These days we are used to hearing about the power struggle between the owners of a football club and its manager but this week’s High Court battle between the owners and the directors of Liverpool Football Club (“LFC”) highlighted a different problem which is potentially relevant to any incorporated company.
The matter focused on the areas of company law relating to the control of a company, and the power of shareholders to control who is on the board of directors. The basic position with any incorporated company is that the shareholders own the company, and the directors run the business. In many smaller companies, the same people may fulfil both functions, but this is not always the case.
Where disputes arise, these different roles can give rise to conflicting interests. For example, while the directors run the business, they are under a duty to do so in the interests of the shareholders. In addition, shareholders have the power to remove directors from office, providing that they adhere to certain procedural matters, most notably, giving 28 days’ notice of their intention to do so.
In the case of LFC, it would appear that the owners agreed to cede the power to hire and fire directors to the chairman, Martin Broughton, in addition to giving undertakings to Royal Bank of Scotland (“RBS”), to whom the company owed some £237m, that they would not do anything which would frustrate a potential sale.
It would appear that the court considered their actions in seeking to effectively sack the existing board, and replace it with one of their own choosing, was unlawful, and breached the undertakings to RBS, paving the way for the sale of the club, and for the bank to recoup its money.
For any company, no matter what the size, clarity is essential when these sorts of disputes arise. Due to documentation put in place at the outset, the court was able to ascertain exactly what the position was and to make a ruling.
Unfortunately, many companies neglect to put correct documentation in place, such as shareholder agreements, or bespoke articles of association, leading to uncertainty when disputes arise.