The High Court judgment in the case of Smith v Butler & Anor provides a useful illustration of the importance of ensuring that shareholders agreements and articles of association accurately reflect the intended balance of power between shareholders, and also clarifies the limits on the authority of a managing director.

The managing director / minority shareholder of a company purported to suspend the majority shareholder as chairman, under what he considered to be an implied delegated authority as managing director.

The minority shareholder's refusal to attend subsequent general meetings meant that no business could be transacted at such meetings given that the articles required a quorum of two members. The majority shareholder sought a declaration that such suspension was unlawful, and an order under section 306 of the Companies Act 2006 that a general meeting could be held with a quorum of one in order to enable him to remove the managing director from office and appoint a new director in his place. Section 306 allows the court to order a general meeting to be called in any manner it thinks fit where it is impractical for a meeting to be held in accordance with the company's articles or the Act.

The High Court held that the managing director's decision to suspend the chairman had been unlawful. Articles of association typically provide that the business of a company is managed by the directors, and that the board can delegate its authority to a managing director or other director. Unless any power has been delegated by a formal board resolution, or any powers have been specifically delegated by the articles, the managing director has no implied authority over and above those of a non-managing director.

The High Court also granted an order under section 306 to enable a general meeting to be convened by the majority shareholder alone for the purpose of dismissing the managing director and appointing a new director. The Court held that a majority shareholder has a right under the Act to appoint and remove directors, and that this was being frustrated by the chairman's refusal to attend general meetings. Whilst the Court's power under section 306 was not intended to alter the balance of power between shareholders where class rights and/or other minority protection rights had been agreed between the shareholders and were reflected in a shareholders agreement and/or articles of association, there were no such rights here. A quorum provision was not of itself evidence of such minority protection.

The decision emphasises the need for shareholders to think very carefully about the level of minority protection rights enshrined in a company's governing documents. A minority shareholder cannot rely on a mere quorum provision for protection against being voted off the board - if a guaranteed board position is required, weighted voting rights on any resolution to remove the shareholder as a director should be negotiated.