Question

Gerald and Lawrence, two brothers, incorporated Durrell Ltd in 2013 to provide activity holidays in the UK.  The brothers each took 100 shares in the company and became the company’s initial directors.  In 2015 they were joined in the company by Gerald’s friends, Spiro and Theo, who were each allotted 50 shares and appointed directors.  At the same time, Gerald and Lawrence’s sister, Margot, began helping with the management of the business and the company accounts, and began attending board meetings, although she was not allotted any shares, nor formally appointed director.

In 2016 Gerald fell out with Lawrence and Margot over family issues and relationships became very strained.  Lawrence began spending most of his time (helped by Margot) on a new business venture, providing active city breaks in the UK, and thereafter was increasingly ignored by Gerald, Spiro and Theo.  In 2017, at a general meeting (attended by all the shareholders), Gerald, Spiro and Theo voted to remove Lawrence from the board of directors and thereafter refused to allow either Lawrence or Margot to attend board meetings.  At the first board meeting of 2018, Gerald, Spiro and Theo decided to expand the company’s business into activity holidays in Europe and the Far East and have since been actively promoting this new business. 

Lawrence is unhappy about the new direction of the company, which he believes is unduly risky and unfair to the company’s employees, many of whom will now have to spend long periods of time away from their families.  He is also unhappy that since he has been removed as director he no longer receives any director remuneration, but the company has yet to declare any dividends.  Gerald, Spiro and Theo are unhappy because they believe that the success of Lawrence and Margot’s new venture is largely due to the contacts and information they obtained from Durrell Ltd.

Advise the parties.

Answer guidance

This question requires you to consider de facto directors, directors’ duties, and shareholder remedies.

You need first to identify if M is a de facto director, explaining what this means and relevant factors. You need to address explicitly whether this means M is subject to the duties of a director. Consider whether L and M are in breach of CA 2006, s. 175 (conflict of interest). For G, S and T you should consider a potential breach of CA 2006, s. 172. You could make the point that there is nothing unlawful in removing L (using CA 2006, s. 168), nor in not paying dividends.

You then need to explore what L could do as a minority shareholder. Consider whether there is a strong enough case to pursue a derivative claim, and whether the outcome would be satisfactory. Consider unfair prejudice under CA 2006, s. 994, looking in particular at the notion of unfairness in O’Neill v Phillips [1999] 1 WLR 1092 and Saul D Harrison & Sons plc [1995] 1 BCLC 14, and considering the relevance of L’s own behaviour. Recognise that s. 994 doesn’t give the right to buy out in the absence of unfair prejudice. You could also consider just and equitable winding up (IA 1986, s. 122(1)(g)), but recognise its limited value in shareholder disputes.