“I own 70% of the company. Just do what I’m telling you.”
A majority shareholder may control the votes at a general meeting, but that does not mean they can simply instruct directors to disregard their own legal duties.
This distinction becomes particularly important when a company is experiencing financial difficulties or approaching insolvency.
Directors of Irish companies have statutory and fiduciary duties that require them to exercise their own judgment and consider the interests they are legally required to protect. Those obligations cannot necessarily be displaced because a founder, investor or controlling shareholder demands a particular course of action.
For a director caught between a powerful majority shareholder and concerns about the financial position of the company, the consequences of getting that decision wrong can be significant.
Consider the following scenario.
A private Irish company is experiencing serious cash-flow difficulties.
Its founder owns 70% of the shares but is no longer a director of the company.
The company’s finance director becomes concerned about a series of substantial payments that are proposed to another business controlled by the founder.
The founder insists that the payments should be made immediately.
His position is straightforward:
“It’s my company. I put the money into it. Approve the payments.”
The finance director is uncomfortable.
Trade creditors are already overdue. The company’s liabilities to Revenue are increasing and cash reserves are under significant pressure.
She questions whether making the proposed payments is in the interests of the company and asks for further information about their commercial basis.
Privately, she is warned that if she continues to block the transactions, the majority shareholder may use his voting power to arrange for her removal from the board.
The finance director now faces a serious dilemma.
Should she follow the wishes of the shareholder who ultimately controls 70% of the voting rights?
Or should she refuse to approve the transactions and risk losing her position?
This is where an important principle of Irish company law becomes critical.
A director’s duties are not simply owed to the shareholder who appointed them or who controls the company.
Section 228 of the Companies Act 2014 sets out the principal fiduciary duties of directors of Irish companies.
These statutory duties include requirements concerning matters such as acting in good faith in what the director considers to be the interests of the company, acting honestly and responsibly, acting in accordance with the company’s constitution and exercising powers only for lawful purposes.
They also address the director’s obligation not to use company property, information or opportunities improperly and the requirement to avoid conflicts between personal interests and duties to the company.
The practical consequence is important:
A director cannot simply substitute the wishes of a controlling shareholder for the exercise of the director’s own judgment.
Shareholders and directors perform different roles within a company.
A shareholder may have considerable power.
A 70% shareholder, for example, may have sufficient voting strength to determine many shareholder resolutions and may potentially influence the composition of the board.
But shareholder control does not automatically convert the board into an instrument through which the shareholder can direct every company decision.
Directors must continue to comply with their own statutory and fiduciary obligations.
This distinction can become especially important in:
A director who approves a transaction should therefore be capable of explaining why they considered the decision appropriate for the company — not simply that “the majority shareholder told me to do it.”
The proposed payments in this scenario create another obvious issue.
The recipient is a separate business controlled by the company’s majority shareholder.
That should prompt careful scrutiny of the commercial basis for the transaction.
Questions may include:
A related-party transaction involving a controlling shareholder should not be approved simply because that shareholder demands it.
The board should understand both the transaction and its consequences for the company.
The financial condition of the company makes the scenario considerably more serious.
The company is experiencing cash-flow problems.
Trade creditors are overdue.
Revenue liabilities are increasing.
These are circumstances in which directors need to pay particularly close attention to the company’s financial position and the interests that company law requires them to consider.
As a company moves towards insolvency, creditors’ interests can assume increasing importance in directors’ decision-making.
That means a payment that might attract one level of scrutiny in a financially healthy company can require a very different analysis where the company may be unable to pay its debts as they fall due.
Directors should therefore be extremely cautious about approving significant payments to a business connected with a controlling shareholder while unrelated creditors remain unpaid.
Directors sometimes assume that simply voting against a transaction is enough.
It may not always be that straightforward.
Where a director has serious concerns, the way in which those concerns are documented can become extremely important if the transaction is later examined by a liquidator, creditor, regulator or court.
Depending on the circumstances, practical steps may include:
A carefully documented contemporaneous record can be significantly more persuasive than a director attempting months or years later to reconstruct what they remember saying at a board meeting.
A director faced with serious disagreement may consider resignation.
But resignation should not automatically be regarded as a complete solution to an existing problem.
If potentially problematic transactions have already occurred, simply resigning does not erase the director’s previous involvement or decisions.
Equally, a director who becomes aware of serious concerns may need advice about whether resignation is appropriate and what steps should be taken before or in connection with that resignation.
The circumstances will matter.
Directors facing these circumstances should consider obtaining independent legal advice about their personal position, particularly where the interests of the company, controlling shareholder and individual director may no longer align.
The threat to remove the finance director adds another dimension to the dispute.
A majority shareholder may have significant influence over the composition of the board, but any proposed removal of a director must be considered in the context of the Companies Act 2014, the company’s constitution and any applicable shareholders’ agreement or contractual arrangements.
The director may also have separate employment or service-contract rights.
More fundamentally, the possibility of removal does not relieve the director of their legal duties while they remain in office.
A director should not approve a transaction they believe is improper merely because refusing to do so may have personal consequences.
Concerns about directors’ duties become particularly acute when a financially distressed company subsequently enters liquidation.
Decisions made before insolvency may later receive detailed scrutiny.
Depending on the circumstances, issues concerning directors’ fiduciary duties, restriction or disqualification, improper transactions, reckless trading or other potential liabilities may arise.
Not every unsuccessful commercial decision creates personal liability.
Directors are required to make difficult decisions and businesses sometimes fail despite directors acting properly.
The critical distinction is between a genuine commercial decision made responsibly on appropriate information and conduct that may breach the obligations imposed on directors.
That is another reason why the decision-making process and contemporaneous evidence can matter so much.
If the disputed payments are subsequently challenged, the evidence may extend far beyond the formal board resolution.
Relevant material could include:
A message saying “the shareholder told us to make the payment” may explain how pressure arose.
It does not necessarily justify the decision.
The commercial lesson is straightforward:
“The shareholder told me to do it” is not a substitute for directors exercising their own judgment and complying with their legal obligations.
A controlling shareholder may have enormous practical influence over a company.
That influence does not eliminate directors’ duties.
This becomes especially important where:
Directors in this position should obtain advice early.
By the time a company has entered liquidation and historic transactions are being investigated, the opportunity to improve the original decision-making process has long passed.
Sherwin O’Riordan Solicitors advises directors, shareholders, founders and companies in Dublin and throughout Ireland on complex company, director and shareholder disputes.
Our work includes disputes concerning directors’ fiduciary duties, Section 228 of the Companies Act 2014, conflicts of interest, controlling shareholders, related-party transactions, director removal, shareholder disputes and corporate disputes arising in financially distressed companies.
These matters can become particularly sensitive where an individual director is under pressure from a founder or majority shareholder while also concerned about the company’s financial position and the interests of creditors.
In those circumstances, the interests of the individual director, the company and its shareholders may no longer be identical.
Obtaining independent legal advice at an early stage can help a director understand their obligations, document their position and decide how to respond before potentially irreversible transactions take place.
If you are a director concerned about your fiduciary duties or pressure from a controlling shareholder, or a company or shareholder involved in a dispute concerning directors’ conduct, early legal advice can be critical.
If you would like an immediate call back to discuss any queries, just fill in your details below. All correspondence is treated as confidential.
