Case law: 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.
This update was published in Legal Alert - February 2016
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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.
- 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  ScotCS CSOH_146
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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