Article written by Kush Birdi, Head of Corporate and Commercial
A recent High Court case analysed the extent of fulfilling director duties in resolving a dispute between shareholders in an indoor climbing centre. A director and founder of the centre, who owned a 32% stake in the company that ran the business, was sacked after his fellow shareholders discovered that he had invested £100,000 to acquire 49% of another business in the same sector. He was, amongst other things, accused of creating a conflict of interest and failing to promote the company’s success in accordance with his duties as a director.
Two of the fellow shareholders offered to purchase his shares in the company at a discounted price on the basis that he was a ‘bad leaver’ within the meaning of the shareholder agreement. He rejected that offer and launched proceedings under the Companies Act 2006, asserting that he had been wrongfully dismissed and subjected to unfair prejudice as a minority shareholder.
The director pointed out that the centre and the business in which he invested were not competitors and operated from premises 200 miles apart. In dismissing his claim, however, the Court found that he was heavily committed to the other business and worked for it at times when he could have been working for the company.
His direct or indirect interest in the other business conflicted, or possibly may have conflicted, with the interests of the company. That was a fundamental breach of the duty he owed to the company and the board was not wrong to exclude him from the company’s management and to oust him as a director.
By signing a directors’ services agreement (DSA), he undertook to devote his full time and attention to furthering the company’s business during such hours as might be necessary for the performance of his duties. The Court noted that the board had been rightly concerned to understand how his commitment to the other business might affect his performance of that undertaking.
His decision to invest in the other business was unauthorised and unilateral and the investment opportunity which he pursued himself might also have been of interest to the company. His failure to make full disclosure of his involvement with the other business when asked was also a persistent breach of his obligations under the DSA.
The Court concluded that he had suffered no unfair prejudice and that the company was entitled to terminate his employment contract.
We always encourage people to seek legal advice before going into business with their co-founders. This will help to reduce the potential for disagreements or have in place a mechanism for dealing with disagreements without the need for expensive, stressful and risky court proceedings.
We regularly help businesses to structure their internal governance to ensure that directors and founders have suitable legal protection, which helps everybody involved to focus on the business at hand. For more information or to discuss any aspect of company law, feel free to email me or contact me on 020 8858 6971.