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Company Disputes – Forewarned is Forearmed

Date: 14/09/2023 | Business & Professional Services, Corporate

As every company grows, managing the day-to-day challenges can cause friction on a whole variety of fronts – disputes between directors, fights between shareholders and battles between boards and investors.  It can be helpful to understand what your legal options are for resolving such disputes before things escalate.  Forewarned is forearmed, so here are a few key points to keep in mind:

1. Director Disputes

Directors often disagree on the best way forward for a business and discussion of all available options is to be encouraged.  However when a board cannot come together and agree a way ahead, steps need to be taken to ensure the company can continue to function and flourish.  So what are the options if the Directors really can’t agree?

Option 1 – check the company’s legal documentation to see if it deals with how the dispute can be resolved.  The articles of association of the company and any shareholders agreement will contain detailed provisions on how board meetings are to be held, who can participate, who can vote and how many votes they have.  There may be provisions excluding directors from voting on matters in which they have a personal interest and there may be a casting vote granted to the chairman.  In addition, consent may be needed from particular directors in relation the disputed matter.  Understanding these provisions in the context of the dispute may offer a solution that breaks the board deadlock and knowing how they operate prior to any dispute arising may prevent matters escalating in the first place.

Option 2 – mediation can help. Where all internal efforts at finding common ground have failed, having an independent party mediate can prove useful.  It can be a speedy way of dealing with issues and help to avoid costly and lengthy legal action.

Option 3 – resignation or legal removal of a director.  When all else has failed, often a director will decide it is time to resign and move on.  Failing that, where there are no specific provisions in the company’s articles of association or shareholders agreement there is a statutory procedure which can be followed to forcibly remove a director.  This needs more than 50% of the shareholders to be in favour of removal and it does take several weeks to do as a shareholders meeting has to be held and the director has to have the opportunity to state his case if he wishes to do so.  In reality it is often enough to confirm to a director that there are going to be sufficient votes at a meeting in favour of removal.  That gives them the option of resigning voluntarily before being pushed out which after some reflection is where things usually end up.

2. Shareholder Disputes

Like directors, shareholders may also disagree on the best direction for the company and although they may not be involved in the day to day running of the business, they do have ways of making their presence felt if they feel directors or other shareholders are not engaging with them.  These including the following:

Option 1 – sell your shares to another shareholder or a third party and move on.  This may be more difficult than you might think as there may be restrictions on the transferability of shares or it may be difficult to find a buyer for a minority shareholding but where possible it can be the quickest way to resolve a dispute.

Option 2 – call a general meeting of the company.  Shareholders with 5% of the issued shares can usually force the company to call a general meeting to discuss any topic they see fit.  Directors will need to attend and those attending such a meeting have a right to speak on the resolutions proposed.

Option 3 – go to court to bring an action for Unfair Prejudice.  Often minority shareholders can feel that larger shareholders are not taking their views into account and that their interests are being unfairly prejudiced.  Bringing a successful action will be time consuming, costly and stressful so this is not for the faint hearted.  However, the court can order all sorts of remedies – the purchase of the minority shareholders shares by the company or by other shareholders; the winding up of the company; or regulating how the company is be managed going forwards to name but a few.

3. Action by Shareholders against Directors

Where directors are behaving badly and shareholders want redress or to prevent future occurrences, when all other avenues have failed, options to consider are:

Option 1 – legal action against directors.  Directors owe their duties to the company itself but given that they are unlikely to choose to sue themselves, where the Shareholders believe they have been acting improperly and are in breach of their duties, they can bring what’s called a derivative action against the directors on behalf of the company to claim damages.

To do this the court must first grant permission for the shareholder to bring the action.  This is to stop shareholders bringing actions against the directors which the court feels are vexatious and not in the best interests of the company.

Assuming the court allows the action to be brought and it is successful, any damages payable by the directors are paid to the company rather than direct to shareholders.

Option 2 – PR campaign.  If shareholders feel directors are behaving badly, they can “name and shame” in an effort to change their behaviour by publicising it to other shareholders and the public at large.  Care must be taken not to make any defamatory statements and to make sure all facts disclosed are correct and not confidential.

Option 3 – removal of director.  Shareholders with 5% of the issued shares can force the company to have a general meeting to remove a director even if they don’t have the 50% necessary to pass the required resolution.  This can be a useful tool as part of a PR campaign and can force other directors to take action.

Disputes can be divisive and costly.  Understanding what the end stage options are in advance is a great way to ensure that these are settled by compromise not court action.

If you need advice on resolving any kind of corporate dispute, please contact a member of our Corporate Team.

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