shareholders agreement. Such an agreement can save significant time and cost in the event of a dispute and will generally set out each party’s respective roles, responsibilities and powers. Where such an agreement exists, it is important that the directors of a company ensure that they conduct the business of the company in accordance with its terms.

In the next edition we will look at directors duties of insolvent companies.

For more information on directors' duites and responsibilities please contact: 

Daniel Hayhurst
Solicitor, Corporate
Tel: 0151 600 3155