Help please I have a work problem

plainman

Apologies but this is a long email, but your views and advice would be greatly appreciated. I am planning to get some legal advice tomorrow, but I am after peoples views on what they would do in my situation.

I am a director of a privately owned company, lets say its called A. Its equally owned by two people, Y and Z, who are also directors of A, along with 3 other people, so 6 directors in total.

Company A has made a loan to Company B, which is in the same industry as A. The two owners of A, own a minority stake in B. B is in financial trouble, and the owners of A are in discussion with the majority owner of B, to buy company B. After the purchase Company B would sub contract certain things to Company A but it would remain separate from A and be run by someone else. Company A would get a small equity stake in company B, in return for writing off the loan. Y and Z would become directors of company B, so they would be directors of both Company A and B.

I have read various things in the Companies Act about the duties of directors. Amongst these is the requirement to act in the best interests of a company, even if it conflicts with their personal interest. I am extremely concerned that the owners will have a conflict of interest, and things I have read suggest that Y and Z need to get approval from the other directors of A to get permission to be directors of B. Of course this is an extremely awkward situation, as Y and Z own the company I work for, but I am concerned about not fulfilling my obligations as a director. The other things to add is that the purchase of B will mean a significant increase in my workload, and I am also worried that I will not be fulfilling my duties as a director of A, as I will be providing similar services to B as I do for A, and there is the potential to be pulled in different directions. Also I have been offered a small stake in company B, as reward for my hard work.

What would you do? I am grateful for the offer of shares but will this in itself cause me a conflict of interest? Am I just being too cautious and worried about this? I am, as I said earlier, going to get some legal advice tomorrow, but I would really appreciate peoples views on what they would do in my situation.

Thank you for reading this long post and any comments you make.

Plainman

Premier_2

It's not really clear who will own what.

The people who own a limited company are their members/shareholders.

Shareholders can be individuals (such as X and Y) or companies (such as A) or both.

Directors are appointed by the shareholders to run the company on behalf of the shareholders. Shareholders may also be directors (this is common in small companies), but it is for the shareholders to appoint, or oust, the directors.

Making a loan to, is somewhat different to investing (and so buying shares) in a company

Who owns a company is important, because if company B is a subsidiary of company A, then it may well need the approval of all the directors of A to buy it. However, if 2 individuals want to buy it, they do not need the approval of fellow employees(directors) of their employer.

However, the issue of conflict of interest should be considered. I can't see there being an issue here. As X & Y (only) already own A, and X & Y plan to buy B (possibly with some help of company A), then then the only options of the non-shareholding directors of A are (1) to report their concerns to the shareholders (not much point in this instance as that is only X & Y who are going to be buying or (2) resign from their posts.

As for the time you can spend on company A's business if you become a director of B, then again that would ultimately be an issue for the shareholders of A who appointed you.
Ultimately if X and Y are the only shareholders of A and B, then if X and Y are both happy with being directors of both companies, who's going to complain?
Anyone else is simply an employee who can be ousted by the shareholders X and Y, or may decide to resign in protest.

What I don't follow is that you say B will be run by someone else, but then suggest it will be owned by X & Y and perhaps A ... and then you as well will get a small holding :huh:
You also say the company will be run by someone else, then say it will be X and Y and possibly you too? :huh:

Again, let's make it clear. The owners of a limited company are it's shareholders. The directors are appointed on behalf of the shareholders to run the company (and they may be the same people). Directors are just employees of the company ... but with the duty to manage the company in the interests of the shareholders (and the law obviously)

paddyrg

Hmmm, sounds like you do need professional advice!

However, could A not buy B outright, run it as a subsiduary (so it can always be re-sold) and keep everything very clear and straightforward? Bring the owner/director of B onto the board (going up to 7 members) and give him a salary, you get to work your magic, and grow the company to everyone's benefit?

plainman

Premier

Thanks for the reply. If I may, i will clarify some of the things that arent clear.

X and Y will own a stake in Company B. They will appoint someone to run it for them. This person will have a stake in Company B. Company A will get a small stake to compensate for the loan write off. A small stake will also be given in Company B to two directors of Company A, so the owners of Company B will be:

X and Y will own 45% between them
Person appointed to run Company B will own 45%
Company A 5% - non voting shares
Two directors of Company A, 5% - non voting shares

My concern is that I had read that directors of a company have to act in the best intrests of the company, not their personal interest. The best thing for company A would be for it to own all of Company B, and not for a third party to (the third party appointed to run company to have a stake. I believe that Y and Z should be acting in the best interests of Company A and not getting involved with the third party. There is the potential, amongst other things, for Y and Z to divert work to Company B instead of Company A. Y and Z have in the past made stupid decisions that have cost company A significant sums and what they are doing with Company B is definitely not in the best interests of Company A. I had read that even if directors were shareholders, they had to act in the best interests of the company? Am i just being too cautious, as I dont want to be accused of not acting in the best interests of Company A.

Apologies if this is all confusing but my mind is all over the place at the moment.

Premier_2

Well X and Y are going to have together 50% voting rights, so the worst that can happen is that the MD of B produces a stalemate by blocking any proposed action using his 50% voting rights. Unlikely to happen I suggest, but the structure looks suspicous - best that either X&Y have the majotity share or the MD has - but why would someone just give 50% of a company away?).

Anyway, nothing to stop the sale going ahead (as long as the current owner agrees).

After the sale, I don't think it's likely that X and Y will be giving much work to company B that they can't handle in company A (in company A they get 50% of any profit, in company B they would only get 22.5% of any profit)

As you have little confidence in X and Y, you should carefully consider your current position and perhaps more importantly, any further appointment they plan to offer you. Do you really want to be invested and expect to run a company where you have no confidence in the other board members who also happen to be majority (voting) shareholders???

plainman

Premier wrote: »

Well X and Y are going to have together 50% voting rights, so the worst that can happen is that the MD of B produces a stalemate by blocking any proposed action using his 50% voting rights. Unlikely to happen I suggest, but the structure looks suspicous - best that either X&Y have the majotity share or the MD has - but why would someone just give 50% of a company away?).

Anyway, nothing to stop the sale going ahead (as long as the current owner agrees).

After the sale, I don't think it's likely that X and Y will be giving much work to company B that they can't handle in company A (in company A they get 50% of any profit, in company B they would only get 22.5% of any profit)

As you have little confidence in X and Y, you should carefully consider your current position and perhaps more importantly, any further appointment they plan to offer you. Do you really want to be invested and expect to run a company where you have no confidence in the other board members who also happen to be majority (voting) shareholders???

As you say, why would they give away 50%, it makes no sense and, in my opinion, it isnt in the best interests of Company A. Your logic about not diverting work to company B is absolutely true, however, X and Y dont do sensible things. It looks as if there is not a lot I can do, other than make them aware that I think they are doing the wrong thing. At least that way I will feel happy that I raised the concern, if they ignore it, then its their problem.


Paddyrg, my preferred solution is exactly what you propose. That way Company A gets the full benefit and the current majority shareholder of Company B, who is important to the business, gets a role to help the buisness grow.

Thanks for all your comments.