Boardroom coups – striking while the iron’s hot!

Tony Forster

A boardroom coup is the sudden overthrow of the management or governing body of a corporation, by an individual or small group of individuals, usually from within the company. It is obvious that changes throughout the board room are bound to occur throughout the lifetime of a company, and many would think them to be in an ordinary and uncontroversial, agreed manner. The harsh reality however, is that this is very often not the case.

Coups can arise in various circumstances, often related to performance issues of directors, clear differences and disagreements in terms of strategic approach taken by directors, and through sudden exercises in control by a majority investor or a group of shareholders, united by a common purpose. Sometimes it can simply be the by-product of a clash of strong willed (some may say stubborn!) personalities.

As company solicitors are required to act in the best interest of the corporate body, who is likely to be their client, the most sensible approach would always be to seek independent legal advice. The preparatory steps are always key. Three activities are necessary before a coup strategy can be finalised:

1. Put together an advisory team

They will want to know, amongst other things, the participants underlying objectives, how to minimise damage to the company’s relationship with other stakeholders, and the impact of the desired shake up.

 2. Information gathering

Locating the balance of power in a company involves questions of law. The first step is to gather the necessary information. Shareholder activists posses only the information that they have already received as shareholders, and what they can glean from publicly available information. Shareholders agreements are private documents.

Insider access can go a long way, but there are inherent risks. There is the risk that directors can breach their “director duties”, abuse their rights of inspection, and be put at great risk of personal liability.

3. Analytical due diligence

Information that can help or hinder the coup can be found when analysing the company’s articles of association and its share register.

Potentially winning tactics – locking-in support (by personal agreement between shareholders as to how they will exercise their voting rights), removing directors who are put forward for annual re-election, and making use of the various statutory procedures (in particular those under the Companies Act 2006, section 168 – the right to remove a director).

Flawed tactics – failing to appreciate that company law tends to militate against surprise tactics (so, for example, special notice is required not only for a resolution to remove a director under section 168, but also to appoint somebody in his place); board directors acting in ways that may be problematic, i.e. not attending board meetings, and improperly withholding information; abusing shareholder power, making defamatory statements and carrying out improper surveillance.

Planning really is everything!


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