Forcing a Director out of a PTY LTD company

[GoldenOldie]

Hi Guys,

I would like to know how difficult it would be to force a director out of a company. There are 2 directors in the company.

I hold 100% Management shares and 70% Ordinary Shares. the other director holds 30% ordinary shares.

We do not have a shareholders agreement in place as yet.

Much Respect,


GoldenOldie

[akagrp]

Hi

Please note that the below information is general and you should double check the facts and details for your given situation.

As a general Rule as you do not have a formal shareholders agreement (this was a mistake one is always required), it would depend on the Company's Constitution that was signed when the company was set up.

Normally most Constitutions from acquired via a normal Off the Shelf setup allow for shareholders to elect directors, if yours allows for majority rule then as you hold 70% of the shares you can elect not to offer them Directorship.

It is also important to make sure the company was not setup in a way to require two directors at all time, or such a vote cannot past without full consensuses meaning 100% in favor.

Though really your biggest issue will be the fact that they are shareholders, as given you do not wish them to be a Director would indicate there may be an issue in the relationship.

Hope it works out how you want it.

[GoldenOldie]

Thank you for the reply.

I know that not writing a shareholders agreement is not the ideal way to set up a company. I guess I was a little too trusting. The reletionship between myself and the other director has soured considerabely.

I can confirm that it is a off the shelf company with majority rule.

I have another question. Does the same rule apply for forcing the other director out of the business all together.

Thanks in Advance.

[peppie]

Again it would depend on the terms of any governing document that controls the company rules. It may not be called a constitution. Essentially this is what decides the way in which the company will be run, remembering of course that it still needs to be within the general rules allowed by any company structure (the ones the government sets).

As I understand it you have 2 things at work in any company, the positions and responsibilities of any directors, company officer and secretary etc. and the rights and responsibilities of shareholders. If you have the majority vote as a director then it appears you also have the majority vote as a shareholder.

The only problem I see is that the minority shareholder owns a shareholding in the company and could strictly speaking sell that to anyone. Your best tactic might be to approach that person with an offer to buy them out. Of course you can tactfully mention that it might be the best option for everyone to settle amicably now, sort of cut your losses before things got any worse - which in my experience is very likely to be more the case than never having this problem ever surface again.

I would suggest you consider that it may be better to swallow hard and be prepared to accept less than you really want if it means stopping the problem getting worse and dragging on much longer.

Also, as has been well said above, only my understanding and you need to be sure of how you should act so it might be a good thing to have a chat to a legal type who can make your options clearer.

[akagrp]

Hello

Paul is correct, as a minority shareholder he can also rely on the Corporation Act for protection if there is any actions that will place a minority shareholder at a disadvantage.

Paul is correct in saying the best action is to try and resolve this as amicably as possibly. If it has reach the point that both of you are not speaking I recommend bring in a Mediator that is neutral to both of you.

The reality though is you cannot just remove him, as a shareholder you need to buy him out legally ie including attending to share transfers documents and having them stamped at the Office of State Revenue. You will also require 3 years Annual Accounts to support the value of the shares, so should for example the company show its NET Equity at $100,000 the duty will be paid on $30000 even if only $1.00 was agreed to. He could also have same issue with Tax and Capital Gains Tax. So you need to be very careful how you attend to this.

Normally under standard company documents he cannot sell his 30% without approval of other shareholders, but again important to check your documents.

When was the company incorporated?

[peppie]

Anna, it sounds like you would be our resident expert? on maters company and such. We may need you more so yet.

My experience is really just having been in the position of a director/sharholder and company secretary of a similar 2 person company set up. The main diff was that we were 50/50 in everything and had a working agreement as well. It still didn't stop problems and ran for about 6 years before floundering even though the other person was my brother and we thought we could work well together. Fortunately it did terminate reasonably amicably.

I have also been in the position of secretary or treasurer and trustee for various groups for some time. Still, I know enough to not want to make my own decisions without being very sure of myself, and GoldenOldie, without being covered against every possible eventuality. Because it is pretty certain something will go wrong somewhere.

[GoldenOldie]

Thank You for all your replies.

I would love to settle this amicably. I have already offered to buy the other director out. Suffice to say It was not taken very well.

We now barely talk and constantly argue over the smallest issues. There is barely any level of trust in the relationship. The other director does not have any thing to do with the day to day running of the company. I have built this company from scratch and have formed all of the relationships which make the business successful.

I only ask these question because I feel that this is the only road left.

Also I will be seeing my accountant later this week to get professional advise.

Again, thank you all for your thoughtful advise.

[Kestrelassist]

Hi GoldenOldie,

Great advice from Anna and Paul (Thanks for taking the time to share.)

No easy out it seems.

Work hard on negotiating with the other Director,maybe use a mediator? The answer has to come from there - and the sooner the better.

Good luck!!!
Alan Glasby
www.kestrelbusiness.com.au

[CruzAccountant]

I've come across cases similar to this. Although an accountant can provide you with some financial advise as to a payout value or the value of the company, I do suggest you see a lawyer as well. I've seen family disputes with a company business go to court and it's % ownership is only one aspect that they consider, not the be all and end all.