Conflicts between Shareholder and Director Roles

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It is not unusual for one person to act in more than one capacity in connection with the same company. In fact a director will often also be a shareholder. A shareholder may conduct himself in accordance with a shareholders agreement, whereas that same person in their capacity as director would be bound to conduct themselves in accordance with their statutory duties. This was the situation in a recent case which has highlighted the difficulties when dual roles are held and the extra care that should be taken when entering into shareholders agreements if the parties hold these dual roles.

The case

Mr Jackson and the two defendants owned a Cayman company and entered into a shareholders agreement under which the two defendants made a commitment, as shareholders, to Mr Jackson’s appointment as a director of another company, TFG, and to his appointment at each successive AGM. However, Mr Jackson’s appointment was later terminated by the two defendants, in their capacity as directors of TFG, on the grounds that he was unsuitable. Mr Jackson brought a claim in relation to his termination. The defendants argued that they had to terminate Mr Jackson’s appointment in order to comply with their statutory fiduciary duties. The shareholders agreement was seen to conflict with their duty to act in the best interests of TFG.

The decision

The court found that the defendants were not bound to terminate Mr Jackson’s appointment. It was ruled that it was an implied term of the shareholders agreement that the defendants were not entitled to take any steps to remove Mr Jackson, including that they could not vote as directors to remove him under the articles of association. The court emphasised that it is a general rule of contract law that a contracting party must not do anything voluntarily to render the performance of the agreement impossible or futile.

The argument that the directors had no choice but to remove Mr Jackson in order to comply with their fiduciary duties was not successful. The court found that there were further options available to the defendants in their capacity as directors that should have been considered. In order to ensure that they were not in breach of their fiduciary duties the directors could have got the Cayman company to sanction their breach of duty or changed the articles of association of TFG to remove the provision allowing them to remove another director from office. Furthermore the defendants were obliged to take such steps as under the shareholders agreement there was a further assurance clause which stated that the parties would take such action as might be reasonably required to give effect to the agreement. It is arguable that had this further assurance clause not existed the court might have held that the shareholders agreement was unenforceable.

Impact of the case

This case has emphasised the rule of contract law that it is a breach of contract to do something voluntarily that will render an agreement inoperative. Therefore, when drafting, it is important to remember that the terms of a shareholders’ agreement should be reconciled with the provisions of the articles of association to ensure the documents are consistent, convey the same meaning and to avoid any unnecessary litigation. The case has also highlighted that shareholder and director roles do not exist in parallel universes and more thought may be needed to make sure all parties are aware of the impact that provisions in an agreement may have on their responsibilities and duties in relation to their dual capacity as shareholder and director.

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