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Shareholder and Director roles: not parallel universes

A High Court decision has analysed the position of parties to a shareholders’ agreement who are also Directors of the company and therefore subject to fiduciary and other duties owed to the company (Jackson v Dear and another [2012] EWHC 2060 (Ch)).


The case is of general interest because it is not unusual for one person to act in different capacities in connection with the same company: as well as being a Director he might be a shareholder or an officer or representative of a shareholder. As shareholder he might advocate one course of action and the opposite course as Director, so that in one role or the other he may appear to act purely formalistically.


The Dispute


The case concerned three individual founders of Tetragon Financial Group Limited (Tetragon), who together owned a Cayman company that held all the voting shares in Tetragon. One of them, Mr Jackson, fell out with the other two, who between them controlled the Cayman company (the other founders). The Tetragon Shareholders’ Agreement represented the compromise between them and provided that Mr Jackson would be appointed by the Cayman company as a Director of Tetragon at the 2008 annual general meeting (AGM), and then re-appointed at successive AGMs. The other founders were parties to the agreement and were also Tetragon Directors.


Tetragon’s articles of association provided that a Director’s office would be vacated in certain circumstances but also where all the other Directors so resolved. Although this is not unusual, it is not a standard provision and it was perhaps retained by oversight.


After Mr Jackson was re-appointed by the Cayman company at the 2010 AGM, the other founders, as Directors, joined in a resolution to remove him pursuant to the articles. They said that, as they considered him unsuitable, their fiduciary duty required this. Tetragon is a Guernsey company, and Directors’ duties under Guernsey law are similar to the general duties under the Companies Act 2006.


Despite the Tetragon Shareholders’ Agreement, the Cayman company refused to re-appoint Mr Jackson at the 2011 AGM on the grounds that it would be futile, as he would inevitably be removed by the Directors.


The Decision


The court ruled that it was an implied term of the Shareholders’ Agreement that the other founders were not entitled to vote as Directors to remove Mr Jackson under the articles. A contracting party is entitled to assume that the other parties will do nothing voluntarily to render the Shareholders’ Agreement inoperative (Southern Foundries v Shirlaw [1940] AC 701).


It was argued on behalf of the other founders that they had not acted voluntarily: they had had no choice but to comply with their fiduciary duties. The judge acknowledged that it would be problematic to uphold an agreement that constrained Directors from acting in accordance with their perception of their fiduciary duty. But there is a principle (cited in Brady v Brady [1989] 1 AC 755) that, if an obligation can be performed within the framework of what has been agreed in alternative ways, one of which is lawful and the other not, performance carried out in the lawful way can be ordered.


The other founders could have avoided their fiduciary difficulties by getting the Cayman company to sanction the breach of duty in not removing an allegedly unfit Director despite having the power to do so, or to change Tetragon’s articles, or give a direction to the board not to remove Mr Jackson. These were the sort of steps that they were obliged to take under a further assurance clause in the Shareholders’ Agreement, under which the parties agreed to take such actions as might be reasonably required to give effect to the Shareholders’ Agreement.


The court was therefore ready to declare that the other founders must not remove Mr Jackson under the articles and, if they insisted that this put them in breach of duty, they had their choice as to the steps that could be taken to cure the problem.


Which hat to wear?


The case highlights the rule of contract law that it is a breach of contract to do something voluntarily that will make performance of the contract impossible or futile. It is this rule that enables contracts to be written sensibly, setting out clear positive obligations without having to specify that this means the party must not do other things that would make the positive obligation pointless.


Here, the individuals contracted as founders, not as Directors, but the distinction was artificial. It might be tempting for a shareholder who is also a Director of the company to think of him or herself as having separate identities according to the particular hat he is wearing. He may think that in this way he can comply to the letter with the Shareholders’ Agreement but then be free of his contractual obligations when he acts as a Director. But that will not be the case unless there is a carve-out to that effect in the agreement.


There are particular problems where a person binds himself to act in a way that is inconsistent with a fiduciary duty to which he is subject. If the Shareholders’ Agreement had not contained a further assurance clause under which the parties agreed to take additional steps, it might not have been possible for the Shareholders’ Agreement to work lawfully, and the court might have held the Shareholders’ Agreement to be unenforceable. On the other hand, perhaps the court would have found that it was an implied term of the Shareholders’ Agreement that the necessary steps be taken to stop a breach of duty arising.


Andrew Morgan is Head of Company and Commercial at JPC Law.

For more information on this or any other Company Commercial matter, please contact him.


T: 020 7644 7272

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