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Board deadlock and shareholder intervention

Case briefing

Name: Galasys PLC, Seng & Yuen v. Wah, Mingh, Keong & Seong [2016] JRC188 

Facts

Galasys was engaged in litigation in whose outcome certain directors were personally interested. This conflict of interests prevented their being counted in the quorum for the required board meetings. The directors could not simply be replaced because of certain injunctions issued in England during 2015 preventing the board from reconstituting.

As a result the company’s board of directors was paralysed.

The Royal Court was asked to rule on whether the shareholders of a company have a reserve power to act where the board of directors is unable or unwilling to do so, and whether that power is confined to merely appointing the members of a new board, or extends further to the taking of the management decisions the board can’t take.

Decision

The court found that in circumstances where the board is unable or unwilling to act then shareholders have a reserve power to act and may appoint further directors to the board in order to resolve the issue of deadlock at board level.

Did this power extended to allowing shareholders actually to intervene in management issues?  Referring to the case of Baron v Potter, the court considered that, where no one was able to act as director, the powers granted to shareholders could extend to directly engaging in management matters by passing ordinary resolutions.

The shareholders need not concern themselves with the type of resolution to be passed, even where the Company’s articles required a special resolution to be passed. An ordinary resolution in these circumstances will suffice to allow the shareholders to use the company’s powers effectively to manage its affairs.

Principle

Where the board of directors is deadlocked the shareholders can exercise the company’s powers by way of ordinary resolution and make management decisions to resolve the issue. What is not clear however is whether shareholders are entitled thus to intervene in all deadlock cases, or only when such deadlock cannot for some reason be resolved by the exercise of the shareholders’ power to appoint additional directors.

If you need help or advice on director’s duties and company powers please contact Christopher on: +44 (0) 1534 632255 or email commercial@viberts.com.

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