Preventing Company Director Disputes

Disputes between directors are commonplace. Running a company can be extremely pressurised and there can be different opinions over many areas including strategy, dividend and salary policies and appointments. So, what actions can you take to help prevent matters spiralling out of control?

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Even if company directors have long-standing friendships or perhaps are family members, a serious falling-out can never be ruled out. But, a company is a legal entity and it may not be straightforward for an aggrieved party to simply walk away, or indeed, be dismissed.

Livelihoods are often tied up in the company and often, no one wants to give way. This is why you need watertight contracts and other key documents to avoid boardroom disputes. These include non-disclosure agreements, business plans and you should also make sure important meetings where decisions are made are always properly minuted.

The value of trusted advisers in preventing disputes

Directors should never rely on a verbal agreement, even if their relationships are cordial, as this can be incredibly risky in the case of any legal action. You should always make sure you know and trust your advisers and be prepared to call on them when necessary. So, this could include solicitors who are experts in both company and employment law,  and who can both draft the requisite company documents and provide objective legal advice as needed – before a situation develops into a crisis.

Legal advice can be costly, but so too can the expense of managing a damaging director dispute and litigation. Outside of a good law firm, an accountant that works closely with the finance director and offers more than a basic online service can be extremely valuable, such as in advising in ways to improve cash flow and saving on tax.

Further, a corporate insurance broker can ensure the business has strong protection – this should go far beyond advising on physical risks such as fire and flood. They should assist the business in risk management, identifying risks before they emerge. They can also advise on insurance products that protect directors, such as directors’ and officers’ liability cover, among others.

Meanwhile, if there are concerns that the business may be insolvent, then working with an insolvency practitioner can also be your most effective route to ensuring the company can be rescued or liquidated voluntarily.

An insolvency practitioner is not just there to wind a business up – they can be your best hope of ensuring survival. They will have the expertise to handle difficult negotiations with creditors, including HMRC, and to advise on business restructuring if this is required and possible.

What can help prevent company director disputes?

Many SMEs may rely on standard Articles of Association, which form the company’s constitution and set up the internal rules and regulations that must be followed. You should ensure there is a dispute resolution procedure within this document. This could, for example, state that a mediator must be brought in, and the directors in disagreement must agree to attend these meetings. 

There should be bespoke guidance drafted for the business on a range of key issues, in terms of directors’ powers and responsibilities, the procedures for decision-making, appointments, remuneration, and expenses. Where there are a number of shareholders, active directors should also look to ensure they can push through important decisions where possible. 

Shareholder agreements can also be vital in helping prevent disputes. They should outline shareholders’ responsibilities and cover what the outcome should be in the case of specific scenarios such as the death of a shareholder, divorce, and misconduct as well as succession arrangements. They should also regulate the sale of shares in the company and provide some protection for minority shareholders – the agreement is there to protect the company as well as the investment in it.

A majority shareholder will hold most sway, but although those holding a small shareholding may have less influence, they do have some powers, such as under Section 994 Companies Act 2006 –  ^[1]LEGISLATION “Companies Act 2006 S 994” . This allows them to take action if they believe their shares are deliberately undervalued, for example

Individual directors should also be aware of their roles and responsibilities but there can be overlap and power struggles. So, make sure that employment contracts – also known as service agreements – are properly drafted. 

All such documentation must be in place to show there is a clear process to resolve disputes, eliminate uncertainties, and ensure that all parties are aware of their obligations.

How can mediation help prevent directors’ disputes?

A mediator can be well placed to find a resolution if there is a dispute between directors. The individual will usually be a lawyer and could be from a firm of solicitors that is independent of the company but should also be acceptable to all parties. The Articles of Association could state, for example, that directors will agree to meetings with the mediator before taking any legal action.

A mediator can assist in a range of difficult areas including director deadlock. This occurs when votes are equally split and a majority cannot be secured. In some cases, this event has led to the end of the business and when such cases have gone to court, the most usual remedy is for an order to sell the company to the highest bidder.

So, perhaps as a result of mediation, the issues are thoroughly discussed, the air cleared and the director could agree to remain in the business, but in a different role. 

Another problem can be if one director wants to liquidate and another does not. Again, this situation could become highly damaging if a decision cannot be reached. There will only be a number of solutions, including the director who wishes to continue trading, then buying out the other’s shares, or alternatively, having the business voluntarily liquidated. If there is no intervention, then a stalemate could result, so mediation can mean directors again continue to talk about their options, rather than the matter progressing to court.

Can a company director be removed?

Directors’ duties may be clearly defined, but they do not always act in good faith and they may perhaps be involved in various types of wrongdoing. Or, there may be conflicts of interest and perhaps other directors could feel a fellow director is not pulling their weight – directors have a duty to behave in a way that is professional and this is an intrinsic part of the Companies Act 2006 and for example Section 175 –  ^[2]LEGISLATION “Companies Act 2006 S 175” – outlines the strict duty to avoid situations where conflicts of interest could result in problems.Or, a personality clash could make it impossible for the directors to work together effectively. This can become an extremely problematic situation if they refuse to leave voluntarily.

This is one of those times when legal advice should be obtained as early as possible. They will be far better placed to handle negotiations with the director and to see if they can agree on a satisfactory leaving arrangement and help decide what will happen to their shares. So, will the director accept a severance package and can they be required to sell their shares? If so, what price should be paid and how will the transaction be handled? These can be highly sensitive matters, but handling negotiations in a professional manner could again prevent highly damaging legal proceedings against the company. 

In the case of company directors who refuse to resign, shareholders can choose to send a Special Notice under section 168 of the Companies Act 2006 – ^[3]LEGISLATION “Companies Act 2006 S 168” . However, there are a number of protocols to be followed around this in terms of timing, communication and meetings and failure to follow these, could result in the process failing and potentially increase the likelihood of a claim for unfair dismissal or other legal action.  

The complexities of corporate law may well mean that directors cannot have a full understanding of all these issues when they are focused on running their companies. But, dispute resolution must be planned for, because although it may be something that directors do not want to focus on, a means of prevention will always be better than cure.

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

1. LEGISLATION “Companies Act 2006 S 994”
2. LEGISLATION “Companies Act 2006 S 175”
3. LEGISLATION “Companies Act 2006 S 168”