Partnerships: When the side breaks up: Ian Hunter says unravelling corporate relations can be complex

Click to follow
AS TERRY Venables has discovered, not every business partnership is made in heaven. Identifying, evaluating and separating former partners' interests can be a time-consuming and expensive task.

In many companies business partners play several different roles simultaneously: those of employee, director and shareholder. Each role confers different rights and obligations.

Most business partners grant themselves contracts of employment with long notice periods. Mr Venables, who recently submitted a claim for wrongful dismissal, had three years to run on his contract when he was dismissed.

An employee dismissed without notice may have a substantial damages claim for breach of contract. The starting point for calculating these damages is the value of the net salary and fringe benefits that would have been received during the residue of the contract. Mr Venables enjoyed a salary of pounds 225,000 per annum, and if a claim for breach of contract is successful the cost to Tottenham Hotspur could be substantial.

The 1985 Companies Act stipulates that contracts exceeding five years granted to employees who are also directors must first receive shareholder approval.

The office of director is completely separate from the employment relationship with the company. This is why Mr Venables was able to remain a director of the company despite losing the position of chief executive.

Directors' powers and responsibilities are governed by a cocktail of regulations including statute, common law and, in the case of public companies such as Tottenham Hotspur, the rules of the Stock Exchange.

Under common law, directors have an overriding fiduciary duty to act bona fide in the best interests of the company. The directors are to a large extent allowed to exercise their business skills unhindered. The courts will normally only interfere if no reasonable director could have decided that certain decisions taken were in the interests of the company.

Directors are also under a duty not to put themselves in a position of conflict between their personal interests and their fiduciary duties. They are required to exercise their powers for the benefit of the company as a whole, and should not be motivated by self-interest.

Profits or payments received by directors from company business contacts, by virtue of the directorship are lawfully the property of the company rather than the individual director. This can often lead to disputes between business partners.

The appointment and removal of directors is usually governed by the company's internal rules or articles of association. In the absence of provisions to the contrary, the Companies Act provides that a director can be removed by a simple majority of the shareholders. However, in a business partnership, the company's articles often provide directors with entrenched voting rights when a resolution to remove them is proposed. This can cause serious problems when the business relationship breaks down.

Although directors can be dismissed from employment if they cannot be removed from office, they can still continue to participate in board meetings. If a director is not given notice of a board meeting the business conducted at that meeting will be treated as unlawful and invalid. Such disruption can seriously affect the running of a business.

However, even if a business partner is prised from the board and dismissed from employment, provided he or she is a shareholder help may still be obtainable from the courts, particularly if it can be shown that it was intended that he or she would be intricately involved in the management of the business.

Section 459 of the Companies Act provides any shareholder with the right to apply to the court for relief on the grounds that the company's affairs are being conducted in a manner unduly prejudicial to the interests of some of the shareholders. The court has the power to make whatever order it considers appropriate. Mr Venables, a 23 per cent shareholder in Tottenham Hotspur, is petitioning under this section for an order to enable him to purchase sufficient shares to gain control of the club.

As the size of Mr Venables' legal fees proves, company disputes can be expensive. Partners should seek to delineate areas of responsibility and if possible agree a procedure for settling disputes. The price of failure can be high.

(Photograph omitted)