When Shareholders Disagree but the Business Must Still Run

Sometimes, the real difficulty in shareholder disputes is not the fight itself, but what happens to the company while the fight continues. This is especially so where board deadlock begins affecting ordinary operational decisions necessary to keep the business running.

This note is intended as a high-level discussion of general principles and not legal advice.

Deadlock

A company’s direction and functions are usually shaped by 3 groups: its shareholders, directors and executives (for this discussion, let us limit this to the Chief Executive Officer / Managing Director of the company).

Most of the time, those groups are broadly aligned behind a common commercial objective. But when interests diverge or relationships deteriorate, tensions can emerge that threaten to paralyse the company itself. This is most commonly seen in shareholder disputes, where disagreements at ownership level eventually spill into the boardroom and result in deadlock at both shareholder and board level. Sometimes, this means that even routine decisions necessary to carry on the ordinary course of business are not approved. Left unresolved, this can seriously impair the company’s operations.

By way of a case study, say there is a budget for an upcoming financial year, it covers payments of salaries / bonuses, payment to suppliers or payments for ongoing contractual obligations. The budget is presented at board level. Due to the deadlock, the budget is not approved. Then here comes the new financial year, still no approved budget. But the deadline for these payables is also nearing, and non-payment will spell serious issues for the company’s business and operations.

An executive of the company now faces 2 impossible choices: (a) respect ownership control, wait for a resolution but risk the company running into a substantial default, or (b) to do what is best for the company, but risk personal liability.

This note deals with scenario (b) above, and some of the considerations that may become relevant if an executive finds themselves having to act in the absence of express approval by the board or shareholders. There is no complete answer or safe harbour, and any such action comes with very real and serious risks. But commerce waits for no one and if you are an executive tasked with steering a company and are asked to do the impossible, hopefully this note can help inform the considerations involved and, more importantly, underscore the importance of proper process and record-keeping.

Navigating the Position

In general, directors and executives are entrusted with managing the affairs of a company. However, the exercise of such autonomy and discretion is subject to the applicable laws and any lawful limitations as may be imposed by the shareholders by company constitution or resolutions. An action taken beyond an express limitation can not only be rendered invalid, but may attract personal liability for want of authority or breach of duty.

But the limits of such discretion are seldom exhaustively defined. In practice, situations can arise where the governing provisions do not clearly address operational decisions required during periods of deadlock. If the governing provisions do not clearly address the situation and obtaining board direction is not realistically possible, considerable caution is required before any action is taken.

There appears to be limited direct authority dealing specifically with operational spending during periods of board deadlock. The position therefore has to be assessed by reference to broader principles relating to directors’ duties, proper purpose and the ordinary course of business.

The proper starting point is that the executive’s overriding duty remains to the company itself, and not to any individual shareholder faction. And in assessing whether an act can or must be taken, the law requires the executive to consider that the act is in the “best interests” of the company.

There is no fixed definition for what “best interests” are, and it depends on each company and each case. But some guidance can be gleaned from the cases. The executive must honestly believe that the act to be done is genuine and done for a proper purpose in the best interests of the company (see generally Acumen Scientific Sdn Bhd v Yeow Liang Ming [2020] 3 MLJ 82 (Court of Appeal) at paragraph [37]-[38]). Such honest belief will usually be more evident if the act is reasonably incidental to and within the reasonable scope of carrying on the ordinary business of the company (again fact-sensitive, see generally Koza Ltd and another v Akcil and others [2020] 1 All ER 301 (Eng Court of Appeal) at paragraphs [22]-[27]).

Applying the above to our case study at the outset, a court may be slow to conclude that the payment of salaries, suppliers or existing contractual obligations was contrary to the company’s best interests, especially if these are payments ordinarily paid in the past.

If the intended act satisfies the above, while it does not prevent any complaints or claims by shareholders on basis of lack of authority or breach of duties, an executive may at least be able to demonstrate a credible basis for why the action was taken.

Prudent Approach

Still, the safest and most prudent approach is to impress upon the board to reconvene and provide the necessary direction or approval to take a necessary step. If the tension arises from other aspects, those could be dropped in favour of agenda that can be readily agreed upon. This ensures that at least something gets done.

But if that is not possible and waiting is not an option, these are among the considerations likely to become relevant before any action is taken:

1. there is no express prohibition from doing the intended act;

2. the intended act is incidental to and within the reasonable scope of carrying on the ordinary business; and

3. the executive honestly believes that the act is necessary and in the best interests of the company.

If an act is taken, when possible, always seek ratification by the board.

Takeaway

The reality is that businesses cannot always wait for perfect alignment between shareholders or directors, and executives tasked with stewarding the company through such periods must do so carefully and aware of the personal risks involved. The key ultimately is to act genuinely for the company rather than a faction, and to ensure that the reasoning, process and surrounding circumstances are properly documented. The position is often nuanced and highly fact-sensitive, and it is always advisable to seek legal advice before acting.