What is the best way to deal with director and shareholder disputes?

Douglas Skilton, offers expert advice on director and shareholder disputes in an article for South East Business.

Disputes between company directors and shareholders are a common occurrence in the business world, and can arise for a variety of reasons. In some cases, these disputes can escalate to the point where legal action is required. Court intervention might be necessary to deal with alleged mismanagement, or breach of a director’s duties. Alternatively, legal action might be required to enforce agreements between shareholders about their share ownership rights.

Why do director and shareholder disputes happen?

• A difference of opinion on the direction of the company. Shareholders may want the company to focus on short-term profits and growth, while directors may have a longer-term vision for the company and its future. This can lead to disagreements over investment decisions, marketing strategies, and other key business decisions
• Disagreements over executive conduct. Shareholders may believe that directors have breached their duties, such as by failing to avoid conflicts of interest, not acting in the company’s best interests, or by exploiting company property or opportunities for their personal benefit.  Directors’ remuneration is another common ground for complaint, which can lead to contentious discussions
• Transparency, communication and information. Shareholders may feel that they are not getting the information they need to understand what is going on, or to make informed decisions, while directors may feel that shareholders are seeking to interfere with management functions without justification, or a full understanding the company’s situation. This can lead to a breakdown in trust and a lack of cooperation between the two groups.

How can you prevent director and shareholder disputes?

• Ensure that that clear governance structures and protocols for making key business decisions are in place. A shareholders’ agreement can help to head off disagreements, as can setting up committees, or sub-boards, to review important decisions. Establishing clear criteria for evaluating, selecting and removing directors from their post is also important
• Establish communication channels between owners and boards of directors, so that everyone is on the same page and can work together towards common goals. This can include regular shareholders’ meetings, as well as regular updates and reports from management
• Ensure management practices are overseen and accountable. This may include implementing internal controls and audits, as well as adopting a code of conduct and guidelines for directors and executives to observe.

What can you do if shareholder and director disputes can’t be resolved bilaterally?

Ideally, any disputes should be dealt with by discussion and consensual resolution between the parties. However, where this proves not to be possible, other options may need to be identified. These could include:

• Unfair Prejudice Proceedings – If a shareholder believes that the company has been operated in a manner which causes unfair prejudice to their interests, or that an act or omission of the company might be so prejudicial, the minority shareholder may be able bring unfair prejudice proceedings, under Sections 994 and 996 of the Companies Act 2006. There are a range of potential remedies available, including a court ordered buy-out by the wrongdoer, or the company, at a fair value. The court can also regulate the conduct of the company’s affairs, order the company to refrain from doing or continuing an act complained of, or to take steps that it has omitted to take
• Derivative Proceedings – If there is an alleged breach of duties by one or more company directors, a shareholder may not have the right to bring a direct claim; usually the right to bring a claim against a director rests with the company, but the errant director(s) are unlikely to permit the company to bring a claim against them. A shareholder may have the right to ask the court for permission to pursue proceedings against the director(s) concerned, on behalf of the company
• Mediation – To avoid the extensive time and cost of court proceedings, facilitated negotiation between parties should always be considered as a means of achieving a resolution. This can be aided by a legal advisor, and a third party mediator, to help the parties navigate their way to an amicable outcome.

If you are a director or a shareholder of a company involved in an actual, or potential, dispute, and you would like to discuss the options, please contact our expert team info@ts-p.co.uk.