Director disputes can arise for various reasons. All company directors have a variety of responsibilities, including the obligation to promote the company’s success. Disputes can arise in the boardroom when directors disagree over the administration of the company and how to promote its success, especially if there are doubts about the board’s actions. Conflicts of interest and suspicions that a fellow director is misappropriating company funds or otherwise acting illegally are also common causes of conflict. In this article, Resolving Director Disputes, we take a look at the process involved and the options available to you.
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Why do disputes occur?
There are a number of reasons why disputes happen between directors, and they can include:
- Lack of day-to-day involvement – typically, directors of smaller companies will consent to work actively in the business. This may not be the case over time, and one may not be carrying his or her weight.
- Control – when one director attempts to dominate the company’s operations.
- One of the shareholder directors is taking an unfair amount of money out of the business via dividends.
- Breach of duties – one of the directors has violated his or her director responsibilities, typically due to a conflict of interest or by actively harming the business.
The importance of gathering all the relevant documents
It is important to establish basic information regarding the organisational structure of the company and its associated documents. This can include:
- The present state of management affairs
- Is it within the company’s authority to terminate the employment of a director who is exhibiting poor performance or engaging in dishonest behaviour?
- What potential liabilities may the business potentially face?
The determination of resolution is contingent upon the existence of a director’s service agreement or a shareholders’ agreement that has been executed by all shareholders. In the absence of a formal written agreement, the resolution of the issue is contingent upon the dynamics and communication between:
- the articles of association;
- the rights provided to employees under employment protection laws;
- the rights granted to shareholders under business law.
The presence of a formal written agreement significantly enhances the likelihood of a streamlined resolution to the situation.
What is the best approach to resolve director disputes?
Code of conduct
Establishing a written code of conduct that defines the board’s duties and responsibilities is an efficient way to resolve a board dispute. Implementing a written code of conduct promotes more effective management and reduces the likelihood of disputes, which can ultimately hinder the company’s governance. If a dispute arises, the first step in resolving it should be to refer to the code of conduct, which clarifies the roles and responsibilities of board members and ensures that they understand how to manage conflicts of interest, their duties and responsibilities.
Refer to the company articles
Numerous small businesses are founded by family members and/or friends, who may feel uneasy about proposing a dispute resolution process (DRP) be included in the articles of incorporation. However, there are numerous reasons for directors’ disputes to arise, and while in the early stages of a startup it may seem absurd for certain issues to become contentious, the situation can change rapidly as your company develops and becomes more complex.
When it comes to director disputes, prevention is better than cure. It can be extremely expensive, distressing, and time-consuming going to court to resolve a director dispute.
Including a DRP in your articles of incorporation and drafting a shareholders’ agreement at the outset of your business provides a defined process for managing disputes. For instance, the DRP could state that if the dispute cannot be resolved at the level of the Board, a mediator will be appointed to facilitate a win-win resolution. In addition, your shareholders’ agreement can be written to address common sources of conflict, including succession planning, voting rights, each director’s responsibilities, and work hours and compensation. Having policies and procedures in place to address such issues will reduce the likelihood of a director dispute arising.
Consider using alternative dispute resolution methods
Using dispute resolution mechanisms, such as mediation, frequently results in disputes being resolved in a civilised manner, allowing parties to express their concerns and resolve issues. Using an independent chairman who is not a shareholder to hear director disputes is a common mechanism. Alternately, appointing the services of an external, independent mediator is a time-efficient method of resolving disputes when the directors have exhausted all internal options for finding common ground. In addition, these mechanisms prevent potentially expensive legal proceedings that can, in some instances, impede a company’s ability to conduct business.
Consider removing a director
If mediation and other methods of alternative dispute resolution, such as negotiation, fail to resolve the dispute, you may be compelled to remove a director. Examine the articles of association of the company to determine how to remove directors and under what circumstances. If nothing is specified in the articles, you and other directors may attempt to convince a director to resign in exchange for a severance package.
If the director refuses to resign, the shareholders can remove them by sending a Special Notice under section 168 of the Companies Act 2006 to the company at least 28 days prior to the meeting at which the resolution to remove the director will be tabled. The company must submit a copy of the Special Notice to the director in question and call a board meeting to convene a shareholders’ meeting.
The company must provide shareholders with notice of the resolution to dismiss the director at least 14 days prior to the annual meeting. The director may submit written comments to the company as well as speak at the meeting.
If a director is removed by Special Notice, they are still entitled to any compensation stipulated in their employment agreement. They may also be able to file a claim with the Employment Tribunal for unjust dismissal. Before attempting to remove a director through Special Notice, it is essential to seek legal counsel.
Holding a General Meeting to seek a resolution
In specific situations, the board of directors is required to convene a general meeting of the shareholders. The written request must adhere to a predetermined structure, and it is preferable that the disagreement be resolved through a democratic voting process or by using the meeting to air grievances and seek a solution that is mutually acceptable. Frequently, the addition of a new director can serve as an effective strategy for conflict resolution and board revitalization.
How we can help
We have a proven track record of helping clients deal with the process involved in resolving director disputes. We will guide you diligently and ensure all checks are carried out swiftly and efficiently. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to contact our Corporate solicitors
It is important for you to be well informed about the issues and possible implications of a director dispute. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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