Director Duties and Shareholder Disputes

Partner David Few, head of our Corporate team, explains director duties and shareholder disputes.

In most family and small businesses, the shareholders will often also be the directors of the company. It is not uncommon however for there to be other shareholders, usually minority shareholders, who are not directors of the company and are not involved with the normal day-to-day running of the company. 

Shareholder disputes typically involve claims made by a non-director minority shareholder regarding the conduct of the directors, who are in the majority. The claim will usually be made if the directors’ conduct constitutes a breach of the directors’ duties.

What are the directors’ duties?

Directors owe many duties to a company. Many of these duties have been developed by the courts over hundreds of years from more general common law rules and equitable principles.

Some of these duties have now been set out in statute. Sections 170-177 of the Companies Act 2006 (the Act) codifies for the first time the general duties owed under common law rules and equitable principles.  

These general rules should be interpreted as such and regard must also be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.
The directors’ duties as set out in the Act are as follows: 

• to act within powers;
• to promote the success of the company;
• to exercise independent judgment;
• exercise reasonable care, skill and diligence;
• to avoid conflicts of interest;
• not to accept benefits from third parties; and
• to declare an interest in a proposed transaction. 

Directors’ duties are owed to their companies, and so it follows that only the company can enforce them.  Members can, in appropriate circumstances, avail themselves of derivative actions and claims for unfair prejudice.

Who do theses duties apply to? 

These duties apply to all validly appointed directors of a company. They also apply to shadow and de facto directors of a company. 

A de facto director is a person that acts as a director of the company, although they have not actually or validly been appointed as such.

A shadow director is defined by the Act as a person in accordance with whose directions or instructions the directors of the company are accustomed to act, although that person has not been appointed as a director of the company. 

Shareholder protection:

There are several forms of protection for minority shareholders, the most common being:

•    Shareholders agreement; 
•    derivative proceedings;
•    the Companies Act 2006; and
•    the winding up of the company.

1.    Shareholders Agreement

The Shareholders’ Agreement will be enforced like any other contract and will be the first port of call for any disgruntled shareholder. It will usually confer additional rights above what is provided for in the company’s Articles of Association but it cannot be varied or modified by the majority without the agreement of all parties to it, including the minority shareholders. 

The Shareholders’ Agreement should make a provision for how any breaches of duty by a shareholder or a director shall be dealt with and if the parties have the right to terminate the agreement.

2.    Derivative proceedings

Generally speaking, only a company may sue for damages where a wrong has been done and a shareholder cannot seek to recover losses suffered by the company even if the value of the shareholders shares has decreased. There are some exceptions to this. 

A minority shareholder will be able to bring a derivative claim (where any damages awarded will vest in the company) on company in cases of equitable fraud or where the majority wrongdoers were in control of the company. This will not directly benefit the minority shareholder but this will increase the value of the shareholding. 

This may not of course provide a solution to the fundamental dispute between the majority and minority shareholders.

3.    Companies Act 2006

A claim for unfair prejudice is the most common form of action taken by a minority shareholder. The shareholder’s complaint is normally that there has been a decrease in the value of their shareholding as a result of the actions of the directors. In order to make a claim, the following two criteria that must be satisfied:

•    The conduct of the majority must be prejudicial; and 
•    The conduct of the majority must be unfair. 

4.    Just and equitable winding up 

The final option for a disgruntled minority shareholder is winding up the company. This should only be used where no other remedy is available and all other avenues have been exhausted. The Court will wind the company up if it is “just and equitable” to do so. 

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.