Owner-managers must have clear agreements governing the terms of their relationship with other shareholders to avoid potential difficulties if relationships break down.
Following the Court of Appeal’s recent decision in Dear and Anor v Jackson [2013], it is also crucial for owner-managers to consider the interaction of shareholders’ contractual agreements and directors’ powers where an there may be a potential conflict between the two.
On a general note, the case once again highlights the reluctance of the courts to imply terms into commercial contracts.
Background to the Shareholders’ Agreement
The parties, who were shareholders in a parent company, had entered into a shareholders’ agreement following a dispute. In that agreement Mr Dear and Mr Griffith agreed to vote to elect Mr Jackson as a director of a subsidiary company at each Annual General Meeting. They were to use their vote to secure Mr Jackson’s appointment and subsequent re-appointments unless and until the occurrence of one or more termination events stipulated in the agreement.
The parties were also directors of the subsidiary whose articles permitted every director to remove one of their numbers by the process of written notice to all other directors. Through this mechanism and along with other directors, Mr Dear and Mr Griffith removed Mr Jackson as director of the subsidiary and Mr Jackson brought proceedings.
The High Court Decision
The court was asked to decide two main issues. The first was whether there could be an implied term in the shareholder agreement that Mr Dear and Mr Griffith would ensure Mr Jackson was not removed as a director. The second issue concerned the subsequent interpretation of an assurance clause in the agreement which obliged the parties to take steps to see through the agreement without breaching their fiduciary duties in their capacity as directors of the subsidiary.
The High Court held that there was a term implied into the shareholders’ agreement preventing the exercise of the right of removal contained in the subsidiary’s articles of association. The judge offered three ways in which the directors could refuse to remove Mr Jackson while not involving themselves in a breach of fiduciary duty under the articles.
The Court of Appeal Decision
On appeal, it was held that no such term could be implied into the shareholders’ agreement. The court held that is was not obvious that a reasonable person would imply that term in order for the contract to make commercial common sense; the contract would make sense with or without it. Furthermore, the shareholders’ agreement only related to the shareholdings in the parent company. The court decided therefore, that it would be wrong to imply a term into the contract that interfered with the powers of the directors contained in the articles of the subsidiary.
Comment
On the facts, it is important to note that the shareholders’ agreement had been professionally negotiated by lawyers and had not dealt with the potential conflict between the shareholders agreement and the directors’ duties. It was silent on whether Mr Dear and Mr Griffith could join in removing Mr Jackson using the directors’ powers in the articles.
There are various means to avoid such conflicts either by dealing with specific terms explicitly or giving priority to the shareholders’ agreement. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
