Amidst the cut and thrust of commerce, relationships between fellow directors and shareholders can fall below the ideal of brotherly love. As an instructive High Court ruling showed, however, they are generally under a duty to exercise good faith in their dealings with one another and to look after each other’s interests.
The case concerned an employee of an air conditioning business who was invited by its owner to buy in to its parent company. He acquired a 20 per cent shareholding in the parent for £50,000 and was appointed as a director. He and the owner, however, subsequently fell out and his employment was terminated. The owner asserted that he was a ‘bad leaver’, within the meaning of the shareholder agreement, and that he was obliged to sell back his shares for £14,200, their nominal issue price.
The man, who was dismissed at a time when he was devastated by the recent death of his mother, held a deep-seated conviction that he had been treated shabbily. After he launched proceedings, however, the Court rejected claims that the owner had taken advantage of him and engineered his dismissal as a means of compelling him to sell his shares at an artificially low price. The owner, who was concerned about his performance, was authorised to terminate his employment and had acted neither dishonestly nor with an ulterior motive or purpose.
The Court found that the owner’s mind was focused on what he saw as the need to take drastic action to avoid damage to the business arising from what he perceived as the man’s poor performance. In terminating his fellow director’s employment, he did not consider the matter from his perspective. The man was not informed of the complaints against him; he was given no opportunity to answer them; there was no proper investigation and the possibility of remedial action was not considered.
The circumstances of the man’s dismissal, the Court ruled, amounted to a breach of a term in the agreement that required each shareholder to act in good faith towards the others at all times. The owner was obliged to be faithful to the shareholders’ common purpose and to treat his fellow director fairly, openly and with regard to his interests. The man was awarded £135,800 in damages, that sum representing the difference between the nominal price of his shares and their fair value.