Navigating director and shareholder disputes

Director and/or shareholder disputes can have a detrimental impact for the business involved. A dispute between directors and/or shareholders may arise for various reasons, such as, breach of a director’s fiduciary duties, deadlock due to disagreements over business strategy, non-payment of dividend or exclusion from the management of a business. In the event of a director/shareholder dispute, the parties should seek legal advice swiftly to ensure that the dispute is dealt with appropriately with the aim of mitigating its effect on the functioning of the business.

Shareholder Disputes 

Directors control the day-to-day running of the business, but shareholders have the ultimate control over the business. Issues which can arise at shareholder level, include, minority shareholder action. If a minority shareholder feels that majority shareholders (or director (s)) are acting in a way prejudicial to their interest, the minority shareholder may bring an unfair prejudice petition. The court has a wide discretion to make such order as it thinks fit to give relief in respect of any unfair prejudice that the petitioner is able to establish.

Where there is 50/50 shareholding, and a decision cannot be reached, known as deadlock, it is possible that with the assistance of legal advice, negotiations may resolve matters. However, where the deadlock cannot be broken, action may be taken in the form of a winding up petition on just and equitable grounds.

Director Disputes

Inevitably, directors of a company will disagree from time to time. If so, the directors should refer to the articles of association of the company, any shareholder agreements in place and, if relevant, any director service agreements.

If a situation occurs where there is a deadlock at board level and the articles of association, or any other relevant documentation cannot resolve the deadlock, the directors should explore negotiations to resolve matters in the first instance, including alternative dispute resolution methods. As a last resort, recourse to the court may be required.

A situation may arise where one director claims that another director is not acting in good faith. In addition to fiduciary duties, a director owes various duties to the company set out in the Companies Act 2006. For example, a director must exercise reasonable care, skill and diligence and promote the success of the company. Should a director breach any of their duties, a claim may ultimately be brought against that director seeking relief, including, for example, the removal of the director.

Disputes within a business can have a significant detrimental impact on its operations, including negative financial consequences which may ultimately lead to its insolvency. Where directors agree to continue trading when they know or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, this can give rise to a claim being brought against the directors seeking a declaration that the director(s) make a contribution to the company’s assets.

Avoiding Disputes 

Prevention is key to avoiding disputes in business. There are proactive steps which can be taken to reduce the risk of disputes, such as, reviewing the company’s articles of association to ensure there is a mechanism which the directors and/or shareholders can use to resolve disputes without the need for court interventions or having an effective shareholders agreement in place.

However, the risk of disputes cannot be eliminated. The key point is to seek professional legal advice at the outset so as to seek to reduce the impact of the dispute before it escalates, and unintended consequences ensue.

For more information, please contact Charlotte Burkert in the Insolvency and Business Recovery Team on 01473 617323 or email [email protected].