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directors being untruthful in shareholder presentations

directors being untruthful in shareholder presentations

Postby jantra » Wed Sep 20, 2017 1:35 pm

I am a shareholder in a company and earlier this year we had a general meeting in which the directors presented a pack to us about the usual stuff: annual accounts, trading update, outlook etc. In the pack was a statement that one of the directors had made comment in a recent board meeting of the solvency of the company and that administrators should be appointed to establish the financial viability as well as the opportunity to realise maximum shareholder value. The other directors claimed (in the pack) that they had taken advice from an IP regarding solvency and the company could carry on trading. It transpires that this statement was complete fabrication, no advice was taken, and since then shareholder value has reduced by at least 75%. Given the extensive losses suffered this year, the company is really trying to push water uphill with its continued trading.

If the administrators had been appointed last year as suggested by the one director, shareholder value would have been protected more so than it is today. As it stands shareholders are likely to suffer serious losses on the share price collapse.

Given the other directors made a false statement in a pack to shareholders, can they be held accountable for the losses incurred by shareholders as they clearly failed to take appropriate action or advice, when it was made clear to them that the company was in financial distress and it was unlikely that they could trade their way out of trouble. The director who raised the issue is a chartered accountant and has since resigned given the failure of the board to act.

The company has positive net assets, although the book value of the fixed assets would unlikely to be realised on an open market.
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Re: directors being untruthful in shareholder presentations

Postby atticus » Wed Sep 20, 2017 1:48 pm

Did the shareholders rely on that statement in deciding not to appoint administrators?

What percentage of the vote do these directors control?

Administration rarely protects shareholder equity; indeed insolvency of the company is one of the conditions for administration.
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Re: directors being untruthful in shareholder presentations

Postby jantra » Wed Sep 20, 2017 4:09 pm

On the basis the directors said they had taken professional advice the shareholders decided no action was required.

Since that time further debt has been taken on to cover operational losses - debt secured against company assets.

The directors have say a third of the vote or thereabouts. Significant, but not overall control.

A company can be insolvent but have significant realisable assets - those assets have now been mortgaged to keep the company going when better shareholder value would have been had by a CVL at that rime.
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Re: directors being untruthful in shareholder presentations

Postby dls » Thu Sep 21, 2017 4:44 am

This is very clearly a situation where establishing causality and that if x had not happened then y would have happened would be very very difficult.

The ability to charge assets to produce a cash flow may well negative any suggestion of insolvency.
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Re: directors being untruthful in shareholder presentations

Postby jantra » Thu Sep 21, 2017 9:05 am

the company has taken on over £1m debt secured against assets since the suggestion to appoint administrators. The £1m has been used to plug operational losses. The assets now belong to the asset finance company (effectively) whereas previously they could have been sold with the cash being given to shareholders.

the losses can be evidenced, the asset finance can be evidenced. the open market value of the assets can be determined. i would say that the directors failure to act has cost upwards of £1m in shareholder value. Am I looking at this too simplistically?
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Re: directors being untruthful in shareholder presentations

Postby dls » Thu Sep 21, 2017 9:14 am

The directors are asked to apply their judgment to make very complicated assessments in a world of uncertainty.

Clearly if you are trading at a loss, it makes sense to pour good money in depends upo having some reason to think that things willl improve. It may not take much to provide a defensible position. That it did not work out, causing losses to investors, is a long way off, in itself, or supporting an action.

In some industries, it has been common for investors to throw their money into companies where the chances of a good return are little more than one in ten.

Yes you may have suffered losses, and yes thse losses may follow direcly from the decisions of teh dirsctors, but that is a long way off having a cause of action.
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Re: directors being untruthful in shareholder presentations

Postby atticus » Thu Sep 21, 2017 10:10 am

as an accountant, jantra, you will understand the concept of initial losses being necessary as part of costs incurred to achieve success in the medium to long term.

You know what I am going to say next. Those solicitors that you use will be able to review all necessary papers and advise whether a shareholder claim has any prospect of getting anywhere.
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Re: directors being untruthful in shareholder presentations

Postby jantra » Thu Sep 21, 2017 8:20 pm

Slightly related....

2 of the directors (from a board of 3) have expenses of around £80k that arent supported by receipts. They voted to write off these expenses (surely a conflict by them voting on it).

What can be done?

@atticus - the firm of solicitors you refer to

They act for us in all commercial matters now
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Re: directors being untruthful in shareholder presentations

Postby jantra » Fri Sep 22, 2017 7:41 am

there are 3 directors on the board. The companies articles state that a board is quorate only if 3 directors attend (there were previously 6 directors). The 2 directors wish to approve the accounts with the write off of expenses by written resolution. My understanding is that a written resolution of directors has to be unanimous.

The other director is sympathetic to the request that the other two must provide receipts for these expenses. Can the accounts approval be blocked by the sympathetic director refusing to (i) give approval to a written resolution and (ii) failing to attend a board meeting so it is not quorate, until such time as the directors expenses is discussed and voted on. Given the conflict of interest of the other 2 directors in the matter, I assume the vote on writing off their expenses would not be quorate anyway.

Is this something that ultimately is going to have to go back to shareholders to resolve?

NB i have asked the question of our sols, i just want to get the opinion of the resident legal experts
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Re: directors being untruthful in shareholder presentations

Postby atticus » Fri Sep 22, 2017 8:36 am

The answers will, in part, be in the Articles.
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