Company, partnership or limited liability partnership? Choice of legal status 349The right to manage
As we have seen in this chapter, all partners have a right to manage the partnership’s
affairs, and all partners are agents of the firm as regards contracts made in the ordinary
course of the firm’s business. The members of an LLP are in essentially the same position.
Shareholders, no matter how large their percentage holding, do not have a right to man-
age a company. This right is vested in the board of directors, the directors being elected by
a simple majority vote of the shareholders at a general meeting. Therefore, a shareholder
with over 50 per cent of the shares has the power to change the directors. It must be
emphasised, however, that until the shareholder exercises this right the directors who are
in office have the right to manage the company’s affairs.
A shareholder with less than 50 per cent of the votes can be outvoted on a resolution to
appoint or change the directors. So minority shareholders are in the unfortunate position of
having no right to manage the company’s affairs, and no power to change this situation.
However, in Chapter 11 we saw that an entrenched article, or a Bushell vFaithclause in
the articles, might allow a minority shareholder to remain a director, and so, with careful
planning, the vulnerability of minority shareholders in small companies can be reduced.
A person going into business with one other might therefore be very unwilling to form a
company unless he or she was to own 50 per cent of the shares. Similar problems arise when
there are several shareholders. If a group of majority shareholders have a closer relationship
with each other than they have with the minority shareholder then a minority shareholding
can again be a very precarious position.
We saw in the previous chapter that quasi-partnership companies are small companies in
which the shareholders have a personal relationship, trust each other and expect each other
Irvine vIrvine (2006)Two shareholders (P and T ) between them held 49.96 per cent of the shares in a company.
The rest of the shares were held by one other shareholder, I. The company was a family
company, which had been owned equally by two brothers, I and M. M died and in his will
he left one share to I. He left the rest of his holding to P, his wife, and to T, a trust set up
for the benefit of his children. When I gained the majority shareholding he elected himself
as director and paid profits to himself, in the form of a salary, rather than awarding proper
dividends.
HeldUnfair prejudice was established under what is now s. 994 of the Companies Act
2006 and I was ordered to buy the shares of P and T. However, because the company
could not be regarded as a quasi-partnership, the price of these shares should be based
on the basis that they were a minority shareholding. The court ordered that a valuation be
made by a valuer.
CommentHaving heard the views of two valuers, the court later ordered that I buy the
shares of P and T at a 30 per cent discount. So the shares, which were worth £2.5 million,
were bought for £1.75 million. The discount would have been much greater if the share-
holding of P and T combined had been so small that they could not have prevented I from
passing a special resolution. The court also ordered that I should account to P and T for
the excessive amount of profit which he had taken in salary. However, this excessive
amount was also subject to the 30 per cent discount.