Minority Shareholder Disputes

Author:Mr Clive Lee
Profession:Rawlison Butler

In a case study of a fictitious company, the Managing Director poses the following question:

"I am very worried, the Company urgently needs to buy a new computer system."

The Company is family owned (in equal shares) by three brothers (Tom, Dick and Harry) who are also members of the Board of Directors. Tom says that the system is a waste of money and sub-standard. He claims that his brothers promised him a large bonus this year (to pay for his yacht). Dick and Harry want to remove Tom as a Director and have asked for our support. Tom says that the Company should not do anything without his say so and is threatening to "put things straight". He is threatening to write to the computer company telling it that if it does sell the system to the Company he will sue it.

Can Tom interfere with the majority of the Board's decision, or sue the Company's proposed supplier himself independently?

The Board's ability to remove Tom as a Director will be set out within its Articles of Association and/or established by the procedure that the Board has adopted over time.

Tom, Dick and Harry may have entered into a shareholders agreement that may provide Tom with contractual rights (between the shareholders) to maintain his position upon the Board, or set out consequences arising from his removal. Those rights may well be binding on the shareholders.

Subject to reviewing the Company's Articles, any shareholders agreement and the Board's internal procedures, the majority of the Board may be entitled to remove Tom by a Board resolution. Tom may then seek to challenge the Board's actions in his capacity as a shareholder.

As a general principle, companies are required to be managed without interference on a day to day basis by the board of directors, to whom the shareholders delegate management responsibility in accordance with the provisions of the company's constitution.

Internal company disputes sometimes arise if the board acts (or omits to act) otherwise than as an individual or class of shareholders considers it should.

Minority shareholders cannot as a general rule sue in respect of "wrongs" done to the company or complain of irregularities in the conduct of its internal affairs. This is because:

the majority of the shareholders will generally be able to ratify most alleged misconduct in general meeting.

the company generally has an exclusive right to sue on its own behalf.

There are, however, some exceptions to this general rule (including...

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