While the shareholders own companies, the running of the company is up to its directors. But, what happens when shareholders do not like what the directors are doing? As owners of the company, shareholders have rights in relation to how the company is run and can take action to prevent directors from running the company in a way they do not agree with.
In this article, our dispute resolution team look at the action shareholders can take to protect the company from mismanagement.
In the first instance, we would always recommend discussing any issues you may have with the directors. It may be possible to use alternative dispute resolution such as mediation to resolve matters. However, whether this will have any impact may depend on the size of your collective shareholding.
If shareholders with 5% or more of the voting power are unhappy with the actions of the board of directors, they can call a general meeting to take action, but it will require 50% of the votes cast or more to pass a resolution.
Shareholders have the power to remove a director or several directors from the board by passing a resolution. The shareholders do not need a reason to do so, and there is no need to prove that the director acted in a wrongful way.
In order to remove a director, shareholders with 5% or more of the voting power must vote to hold a general meeting to consider a resolution to remove the director or multiple directors. When such a meeting is called, you must follow the correct procedure. In order to be effective, the resolution must be passed by more than 50% of the votes at the meeting.
The director must be given special notice before the meeting to allow them to prepare their case. They may present written representations to the company members before the meeting and further verbal or written representations at the meeting. A resolution to dismiss a director cannot be passed using a written resolution – there must be an in-person meeting.
The Companies Act 2006 outlines that a director can be removed by a resolution passed by the shareholders, regardless of whether it is prohibited in their employment contract or the company’s articles of association.
In some companies, directors who are also shareholders may have special voting rights on resolutions that seek to remove them. These circumstances are often complex and may mean the necessary majority vote cannot be obtained to pass the resolution. Strict time limits also apply, so you should seek specialist advice on your specific circumstances as soon as possible.
Rather than removing directors, the shareholders can vote to pass a resolution that outlines how the directors must act in relation to a specific matter. Once such a resolution has been passed, the directors must act in accordance with the action that has been set out in the resolution.
Minority shareholders do have some powers, but these are more limited. In the first instance, a minority shareholder may wish to gain the support of the other shareholders to reach the required 50% of the shareholding power to take action.
In serious cases, such as where the directors seem to be failing to meet their responsibilities or abusing their powers, shareholders may take legal action. This can include:
Our specialist solicitors can advise you fully on your options and the best course of action for your circumstances.
Our dispute resolution solicitors are experienced in resolving a wide range of shareholder disputes involving both UK-based companies and international organisations with offshore operations and complex cross-border structures.
We act for shareholders, investors and directors in equal measure and pride ourselves on being able to give commercially sensible advice which takes account of any competing interests that may be at play. Contact our team today.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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