Under company law, it is the directors who have responsibility for the day-to-day management of a company, not the shareholders.
At TS&P we act for a lot of owner-managed businesses i.e. the shareholders are also the directors. However, many companies are structured so that not all shareholders are also directors. This can lead to the situation where certain shareholders feel excluded from the management of the company.
When the intention is that the shareholders should play an active part in the running of the company, we recommend putting in place a shareholders’ agreement which:
- gives shareholders the right to appoint directors so that they have ‘representatives’ on the board of directors or which allows the shareholders themselves to be appointed as directors;
- sets out a list of key decisions which have to be made unanimously, or by a 90% majority of the shareholders, for example. Key decisions might include a change to the nature of the company’s business, the acquisition and disposal of company assets above a threshold value, borrowing money and issuing shares in the capital of the company to new shareholders; and
- sets out detailed procedures to be followed by shareholders in the event of deadlock.
The company should also put in place bespoke articles of association which contain detailed provisions (amongst other things) about how the directors and shareholders make decisions, how directors are appointed or removed and the circumstances under which shares can be transferred to third parties and other shareholders.
If suitable provisions are not in place, time-consuming and expensive legal disputes can arise between the company and an aggrieved shareholder. Perhaps the best solution in such a situation is to avoid a dispute and instead reach an agreement where the aggrieved shareholder sells his/her shares to the other shareholders/the company itself. However putting in place robust decision-making procedures can help to prevent a dispute in the first place.