If the attendance of a specific
director is a requirement of a company’s constitution, can a decision made at a
directors’ or shareholders’ meeting be valid if that director is not present? Further still, can that director’s removal as
a director of the company be possible without their attendance?
Simply put, the answer to this
question is no, which leads to a situation in which it may be impossible to
remove an uncooperative director without breaching the company’s constitution,
resulting in a deadlock situation.
Perhaps unsurprisingly this situation
is commonly encountered by many small and often family run businesses and,
whilst understandable that a director wishes to ensure that the management and
strategy of the company remains under their control and that their interest
remains secure, the situation becomes complicated when director relations start
to fall apart.
Court
Intervention
Section 306 of the Companies
Act 2006 provides some comfort to companies, as a court may, at the request of
a director or shareholder, order a general meeting to be called, held or
conducted in any manner it thinks fit where it is impractical to call or
conduct the meeting in the manner prescribed by the company’s articles (as supplemented
by the Companies Act 2006). Furthermore,
the court has the general power to make any necessary directions to give
efficacy to the operation of the company, which may include amending a
company’s quorum from two to one, amongst other things.
Smith v Butler & another [2011]
EWHC 2301 (Ch)
The case of Smith v Butler successfully illustrates
s.306 in action. The claimant, Smith,
was the Chairman of a company and held 68.8% of the shares whilst the Managing
Director, Butler, held the remaining 31.2%. The quorum requirement for general and board
meetings was two, one of which had to be Smith unless he waived the requirement.
In 2011 the parties fell out with
suspicions of fraud being raised by Butler against Smith culminating in Smith
wanting to appoint a new CEO and Butler seeking to suspend Smith as a Director.
Butler proceeded to hold a meeting in
which Butler and a third director signed a resolution of the board authorising
the suspension. Following this, Smith
requested that a general meeting be held in order to remove Butler and the
third director as directors, Butler’s refusal to attend the meeting led to the
meeting be held inquorate causing Smith to make an application to court to seek
an order that a general meeting be called with a quorum of one.
It was held by the court that a
quorum of one would be allowed as the Articles were designed to give excessive
protection to Smith who could not be dismissed as a director. As a point of interest, the court also commented
that Butler, as a minority shareholder, could in fact have commenced unfair
prejudice proceedings and/or sought permission to commence a derivative action.
Conclusion
– the need for a Shareholders’ Agreement
Whilst this case is an example
of court intervention in a deadlock situation, the reality is that a s.306
application is often an option of last resort, as the courts are generally
hesitant to interfere in company matters unless absolutely necessary. A preferable and potentially more cost
effective option would be for a company to invest in the drafting of a clear
and concise shareholders agreement to strike an effective balance between
protection and flexibility and which contains specific provisions dealing with
potential deadlock scenarios. This would enable the company to function
successfully and thrive irrespective whatever the situation.
For more information on the
drafting or interpretation of shareholders’ agreements or any of above, please
feel free to contact Partner Andy Wilks on 0207 841 0390.
