A good company board is one of the keys to a well-run business; it should identify key issues that need resolving to trigger company development, a constant flow of ideas and regulated decision-making.
That all sounds positive and progressive, but it does not always turn out that way. Disagreements can arise over strategy, company financing, remuneration, and conflicts between directors’ interests in the company and outside interests.
The personal dynamism that the board relies upon can turn into disagreements which, if left to fester, can crystallise into acrimonious disputes.
What can Cause Disagreements?
Directors and shareholders are often at odds over several aspects of their roles and the company. Common issues include:
Absent Shareholders’ Agreements
Shareholders’ agreements underpin the director and shareholder responsibilities, making identifying those in the wrong simpler. Without a written agreement, you can quickly end up pointing fingers and needing litigation.
Breaches of Duties or Agreements
English law sets out legally binding directors’ duties. If a company director breaches these obligations, they threaten the company’s security by potentially going against its interests and constitution. If the shareholders believe the directors have breached them, it can lead to company injunctions and disagreements.
Shareholders can breach their shareholders’ agreements, a contract between them and the company that establishes their responsibilities. These breaches lead to shareholder disputes and shareholder and director disputes.
Salary Disparities
The board can quickly move into a dispute if the various directors earn different salaries. When the reasons behind these disparities are poorly communicated, the chance of problems grows dramatically.
Conflicting Interests
Directors must have no conflicts of interest and prevent any possible conflicts. If board members have conflicting business interests or interests in other companies, fulfilling this responsibility is challenging and leads to disputes.
Communication Breakdown
The board of directors must communicate effectively with the shareholders; financial and company information should be available. Withheld or uncertain information can understandably lead to problems.
Excluded Shareholders
Whenever shareholders are left out of board meetings, it can lead to extensive disputes and distrust. Minority shareholders are often excluded.
Personal Differences
Sometimes people just do not see eye to eye, leading to disputes that can become personal. You must find directors that can effectively work together.
How to Resolve Disagreements?
You always have options before winding up a company. Depending on the situation, you can remove directors, break deadlocks and take steps to prevent problems.
Instructing Solicitors
Your first step should always be instructing solicitors for comprehensive advice, no matter the dispute’s origin or your company’s structure.
When approaching a dispute, we will ask:
- Do you believe that the shareholders or directors acted unlawfully?
- Would you like to remove a director?
- Is there a 50:50 deadlock?
- Do you have a shareholder or director’s service agreement?
- What liability does the company risk if the dispute escalates?
Deadlocks
Resolving disputes is very difficult when you are locked in a 50/50 deadlock. Your shareholder’s agreement may include a Russian Roulette or Texas Shootout provision for these issues. If you do not a resolution clause, you may require a mediator or a court buy-out order.
Removing Directors
If disputes continue, shareholders can remove and replace directors. Remember that a director is a company employee and cannot be dismissed without a fair procedure or risk an unfair dismissal claim.
Issues of Performance
If unsatisfied with a director’s performance, you must conduct a performance review process. After you dismiss them as an employee, they can still act as a shareholder. You may lawfully remove them and force them to transfer their shares.
If you have a directors’ service contract, you may have a clause stating that once dismissed as an employee, they must resign as a director.
Gross Misconduct
The law does not clearly define gross misconduct, and employers rely on case law precedents. Typically, it is defined as deliberate wrongdoing or gross negligence, including:
- Gross negligence in fulfilling their responsibilities
- Serious incapability to perform their role
- Theft or fraud
- Failure to meet internal or regulatory standards or policies
- Unauthorised removal of company property or documents
- Insubordination
If your dispute arises from a dishonest director, you can:
- Suspend a director
- Conduct an investigation
- Conduct a disciplinary hearing
- Dismiss the director
Prevention
Prevention is better than cure, so you should create a culture that minimises unclarity and personal disagreements. You can:
- Clarify authority, roles and responsibilities
- Establish regular board meetings with an orderly process
- Meet outside the business – combining meetings with team activities
- Ensure the flow of full information to all board members
- Draw out disputes between parties and encourage Directors to reach a consensus during this process
- Incorporate Alternative Dispute Resolution into the company’s culture
Risks of Pushing Disagreements Under the Carpet
If left underneath the surface, these disagreements can undermine the smooth functioning of the board and the company’s performance. Doing nothing is always the worse option; you are asking for more expensive future issues.
Contact Our Solicitors
If you face a company dispute between directors and shareholders, contact our solicitors today. We can arrange a free, no-obligation consultation to understand your situation and recommend the ideal legal avenues to resolve it.
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