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Company Director Disputes – Resolution and Prevention

Director disputes, similar to shareholder disputes, can sometimes arise as a business continues to grow. These disputes often concern issues related to decision-making and management of the company’s affairs. If a Director cannot meet their significant responsibilities, this impacts the company’s operations, management, performance and relationship with stakeholders and shareholders.

Given that the scope of responsibility of a Director can be wide ranging, and that the implications of their strategic decisions can impact upon the overall performance of a company, it will come as no surprise that sometimes certain decisions are not unanimously agreed/approved, and disputes can arise.

Disputes can appear between or with Directors for several reasons; at AFG Law, our aim is to resolve disputes between Directors quickly and as cost effectively as possible to keep all parties from considering Court.

 

What Happens if a Director Dispute Arises?

Following a Company Director dispute several outcomes are possible.  This depends on the nature of the conflict and the company’s governing documents, as well as any actions taken by the parties involved. Alternate Dispute Resolution (ADR) is a recommended method for companies wanting to avoid Court proceedings, and is often mandated as part of any documented company processes to resolve a dispute.

Governing documents and the company’s Articles of Association can provide provisional guidance on resolving any Company Director disputes. Usually, these include directions regarding how decisions are made and how disputes should be handled.  In the absence of specific company articles, The Companies Act 2006 provides a legal framework within which Directors must operate. Many provisions within the Act are directly relevant to Company Director disputes. If a Company Director dispute does arise, then the following actions may be taken:

  • Resolution of a dispute may be best supported initially with the presence of an informal mediator, whether that be a neutral third-party or a legal advisor. This could take place within a formal meeting with the board of directors present, to discuss the matter in depth with an external mediator. It is important that these meetings be documented to reflect the discussions held and outcome.

 

  • Professional mediation may be necessary in the case that a non-biased third party fails to encourage productive communication and opposing parties remain in a deadlock. Bringing in an expert mediator (which may be a barrister or current/former member of the judiciary) can help opposing parties understand the different perspectives and concerns involved within a dispute, as well as considering the potential legal ramifications of proceeding. Professional mediation is generally highly effective to leading to a resolution to a dispute, though any mediation is not binding unless subsequently agreed by the parties.

 

  • Directors who find themselves caught up in a dispute may find clarity from obtaining legal advice from a corporate law specialist, such as from the team at AFG Law. Legal advice is essential if financial matters crop up within a dispute, such as funding or asset allocation.

 

What is the Potential Outcome of a Company Director Dispute?

If a Director’s conduct or behaviour becomes inexcusable, removal from the position is a potential outcome unless remedial action is taken. A majority vote may be required; however, subject to procedures in place, those involved with the removal should seek guidance from Section 168 of the Companies Act. If this decision is rejected by the Director, they may challenge the decision on making of submissions at any board meeting, either in line with Section 169 of the Act, or as per procedures set out in the Articles of Association or shareholder’s agreement are not effective.

Share buyout may also be a viable alternative solution in cases where the dispute is financial or regarding company control. A fair and independent valuation should be undertaken if a share buyout option in a Company Director dispute is required, and input from relevant legal and financial experts should be obtained to keep the process fair and transparent.

It should not be forgotten that any dispute with a Company Director may ultimately be resolved such that they continue in their role, or that they have the majority support of the board and shareholders.  As such, it is critical to obtain legal input and advice on the merits of any dispute, or defence to the same, to avoid protracted and unnecessary legal disputes ensuing.

Ultimately, if internal resolutions continue to fail in resolving the Company Director dispute, Court involvement may be necessary to resolve the legality or reasonableness of a Director’s actions, and arriving at any conclusion as to whether they should remain in their position or not.

 

A Director’s Service Agreement – How can this Benefit Your Business?

As is always good in business, foresight and proactive management of potential issues is much more effective than taking retrospective action once a Company Director dispute has arisen.

A Directors Service Agreement, like a Shareholder’s Agreement, can prove beneficial should a Director dispute arise. Outlining Director duties, their day to day role, responsibilities and financial arrangements, the Directors Service Agreement protects both the Director and the company should there be an alleged breach of duties, with remedial processes set out to resolve any issues in a pre-planned fashion.  Such preparedness can ultimately save significant legal expenses in dealing with unplanned disputes.

 

How can Director Disputes be Prevented or Minimised?

Taking measures before a Company Director dispute can minimise damage in the event such a dispute should arise. It is not only more cost-effective but acts in the best interest of all involved in a company that may be swept up in the dispute, potentially impacting business prosperity and ongoing profitability, if a dispute is causing persisting issues with regards to the management of day-to-day operations.

As part of formal company documents, specific considerations can be given to the following:

  • A mediation clause, often set out in a company Director’s Service Agreement or bylaws, outlining necessary steps to take in the presence of a dispute, can be a safety net for many companies. This usually requires Directors to attempt mediation procedures before deciding to seek legal advice;
  • An arbitration clause is the next step to consider if mediation hasn’t worked in resolving a dispute. Like mediation, an independent third party will receive both arguments of the dispute. However, an arbitrator has the authority to decide the outcome of the dispute, whereas mediation is an attempt to have parties narrow the issues and agree the outcome of any dispute;
  • Conflict of interest considerations can help to avoid a potential conflict of interest, as laid out in Section 175 of The Companies Act. For example, if a Director has personal reasons which influence the company’s direction in a particular aspect, disclosing anything which may do so can exclude themselves from voting on decisions which their decision may be impartial.
  • Fiduciary duties, simply defined as a duty to promote the success of the company and compel Directors to act in the best interests of the company, are best maintained to avoid potential legal action or removal of the director.
  • A review of governance framework can improve governance and board composition to resolve recurring issues. Strengthening this framework to involve clear and concise descriptions of responsibilities and roles can prevent future conflicts.

 

How can AFG Law Assist Your Company?

Disputes within the business world can be complex in nature and often require help from a professional who has expert knowledge of commercial law. At AFG Law, our team have extensive experience in all aspects of company law and provide a resolving presence for businesses experiencing conflict.

For guidance relating to Company Director and shareholder disputes, or if you need legal representation to bring a claim in court, get in touch with our team today to see how we can help you, or speak to one of our experts on the phone on 01204 377600.

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