Director disputes

When company directors disagree, it can cause long-lasting damage to the business and be very stressful for those involved as well as your employees. It’s therefore important to find a way to resolve any business dispute quickly and effectively.

Director disputes are not uncommon and can arise for a number of reasons. Common scenarios include:

•   A business owned by a divorcing couple with a 50/50 shareholding who don’t have a shareholders’ agreement in place.

•   A business owned by friends or family members who then disagree, which then spills out into the business.

•   Conflicts around financial matters based on suspicions that a fellow director may be misappropriating company funds or otherwise acting improperly.

•   Director performance and their inability to deliver on objectives or address serious operational challenges.

•   Disagreements around corporate governance and directors’ responsibilities.

•   Conflicts of interest which affect a director’s ability to act in the best interests of the business.

•   Legal compliance issues around adhering to the law, regulations or standards.

Directors are subject to a number of legal duties. For example, they owe so-called “fiduciary duties” to the company to exercise reasonable care and skill and act in the best interests of the company, which are now written into the Companies  Act 2006. Breaching these duties can leave directors open to personal liability.

There are many types of director and shareholder disputes but whatever the reason or the size of the company, they all need resolving.  Early intervention is usually best, as once there has been a breakdown of trust, or misgivings over whether fellow directors are acting properly, resolution becomes much more difficult.

With any dispute it is important to know when and how to litigate, but first and foremost when to stop and consider alternative means of dispute resolution called “ADR”.  This could be a formal process with an appointed Mediator,  or an informal round table discussion with or without lawyers present.

Such informal methods are aimed at avoiding litigation.  The key is recognising when a conflict begins to emerge, then taking action which might start with informal communication with the other party to see if the issues can be identified, agreed upon and resolved.  A typical solution for smaller businesses where the directors are also shareholders and employees might be for the remaining shareholder/s to buy the shares of the outgoing party, so they can carry on running the business without them. Early legal advice in the background can stop boardroom disagreements mushrooming into litigation, by promoting engagement and an ADR based approach, before it is too late.

Where all attempts at resolving the dispute fail then legal action can be pursued through Court proceedings, but this can be time-consuming and expensive.  There are also the financial and reputational consequences of a dispute to consider and whether it is possible for the business to recover from it.

Many disputes could be prevented, or more easily resolved by having appropriate documentation in place including service contracts for directors and a shareholders’ agreement where directors are also shareholders.  Even if all is well in your new or established business, to avoid future costs and heartache, it makes sense to have the right documents in place and look at how your business is structured, which our corporate team can help.

If you need help or support dealing with a dispute, or think there may be one in prospect, please get in touch with our team.

Andrew Clarke is an Associate Solicitor in our disputes team and can be contacted at a.clarke@gullands.com