The prospect of director disputes arising when you and your co-directors first launch your business seems absurd. You advance because of your enthusiasm for your new product or service, which makes the late nights and occasionally seven-day weeks fly by. Your business gradually begins to bring in money, assemble a talented team, and submit an application for your initial round of funding. It’s time to commit, quit your “day job,” and put all of your efforts into building your new company. The occasional argument is unavoidable during the startup phase as directors experiment with different ideas and consider alternative growth paths. A full-fledged argument, however, could presumably never arise.
After a few years, you are profitable and have expanded both your team and your customer base. There are now several additional shareholders and Series B and C funding have been obtained. Here is where director disputes might start to arise. A dispute can arise for a variety of reasons, the most frequent being:
Concern about money-related issues.
Family members working for employers.
Fights for authority.
The number of dividends paid.
Various approaches to strategy and business expansion.
One director is not working hard enough.
What would it cost for a shareholder to sell their shares?
A modification in one director’s circumstances.
One of the biggest risks to the success of small businesses is conflict in the boardroom. In this article, we’ll go over three suggestions for handling director disputes in a way that safeguards your company’s assets and good name.
Have an Arbitration Process for Director Disputes
Many businesses are founded by family members, friends, or other associates, who might feel awkward recommending a dispute resolution process (DRP) be written into the company’s Articles. While it might appear absurd in the beginning that certain issues could become contentious, as your business grows and becomes more complex, the situation can quickly change for a variety of reasons, as demonstrated above.
The saying “prevention is better than the cure” holds when it comes to director disputes, despite sounding cliché. A director’s dispute being resolved in court is very expensive, stressful, and time-consuming. A shareholders’ agreement and a DRP written into your articles of incorporation provide a clear procedure for handling disputes. To promote a win-win resolution, the DRP might, for instance, specify that if the dispute cannot be settled at the Board level, a Mediator will be appointed.
Additionally, you can draft your Shareholders Agreement to address issues like succession planning, voting rights, the duties and working hours of each Director, and compensation. A directors’ dispute is less likely to occur if there are policies and procedures in place to handle such situations.
Have Knowledge on How to Remove a Director
You might be forced to remove a director if mediation and other alternative dispute resolution techniques, like negotiation, are unsuccessful in resolving the conflict. Check the company’s articles to see if they contain any instructions on how and under what circumstances a director may be removed. You and any other directors may attempt to convince the director to resign in exchange for a severance package if nothing else is specified in the Articles.
If the director refuses to step down, the company’s shareholders may remove them by sending a Special Notice to the company following section 168 of the Companies Act 2006 at least 28 days before the meeting at which the resolution to remove the director will be discussed. A board meeting must be called to call a general meeting of the shareholders, and the business must provide a copy of the Special Notice to the director in question.
The business must notify the shareholders of the resolution to remove the director at least 14 days before the annual meeting. The director has the right to address the company in person and writing. Any compensation specified in the contract is still due to a director who has been removed by Special Notice. They might also be able to file a claim with the Employment Tribunal for unfair dismissal. Therefore, before trying to remove a director via the special notice, legal counsel must be sought.
Protect the Business’s Best Interests
Admittedly, there are times when a director acts dishonestly and commits fraud, money laundering, or bribery. It is simple for other directors to be held responsible for a director’s bad behaviour. According to the Bribery Act of 2010, for instance, directors who are involved, either directly or indirectly, in the failure to prevent bribery are guilty of an offence. A failure to report fraud could subject one to legal action in both criminal and civil proceedings.
Conflicts involving alleged criminal behaviour are frequently very volatile and pose a serious risk to the company’s reputation, as well as its ability to draw in and keep customers, investors, and talent. Therefore, you and your fellow directors should seek legal counsel as soon as you have reason to suspect another board member’s conduct.
How Can Van Eaton Solicitors Help
We offer a free consultation to go over your case, and our emphasis is on custom solutions that safeguard your financial interests and way of life. When developing a legal plan, our team will always take into account the industry you work in. By creating and interpreting documents, we can also assist you in averting conflicts and preserving your business commitments. Contracts, director service agreements, shareholder agreements, and partnership agreements fall under this category.
If your business is involved in director disputes or you wish to pursue a claim on behalf of your business, contact us online or by phone at 0208 769 6739 to arrange an appointment. A commercial litigation solicitor will be in touch with more on how we can help you.