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Dismissed director penalised as ‘bad leaver’ under company’s articles, despite successful claim against company

Companies disciplining a director for gross misconduct may have their actions upheld in court provided they act in a fair and unbiased way. This is so, even if the director successfully claims ‘unfair prejudice’, and the courts can value the director’s shares as if ‘bad leaver’ provisions in the company’s articles applied.

 A disciplinary investigation found that a director and majority shareholder of a UK holding company, who was also the CEO of one of its subsidiaries, knew the subsidiary was bribing a director of a US customer in return for ongoing business. The director was dismissed for gross misconduct.

The director and his fellow board members were involved in an internal dispute, and the director went to court, claiming that his fellow board members had conducted the UK companies’ affairs in a way which was ‘unfairly prejudicial’ to him in his capacity as a shareholder of the company. If a shareholder successfully claims unfair prejudice a court will commonly require the other shareholders to buy out his shares at their market value.

One of the grounds for alleging unfair prejudice was that the other directors had a personal interest in the outcome of the disciplinary process. However, the Court ruled that there was no unfair prejudice on these grounds. Although his fellow directors benefited from his dismissal, the Court said the investigation and subsequent dismissal were carried out in a fair and unbiased way. While his dismissal as a director did prejudice him as a shareholder, it was not unfair.

However, the Court ruled that other actions by the directors did amount to unfair prejudice. Even though the Court upheld the director’s unfair prejudice claim, it did not order the other shareholders to buy him out at the shares’ market value. Instead, it ruled that his dismissal for gross misconduct meant he was within the definition of a ‘bad leaver’ under the holding company’s articles. ‘Bad leavers’ had to relinquish their shares in the company for their face value. The Court therefore ordered that the director receive only the face value of his shares – around £18m less than he could have expected had he been paid their market value.

Operative date

  • Now

Recommendations

  • Companies investigating and disciplining directors or employees against a background of an internal dispute can have their actions upheld in court provided they act in a fair and unbiased way, even if the outcome benefits them
  • Directors dismissed for gross misconduct can find their shares are valued much lower than open market value under ‘bad leaver’ provisions, even if they have successfully claimed unfair prejudice against the company

Case ref: Gray & Ors, Re Braid Group (Holdings) Ltd [2015] ScotCS CSOH_146

23 February 2016

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]