How to manage boardroom and shareholder disputes

Disputes are commonplace in the boardroom and amongst shareholders. This could be from something as simple as a difference of opinion on the direction of a company, to a more complex issue like a perceived conflict of interest.

Irrespective of their severity, all kinds of boardroom and shareholder disputes need to be carefully and correctly managed to avoid them spiralling out of control.

Foys’ company disputes resolution specialists offers solid legal advice to companies and individual clients currently dealing with boardroom or shareholder disputes. In this article, we’re going to talk through some of the steps you should take to manage a dispute, minimise its impact on the performance of your business, and protect your current and future interests.

Understanding the types of disputes

There can be a number of reasons behind why disputes happen and these can often intersect with one another to make matters more complex. Some can be very procedural, while others can be very personal. The types of disputes often found in the boardroom or among shareholders include:

  • A breakdown of relations between directors/shareholders
  • Perceived poor performance of a director/shareholder
  • Differences of opinion over a company’s direction
  • Directors perceived to be paying themselves too much remuneration
  • Concern over whether or not the board is meeting its obligations and responsibilities (e.g. legal responsibilities)
  • A conflict of interest (e.g. director involved in another business within the same industry)
  • Lack of dividend payments
  • Terms surrounding directors’ contracts
  • The selling of shares back to the company or other shareholders

Some key considerations

Before we discuss legal rights and how to manage a dispute, it’s important to outline some considerations that may impact a dispute.

One of the first missteps often made is that legal advice isn’t sought at an early stage of the dispute. Matters often escalate without an understanding of the respective parties’ legal rights, which can make matters worse and lead to complications in the future. It’s advisable to seek out a solicitor who has no involvement with your company to ensure there is no conflict of interest in the dispute.

Another element of disputes that’s typically overlooked is the relationship that those involved in the dispute have with the company. For example, a director or shareholder may be classified as an employee of the company and as such, their employment rights may impact the dispute. Here, it is necessary to have a thorough understanding of the roles of directors and shareholders within the company.

Lastly, if you are currently setting up a company and researching the possibility of what happens in a dispute, it’s worth considering whether the personal values of you and your potential partners/shareholders align with those of your future company. If you can foresee potential conflict arising due to dissonance, it is worth re-considering the make-up of the board/shareholders or drafting documentation to take these matters into account.

This is why properly drafted Articles of Association or a shareholders’ agreement is crucial in setting out the rights and responsibilities of directors and shareholders as well as the terms and conditions of how a dispute should be handled. Such a document can help directors and shareholders agree at an early stage over what should happen in the event of a dispute – thus streamlining the process. Foys specialist solicitors often work with new companies to draft such documents necessary for navigating potential minefields brought about by disputes within the company boardrooms.

Legal rights in a dispute

When seeking legal advice from a lawyer, you may be asked questions such as:

  • Are you in control of the board? If not, then who is in control of the board?
  • Have you acted in a way that can be classed as improper for your role?
  • Do you have control in shareholders’ meetings? If not, then who has control?
  • Are there any agreements or restrictions in place regarding the selling of shares by shareholders?

The answers to these key questions frame the contextual tenets and salient facts, which outline your legal rights in a dispute. In addition, make sure to read through any company documents that could impact any of the above questions. For example, your Articles of Association may specify circumstances whereby normal rules do not apply and, therefore, a unanimous agreement from the board is required in matters of decision-making. A lawyer is necessary to assist you in understanding these documents and can provide sound advice on what you should or should not do within your dispute.

In instances where misconduct is an issue or you have been deemed to have acted improperly, it is necessary to understand the implications and whether you will be personally liable for paying out on any profits or losses resulting from your actions. Examples of this include using company funds for your own personal use without proper reimbursement, or diverting a contract away from the company to another business that you own, operate or hold a stake in.

Even if you control the board, it is still possible that a minority shareholder could bring a ‘derivative action’ lawsuit against you – a legal challenge under the Companies Act 2006.

Whenever you are looking to remove a shareholder, it is important that you receive legal advice before you act. This is good practice for removing anyone from the company and proper protocol should always be followed. If you don’t, you may be faced with a protracted legal battle that could cost you a lot of money in fees and compensation.

Likewise, for minor shareholders concerned over the size of payouts being made to directors, or who are unhappy with no dividends having been paid out for quite some time, consulting legal counsel is advised. In the former instance, establishing key points such as analysing the objective criteria – to assess whether board members would be expected to receive such remuneration for their duties – is a necessity before deciding on whether to take further action. In the case of dividends, establishing the company policy surrounding the declaration of dividends needs to be done. If you are a minority shareholder and can establish that other shareholders have received dividends, then your rights as a shareholder have been breached. When this is not clear, it is important to come to a decision regarding what type of action to take under legal counsel.

Under the Companies Act 2006, a shareholder does have the power to take a board member to court if they believe the board member has acted in a manner that is unfairly prejudicial to the interests of the rest of the board. These are personal legal actions and, as such, are paid for by the individual parties involved in the dispute – not by the company.

If all else fails in the dispute, shareholders have the right to apply to the court to wind up a company (force an insolvent company into liquidation) – often brought about in conjunction with a petition for unfair prejudice.

What to do in the event of a dispute

Here are some key steps to take in the event of a dispute in the boardroom that can help you manage and control the situation:

  • Understand: Why has the dispute occurred? What are the parties trying to achieve? What can you practically do to resolve the issue in a manner that suits all parties?
  • Negotiate: Can the problem be resolved without an expensive, time-consuming court battle? What will make the aggrieved party stay in the business? Is mediation a worthwhile consideration? Would the aggrieved party agree to sell their shares back to the company or to other shareholders?
  • Offer: What is the company policy on buying out an aggrieved party’s shares? What would you offer to the aggrieved party to resolve the issue? Would the offer be considered reasonable in court?

By now, it should be clear why it is important that you take on legal advice as soon as possible in the event that a dispute arises.

Seek out legal advice from company dispute resolution specialists at Foys

If you want to protect your interests in a business, irrespective of whether you are directly involved in the dispute or not, you should seek out legal advice when it becomes clear that there is conflict in the boardroom.

At Foys, we represent companies, individual directors, and individual or groups of shareholders during such disputes. This can range from drafting proper documentation and policy surrounding disputes, to offering advice at the commencement of a dispute, to even acting for you in legal cases.

Our Company Disputes team offers a free initial consultation – allowing us to understand your case, work out how we can best help you, and specify any potential legal costs going forward.

To get in touch with matters relating to Company Disputes, simply fill out our Online Form or call your local Foys Solicitors office:

Other articles from Foys relating to company law include:

This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.

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