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Buachaill, Barrister
Category: Law
Satisfied Customers: 10976
Experience:  Barrister 17 years experience
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2 dormant directors needing to be ejected as part of a

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2 dormant directors needing to be ejected as part of a company reset
UK Ltd company started with 4 Directors, equal shares.
Produced a free App for IPAD. Got downloads but no revenue. Patent achieved for the Ipad App.
2 Directors get frustrated and drop off the scene but no change to company structure.
2 Good Directors start to think of ideas for new chapter and want to keep the name of the company.
2 Bad Directors refuse to be dropped. Saying they want 5% minimum and full 25% each if the company is sold within three years.
Suggested to Bad Directors that they have 5% of the new chapter for goodwill and thats that. Company is virtually nothing right now, all the work would be the Good Directors and the old App not relevant as new IP would be for new Virtual Reality platforms.
Even with arbitration the result is an impasse. The company will die if they can't reach an amicable agreement.
The bad directors want their cake and eat it, the good directors feel manipulated, trapped and that this is all unfair and not in the best interests of the company.
Objective: how best to get rid of the 2 bad directors legally, what kinds of strategy and steps in order to end up with a company of the same name, it could be a USA Corp (it's expected that funding in future would be easier there), that company having the 2 good directors plus a new 3rd who is key to the future. So a new company structure, UK or USA, having the same name, maybe even the patent from the old world if possible. And in a way where the 2 good directors have low risk of any legal action against them in future re this history.

1. I regret to say tha t you need to set up a new corporate structure with a different name for the venture with the new IP. There is no legal way you are going to get rid of 2 Director/shareholders with 50% of the share capital of a company. There is an unresolvable impasse. So, you need to move quickly on and set up a new company with a different name to handle the new IP. You should put the new IP into this new venture and avoid all contamination with the former venture with the old App.

2. The reason for the new name is ***** ***** need to avoid any action for the civil wrong of passing off which allows a company to sue for someone using the goodwill of its business to generate business for itself. You should also both resign as directors of the existing company before you set up the new company. This is because directors owe fiduciary duties to a company and its shareholders, so if they act or set up a rival company they can have this taken off them if they compete or use the opportunity of the company the are a director of, to set up in business.

3. So, clear water must be established between the old company with the Old App and the new company with the new IP. So new name, resign directorships, and a new company must be created. Ultimately, you can come back and purchase the old app if you wish. But wait until your new business is established.

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Customer: replied 1 year ago.
Thank you. This is valuable but the objective set in the question isn't practicable. So I would like to ask you some follow-on questions and will pay you more if I can.If after resigning for clear blue water, they started a USA company of the same name as the UK company and had no non-compete obligations in the UK,
1. would there be a low risk of any further action against them (all IP would be new and USA based)?2. to go back and pickup the patent or IP, surely that would be impossible as it would require a special resolution of 75% power which they wouldn't have, so it is unlikely anything would be able to be achieved. How could that be navigated to be achievable or actions taken to ensure that it will be?many thanks

Answer 1. The liability to an action for passing off arises whenever there is a risk of confusion amongst customers as to the business selling a product such that one company is trading on the other company's goodwill. So, by adopting the same name, you run the risk that customers of the new US company will confuse it with the old UK company. There is no problem is you have no customers of the old company in the UK. However, there have been cases involving the name Budweiser in Europe where any sales giving rise to goodwill can lead to an action for passing off.

Erratum - The Answer 1 should read "There is no problem is you have no customers of the old company in the US"

Answer 2. My suggestion of buying the Old App is contingent upon the two bad directors ultimately wanting to sell. Essentially six months after the two good directors exit, the old App company will lose its fizz as there will be no one running its affairs properly. At this point a sale will become attractive. However, it requires the co-operation of the two bad directors.

Answer 2 (continued) It is not suggested that the IP belonging to the old App can be "lifted" out of the old App company. In stating that a sale can take place, it is an iron rule of business that the most competitive survive. So, if as you suggest, the bad directors are not pulling their weight, a sale will be attractive.

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