Shareholding of a company

"A company preferably should not to be dependent on two directors and each one of them to have 50% of its shares"

The shareholding or management structure of a company may create problems when the company depends upon only 2 directors and each one of them has 50% of its shares. Any disagreement between them or lack of co-operation may lead to a deadlock which will disrupt the business and activities of the company and may result to its dissolution. In order to avoid such a risk, it is preferable at the time of the establishment of the company, the issue of taking decisions either at the board or in a general meeting to be regulated so that majority is safeguarded. It is preferable to avoid the establishment or participation in a company by 2 members – partners having 50% of the shares each or by only 2 directors, since if a dispute arises, the board cannot be convened and a decision cannot be taken. It is also possible the company’s accounts to be frozen and its activities to be affected or even ceased.

Seeking a remedy through the Court even with a derivative action aiming to protect the company’s rights does not seem to resolve the dispute between the two partners. A derivative action is raised by a shareholder on behalf of the company and is based on a cause of action the company has against another shareholder or director. The existence of a third director or shareholder creating majority is to the benefit of the company and its members and thus a possible deadlock is avoided.

The Companies’ Law, Cap.113 and especially the provisions of articles 126 and 178 may assist in finding a solution, since they give the right of convening an extraordinary general meeting of the board and removing a member where such a decision is possible. A company member who holds more shares than 10% of the company’s paid capital can file an application to convene an extraordinary general meeting and vote. Such an application must mention the purpose of the meeting, to be signed by the member and be deposited at the company’s registered office. If the board members within 21 days from the deposition of the application do not convene the meeting, then the applicant being a member is entitled to convene the meeting himself, but it should not take place 3 months after the deposition of the application.

In such a meeting, the company may decide, through a resolution, to remove a director before the end of his term, despite any provisions of the articles of association or any agreement between the company and the member. However, a special notice for the said resolution must be sent to the member concerned, who has the right to be heard in the meeting. Simple majority of votes is adequate for the said resolution to be approved; the majority of the shareholders decide who manages the company. Article 178 gives the shareholders the right to remove a director, since they are the ones who control the company and the Court cannot intervene.

When a derivative action is instituted, the company is included as a defendant, however it is the actual plaintiff. If the action succeeds and a judgment is issued against the actual defendants, such judgment is to the benefit of the company and not the shareholder filing it as a plaintiff. The company cannot be included as a plaintiff, since the filing of the action was not approved by the board or the general meeting. Such a judgment is considered a precedent, binds the company and cannot be raised again. Furthermore, the plaintiff being a shareholder of the company cannot raise personal claims in the derivative action. Such an action is usually raised by the minority shareholder of the company when he claims that another shareholder has committed wrongdoings against the company or when things are led to a deadlock and the other shareholder refuses to co-operate.

The company law provides that when damage is caused to a company, the shareholder who wished to apply to the Court to safeguard the company’s rights must apply first to the board or the general meeting in order to take legal steps. It derives from the above there are risks when there are two shareholders in a company having 50% of the shares each, since in the event of disagreement or lack of trust the company will be led to a deadlock and may be dissolved.