Sam is an experienced manager and has worked for over twenty years in his industry. He has also sat on two not for profit boards and enjoys the governance role. Now he has an opportunity to buy an equity stake in a small business that has a product and service for which market demand is growing.
The business has not been growing as quickly as the market and revenue has been pretty flat for the past three years. The current owners are a husband and wife team and are tired; they have run the business for many years and want to retire.
The proposal is that Sam should purchase 40% of the company and take a seat on the board. The existing owners would retain 30% equity each and a shareholders agreement would stipulate that board decisions would require a 70% majority to be agreed. The current board has three members consisting of the owners and an ‘independent’ chairman who is the lawyer and a long-standing friend of the owners. The proposal is that he should remain as “He adds a lot of value and sees things we would miss”.
Sam intends not to work in the company but to be merely a shareholder and director. He has ideas for improving the growth and increasing the value of the company but wants to retain his full time employment in a larger corporation as a security measure. His employer is happy for him to take on a board seat and there is no direct competition between the two companies so Sam would have no conflict of interest; however, Sam’s boss, who is a friend and mentor to Sam, is uneasy and has suggested that Sam could find himself outmanoeuvred in the boardroom and overcharged for his equity. Sam is appreciative of the counsel but believes the shareholder agreement protects his interests. He would like to discuss board dynamics with the current owners but they seem not to be interested as they say the chairman handles all the compliance and they just run the business so there is nothing to worry about.
How should Sam handle this issue?
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What would you advise?
Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website atwww.mclellan.com.au or visit her author page athttp://www.amazon.com/Julie-Garland-McLellan/e/B003A3KPUO
We often get inquiries from association members who wonder if the elected directors should be putting more association matters to a vote of the unit owners. They think that it doesn’t seem fair that the Board of Directors can decide to eliminate a service or make other important decisions without the owners’ consent. So that begs the question: what decisions is the board authorized to make without consulting the members?
Hi Robbie
I would suggest you look at the constitution or articles of association (in a more modern association you may also find a board charter). Those documents will tell you exactly what the elected board is able to do and what must come back to the members. If you find you don’t like what is in the constitution you can arrange to have a change voted upon at the AGM, again there will be rules for how you do this in your constitution.
The board is elected by members to govern on their behalf. If members have given the board power to decide on services or make certain decisions then they have the right to do so unless that power is revoked in a properly constituted AGM or EGM.
Be mindful that a board is responsible for their actions and must not become insolvent so providing services if members’ funds won’t cover the cost is an unlikely scenario for all but the most reckless and unaware boards. If the members think the board is being too cautious they can always vote them out and vote in new directors to change the composition of the board and thus the decisions it makes.
Good luck! Let me know what you find out and how you decide to proceed.
Regards
Julie