A CEO's Self-Dealing Lease, a Futile Demand, and a Defective Pre-emption Notice
Halden Precision Ltd has three shareholders: Mr. Voss 45%, Ms. Arne 35% and Mr. Petit 20%. The articles require approval by disinterested directors for any related-party transaction exceeding 5% of total assets, and give shareholders a thirty-day pre-emption right over any proposed transfer, triggered by written notice stating 'the identity of the transferee and the price'.
In June 2023 Voss, the CEO, signed a three-year lease of a warehouse from Eken Property AB, wholly owned by his wife. Annual rent is €480,000 against an appraised market rent of €350,000; total assets are €6.2 million. No board resolution was ever tabled. In September 2024 Petit agreed to sell his 20% to Orion Holdings for €900,000 and, on 3 September, sent notice naming the transferee but not the price. The thirty days passed, and he signed on 10 October. Petit has twice asked for the lease file and board minutes and been refused.
1. Can Petit bring a derivative claim over the Eken lease, and what must he establish?
Read the worked answer
Standing and demand are separate hurdles.
Standing. Petit held 20% when the lease was signed and still holds it, satisfying the contemporaneous-ownership rule and any ordinary minimum holding. He must sue in the company's name, join Halden Precision as a defendant in the capacity the forum requires, and seek relief for the company, not himself; a personal claim for the fall in his own share value would fail as reflective loss.
Demand. He should first demand that the company sue. The articles contemplate disinterested directors, which presupposes a board able to act. Voss is the wrongdoer and the transaction is his; if the remaining directors are Arne and a Voss appointee, or the board has already refused to convene, demand is futile and excused. Futility must be documented - a written demand to the board, a refusal, or failure to respond within a reasonable time.
The company's loss. He must identify loss to Halden: excess rent of €130,000 a year for three years, €390,000, plus restoration of the lease terms. The loss is the company's, not his 20% share of it.
Inspection. The refusal to show the lease file and board minutes is both evidence of futility and an independent breach of his information right as a shareholder. Apply for inspection or for disclosure in the derivative proceedings, and plead the refusal.
Procedural readiness. Some forums require leave on a prima facie case or security for the company's costs; be ready to produce the appraisal, the missing resolution and the relationship between Voss and Eken.
2. How should the related-party lease be evaluated, and what remedies follow?
Read the worked answer
Threshold. €480,000 is 7.7% of €6.2 million in total assets, so the transaction crossed the 5% threshold and required approval by disinterested directors. No resolution was tabled; the transaction breaches the articles.
Duty of loyalty and entire fairness. A director on both sides - Voss controls Halden and his wife owns Eken - must prove fair dealing (timing, initiation, disclosure, negotiation) and fair price. There is no disclosure, no negotiation record and no appraisal in the file; €480,000 against €350,000 market is prima facie unfair, and the three-year term locks the excess in.
No safe harbour. The business-judgment protection applies to informed decisions by disinterested directors. It cannot apply where no disinterested decision was taken at all and the self-interest runs directly through the spouse. Voss cannot shelter behind the fact that the company received a warehouse it uses; the question is what it paid.
Remedies. Damages of €390,000 against Voss; rescission of the lease, since Eken, wholly owned by Voss's wife, plainly had notice and cannot claim good faith; disgorgement of Voss's indirect profit with credit for any value actually received; withholding of indemnification and of any bonus linked to the arrangement; and, in a serious case, his removal as CEO.
Counter-arguments. Voss will say he committed no company funds, that the rent was market at the time, and that the other shareholders knew. Each meets the appraisal, the missing approval and the absence of any written consent; the burden of proving fairness lies on him, not on Petit.
3. Was Petit's transfer to Orion valid, and what can Arne and Voss do now?
Read the worked answer
The answer depends on whether the defective notice started the thirty-day clock.
The text of the article. Notice must state 'the identity of the transferee and the price'. Petit's notice of 3 September named Orion but withheld €900,000. Without the price the notice cannot perform its function: a holder can only decide whether to match a known sum.
Consequence. Where notice is substantively defective, the period does not begin to run and the right is not lost by the passage of thirty days. The transfer to Orion was therefore made in breach of pre-emption. Specific performance lies: Arne and Voss may take their pro rata shares of Petit's 20% (35/80 and 45/80 respectively) on the same terms, paying €900,000 for the whole holding, and require Petit to transfer to them rather than to Orion.
The transferee. Orion is bound where it took with notice of the articles; the board should refuse to register the transfer, and the share register is the practical lever.
The contrary argument. If Petit can show the price was in fact known to the holders - an oral communication, a term sheet circulated in the company - a court may treat the notice as substantial compliance and hold the right lost. That is a fact question on which Petit would bear the burden, but holders who sat on information in order to ambush the seller risk being treated as having waived.
Action. Arne and Voss should serve a notice of exercise, tender the price, and seek an injunction against registration. Delay undermines an equitable remedy, and every week of silence looks like acquiescence.