When you and your co-directors first launch your company, the idea of a dispute developing seems absurd. The excitement and passion for your new product or service propel you forward, making the late nights and occasional seven-day weeks fly by. Over time, your company starts to generate revenue, create a talented team, and apply for your first round of funding. It’s time to commit and give up your ‘day job’ and focus all your energies on your startup.
During the startup phase, the odd argument is inevitable as directors try different ideas and see alternative paths to growth. But a full-blown dispute - surely that could never happen.
Fast forward a few years and you are turning a profit and have grown both your team and market reach. Series B and C funding have been secured and there are now several more shareholders. This is the point at which a director dispute can occur. There are many triggers for a dispute developing; the most common being:
- Concern over financial matters.
- The employment of family members.
- Power struggles.
- The level of dividends paid out.
- Different ideas regarding strategy and growing the business.
- One director not doing enough work.
- The price of shares if a shareholder wants to exit.
- A change in the personal circumstances of one director.
Boardroom disputes are one of the biggest threats to the success of SMEs. In this article, we discuss three tips for effectively handling directors’ disputes in a way that protects your business’s finances and reputation.
>>Read now: 6 rules for removing a director
One - Have a dispute resolution procedure in your Articles of Association and put a Shareholders’ Agreement in place.
Many SMEs are started by family members and/or friends who may feel uncomfortable suggesting a dispute resolution process (DRP) is included in the company’s Articles. However, as illustrated above, there are many reasons for directors’ disputes to develop and although in the early days of hustling the idea of certain matters becoming contentious seems ludicrous, the situation can rapidly change as your company grows and becomes more complex.
When it comes to director disputes, the old adage ‘prevention is better than the cure’ may sound trite but it is completely true. Going to Court to resolve a director’s dispute is extremely expensive, stressful, and time-consuming. Having a DRP included in your Articles and a Shareholders’ Agreement drawn up at the beginning of your venture provides a clear process for managing disputes. For example, the DRP could state that if the dispute cannot be resolved at the Board level, a Mediator will be appointed to encourage a win-win solution.
Furthermore, your Shareholders Agreement can be drafted to cover matters that commonly cause disputes, such as succession planning, voting rights, each director’s responsibilities and hours of work, and remuneration. Having policies and procedures in place to deal with such matters will mitigate the risk of a directors’ dispute developing in the first place.
>>Check out LawBite's Shareholder Agreement
Two - Understand how to remove a director
If mediation and other alternative dispute resolution methods such as negotiation fail to resolve the dispute you may have no choice but to remove a director. Examine the company’s Articles to see if it provides any guidance as to the circumstances in which a director can be removed and the removal method.
If nothing is provided in the Articles, you and any fellow directors can try and persuade the director to resign in exchange for a severance package.
Should the director refuse to resign, the shareholders of the company can remove them by sending a Special Notice under section 168 of the Companies Act 2006 to the company at least 28 days before the meeting to table the resolution to remove the director takes place. The company must send a copy of the Special Notice to the director concerned and a board meeting called to convene a general meeting of the shareholders.
At least 14 days before the general meeting, the company must give notice to the shareholders of the resolution to remove the director. The director can make written representations to the company and speak at the meeting.
If a director is removed by way of Special Notice they are still entitled to any compensation referenced in their contract. They may also be able to claim for unfair dismissal in the Employment Tribunal. It is therefore imperative to take legal advice before attempting to remove a director via Special Notice.
Three - Make sure you protect the best interests of the company in cases of fraud, money laundering or bribery and corruption
Unfortunately, sometimes a director goes rogue and engages in bribery and corruption, money laundering, or fraudulent activity. It is easy for fellow directors to become liable for the actions of a rogue director. For example, under the Bribery Act 2010, directors can be guilty of an offence if they are implicated, either actively or passively, in a failure to prevent bribery. Turning a blind eye to fraud could also result in personal liability in the criminal and civil courts.
Disputes relating to suspected criminal conduct are often extremely volatile and carry significant risk for the company’s reputation and ability to attract and retain talent, investment, and customers. Therefore, it is wise to seek legal advice as soon as you and your fellow directors become suspicious of another board member’s actions.
In summary
Director disputes do not have to destroy the company you have worked so hard to build. By putting in place DRP in the Articles and drafting a Shareholders Agreement, most disputes can be resolved quickly whilst maintaining personal relationships.
In more complex situations where a Special Notice must be given or there are suspicions of criminal behaviour, an experienced Company Law Solicitor can provide expert advice and protect your best interests.
Our dispute resolution lawyers can provide you with expert guidance and advise on strategies to resolve the dispute at a reasonable cost.
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