In Idrees Hashmi v Paul Lorimer-Wing and Fore Fitness Investment Holdings Limited [2022] EWHC 191 (Ch) a dispute between a shareholder and company took an unexpected course: the company's articles prevented a sole director from passing decisions. The decision to commence legal action against the dissenting shareholder was thus ultra vires.
- Mr Lorimer-Wing Incorporated a company to develop software, using Model Articles in 2019.
- Mr Hashmi joined the company as Chief Technology Officer. He was Offered shares and he participated as an investor in a fundraising for the Company, subscribing to 4,639 Ordinary A shares and 1,500 Ordinary B shares.
- As part of the fundraising all shareholders and investors entered into an investment agreement and the Company adopted new Articles of association.
A dispute arose between the parties and Mr Hashmi requested that the company Purchase his shares.
The company issued a counterclaim against Mr Hashmi for damages for breach of his duties as a director of the Company, breach of contract and/or pre-contractual misrepresentation and for rescission.
The High Court was asked to interpret the company’s articles. It found that:
- The Model Articles 7 and 11 contain rules which set decision making and the quorum for meetings, that is the minimum number of directors that are required to be present in order to pass a decision.
- Following the investment agreement, the company had added Bespoke clauses which set the quorum to be two directors.
- A conflict provision in the articles disapplied the Model Articles to the extent they conflicted with the Bespoke Articles.
The effect was that the company was unable to make decisions with a sole director and the company’s claim failed.
Comment
It's well worth reading over your Articles to check the position. We tend to add a blanket clause that has the effect of disapplying all the Articles which refer to a quorum, in the case of the sole director. This tactic though, would not have assisted in the case as the Bespoke clauses prevailed. This presented the problem that another clause was then needed to allow for the situation where the board was reduced to just one member.
Useful guides on this topic
A sale of the company's shares: start here
If one or more shareholders are considering selling their shares what are their options?
How to start a company
How do you go about creating a company? What do you need to do start a company? A practical guide on how to form (incorporate) a private limited company covering the key points that you need to consider.
Giving different share classes to employees
Can you set up different classes of shares? How do you create Alphabet or ABC shares? What are the rules in giving different classes of shares to directors and employees?
Purchase of own shares
What are the conditions to enable a company to repurchase your shares?
External links
Idrees Hashmi v Paul Lorimer-Wing and Fore Fitness Investment Holdings Limited [2022] EWHC 191 (Ch)
Are you enjoying our content?
Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.
Register with us now to receive our receive our FREE SME Topical Tax Update & newletter.
