Introduction
There are three categories of dispute that can typically arise within a company. Firstly, management disputes can revolve around day to day operational matters, such as contracts, suppliers, human resources, premises and so on. Deeper divisions can arise in relation to strategic decisions such as mergers and takeovers. Secondly, personal disputes can arise around matters such as succession and divorce. Thirdly, issues can arise around misconduct, such as loans to directors, transactions with connected persons, diversion of corporate opportunity and exclusion/removal from management.
Issues for Auditors
A company’s auditor is sometimes asked to advise on how to deal with such disputes. A key issue for any auditor is to ensure that he avoids conflicts of interest. If an auditor has to question if he has a conflict of interest, it is likely that he does! As with any potential conflict of interest, the auditor should abide by the Institute’s ethical guidelines.
Auditors need to be careful in issuing Audit Reports on companies which are the subject of internal strife. Such strife may lead to going concern issues. It may be particularly important that all related party transactions are fully disclosed.
It is not uncommon for disputes to lead to “embarrassing” disclosures regarding the company’s tax affairs that the auditor was previously unaware of. Issues that can come up include “secret” bank accounts and “under the counter” cash payments to staff. Accordingly, auditors need to watch out for the whistle blowing provisions of the Criminal Justice (Money Laundering) Act 1994, the Criminal Justice (Theft and Fraud Offences) Act 2001, Company Law Enforcement Act 2001 and various Tax legislation.
Practicalities for the Company itself
It is not uncommon for directors to be dismissed, and issues arise such as securing company assets such as company car, laptop, changing locks, cancelling credit cards etc. It may be necessary to change the bank mandates. It may also be necessary to change passwords for email and voice mail access. We were involved in one case where the dismissed director accessed his co-directors’ emails and voice mails on a daily basis for several months after his dismissal to check up on what legal advice his co-directors were receiving!
Sources of Power within a Company
The ultimate authority is with the majority shareholders, who can appoint and remove directors. In effect, the Board acts as the “cabinet”, and has power to manage the business. Directors can be removed by Shareholders, by simple majority. A minority shareholder, in the absence of a shareholders' agreement, has little power.
What are the Rights of Shareholders?
The Shareholders rights are limited to the following:
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Receiving a dividend – if any
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Attending and voting at shareholders meeting
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Receiving company accounts
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The right to convene shareholders meetings if they hold a minimum of 10%
Removal of Directors
There is an important distinction between the removal of an office holder and the dismissal of an employee. Thus, shareholders might be able to remove a director, but not be able to terminate his employment contract.
What is oppression of a Shareholder?
Section 205 of the 1963 Companies Act seeks to tackle the exercise of a directors’ powers, or the conduct of the company’s affairs in a manner which is oppressive to, or which disregards the Shareholders interests as a member. Such conduct can include selling lands at gross under value, failure to implement management agreement, or exclusion of a director from important decisions.
Using ODCE
A shareholder complaining to ODCE can, in certain circumstances, be effective in terms of encouraging the directors to remedy faults. It can be particularly effective where loans to directors exceed 10% of the company’s net assets. ODCE will directly investigate more serious allegations such as proper books and records not being maintained.
Dealing with Insolvency
A Boardroom dispute can distract the company’s focus from day to day activities, and may eventually lead to its insolvency. Accordingly, directors in such situations need to be careful that they avoid trading recklessly; otherwise they may be held personally liable for the debts of the company.
Settlement Options
As with any commercial settlement, consideration should be given to the most tax advantageous aspect. While every dispute is different, it may be possible to incorporate some of the following “options” into a settlement package:
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Tax Free Redundancy
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Pension Top Up
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Transfer of company car
Usually a key element in arriving at a settlement is for the shares of the dissident shareholder to be purchased. This may be done by the other Shareholders of the company, in which case they would have to abide by the pre-emption rights usually set out in the company’s Articles of Association. In some cases, it may be possible for the company, provided it has sufficient distributable reserves, to buy its own shares back, using the off market share purchase provisions of Section 212 of the 1990 Companies Act. If the company does not have sufficient cash resources to buy back shares, it may be possible, using the provisions of Section 60 of the 1963 Companies Act, for the company to give financial assistance for it to purchase its own shares back.
In some cases that we have dealt with it, the solution has been to place the company into a Members Voluntary Liquidation i.e. a solvent liquidation, and sell the business to the highest bidder, and distribute the proceeds among the shareholders, or in some cases, distribute the assets in specie to the shareholders.
In certain cases it may be possible for a minority shareholder to "force" a settlement by the adoption of certain tactics.
Share Valuations
As outlined above, it is common to settle a dispute by arranging for shareholders to be bought out. We have extensive practical experience of negotiating such buy outs. We can prepare expert reports on share vauation.
Role of Mediation
The legal costs of a Boardroom/Shareholder dispute can be very significant if it reaches the steps of the High Court, at which stage any benefits of the legal action may be wiped out by the legal costs incurred. A very attractive option for dealing with such disputes is to appoint an experienced Mediator who has a good understanding of Shareholders’ disputes and who can act as “honest broker” between the disputing parties. The Rules of the Commercial Court (which deals with commercial claims with a value greater than €1m) make provision for the use of Mediation. Apart from the significant savings on legal costs, there should also be the benefit of no publicity. Mediated settlements can also help to ensure that there is less acrimony between the parties after the settlement is reached.
We offer a Mediation service for Shareholder and Boardroom disputes. Our strong blend of share valuation expertise, company law expertise, experience in dealing with ODCE, tax expertise and conciliation skills means we can offer a full service.
For further information please contact Jim Stafford or Tom Murray on 01 661 4066 or stafford@liquidation.ie
or murray@liquidation.ie