Company directors are charged with numerous duties under the Companies Act 1993. One of those duties is the requirement to refer a decision which involves a substantial change in the company’s business to the shareholders for approval. So long as directors comply with this requirement the shareholders are able to exercise oversight in the management of the company they have invested in. However, as the following situation shows, a more fail-safe way of ensuring shareholders are able to exercise oversight in the management of the company is to ensure their interests are represented through the appointment of a director representing them on the company’s board of directors.
Sole director sells land without shareholder consent
Roger and Frank had originally been directors and equal shareholders in a farming company. The company’s main asset was land which it leased to a neighbour for grazing. After Frank died, Frank’s children inherited his shares in the company. For some years Roger continued as the sole director of the company. Frank’s children were happy for this arrangement to continue and left the day to day management of the business to Roger. On several occasions the neighbour had expressed an interest in buying the land and eventually presented Roger with an unconditional offer. As the offer was well above what Roger believed the land was worth he signed the agreement. When he told Frank’s children about the sale they were very upset. The farm had been in the family for decades and Frank’s children wanted it to remain in the family. Frank’s children took legal advice.
The director’s duty to obtain shareholders’ approval
The children’s lawyer advised them that the sale of the land would have been a “major transaction” under section 129 of the Companies Act 1993. A major transaction is defined as one which involves more than half the value of the company’s assets. Under section 129 Roger was obliged to obtain the approval of 75% of the shareholders in the company. Thus Roger should have obtained the children’s approval to the sale before he signed the agreement (or made the agreement conditional on obtaining that approval).
The shareholders’ rights and remedies
The children’s lawyer advised them that Roger could be personally liable under section 134 for failure to obtain their approval. However, as the land was sold at a very good price, it would be difficult for the children to establish such a claim because they could not show any financial loss. The Court assesses damages in terms of financial loss and there are limited circumstances in which the Court will award damages for emotional upset.
The children’s lawyer also advised them that under section 164 of the Act they could apply to the Court for an order preventing the sale. However, there were provisions in the Act providing that the sale would most likely be valid even though Roger had not complied with section 129. It would therefore be difficult for the children to prevent the sale.
Another option the children could consider would be obtaining an order under section 174 of the Act. Under section 175, failure to obtain the shareholders’ consent to a major transaction is conduct that is unfairly prejudicial to the shareholders. This gives the shareholders the right to apply to the court for certain orders, including orders requiring the company or Roger to acquire their shares; to pay compensation to the children; to regulate the future conduct of the company’s affairs; to alter or add to the company’s constitution; to appoint a receiver of the company; to put the company into liquidation; or to set aside the sale.
The children decided that it was doubtful they could achieve their aim (which was to prevent the sale of the land) by exercising their rights and remedies under the Act. They therefore resolved to ensure someone was appointed a director of the company to represent their interests when it came to future company decisions.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.
