Quite regularly, company directors no longer see eye to eye and reach a ‘deadlock’. Unfortunately, many companies go without shareholders' agreements, making resolving this situation tough.
Generally speaking, if there’s a deadlock and no shareholders’ agreement, the best outcome is a negotiated settlement to avoid expensive litigation.
If the parties cannot settle, they have several options, including winding up or a buyout by one side or the other.
The Directors’ Positions
Directors are employees, meaning the company must dismiss them fairly, following a fair process and providing a fair reason.
If two shareholders each have a 50% stake in the company and Shareholder A does not wish to work in the business, yet wants to keep their share, then Shareholder B is effectively working for A for free.
Resolving the Dispute
Settling without litigation is in both parties’ interests. Litigation is expensive as it requires court payments, and you need a solicitor for longer.
Instruct a Solicitor
Instructing a solicitor helps you negotiate a settlement – you need to understand your legal entitlements and alternatives to enter discussions from a position of strength. A solicitor can analyse and break down the parties’ minority or majority shareholdings value before commencing negotiations. Then they will ensure that your rights and interests are protected.
Solicitors can encourage parties to make a positive effort to produce pragmatic solutions, perhaps with the help of a mediator through Alternative Dispute Resolution, to avoid ending up in court.
Use a Mediator
Mediation is a process where a trained mediator, as a third party, tries to knock the parties’ heads together (and sometimes their Solicitors’ heads) to explore a mutual resolution. It often produces binding legal agreements.
Employing the services of a mediator is an effective, cheaper alternative to all-out war. In our experience, if both parties are competently advised and know their weaknesses and strengths, mediation is very successful.
What if Negotiation and Mediation Fail?
If affordable avenues fall through and the ‘deadlock’ remains unbroken, you should move to litigation. You have three options:
Claim for Breach of Director’s Duties
The Companies Act 2006 dictates the duties of directors towards their company. If one party can prove that the other breached these responsibilities, they can secure an injunction or remove the other director.
A Derivative Action by a Minority Shareholder
Derivative action is a court proceeding against a director. If the director commits a wrong, a minority shareholder can seek a court mandate to begin derivative action against the director on behalf of the company and its members.
An Unfair Prejudice Petition
If Shareholders A and B are in a deadlock, Shareholder A may have a case for unfair prejudice and could bring a claim against B. A would have to prove they received unfair differential treatment, such as exclusion from management or particular benefits.
This expensive litigation typically results in a shareholder buy-out: the court would order that B buys A’s shares. If the parties cannot decide on a fair valuation, the court will.
Winding Up
If the business cannot continue with just one director, shareholder A can apply to a court for a ‘just and equitable winding-up’, whereby the company is liquidated, and the shareholders split any assets. It will likely impact employees and creditors who may require paying. An orderly sale is a far more beneficial option if the shareholders agree.
The court has significant discretions when ruling in all these areas, and competent advice from solicitors who understand how judges approach these matters is vital before starting.
Let Us Break the Deadlock
If you would like more support regarding a co-director dispute, contact our team, who are happy to offer advice. We can arrange a meeting with a skilled mediator in this area at very short notice.
FAQ
What happens to a company when two directors dispute?
If two directors with equal shares fall into a dispute and no other shareholders can cast a vote to resolve it, the company is in a ‘deadlock’. The parties can instruct solicitors to support them and negotiate a settlement, perhaps using a mediator. If not, they can enter litigation.
What happens to a company when a director leaves?
After leaving a company, a director has no responsibilities toward the organisation. The shareholders will then meet to appoint a replacement if necessary.
What will happen to a company if all its directors resign?
If all the company’s directors resign and leave, a shareholder must call a shareholders’ meeting. If none of the shareholders has the authority to call a meeting, they can apply for a court order to force one.
When can a company dismiss a director?
The shareholders can remove a director by giving notice of the intention before a shareholders’ meeting. There, the shareholders will vote on the matter; a majority vote will determine whether the director leaves their position.
Featured image: Unsplash Licence - Cherrydeck
