Boardroom Disputes
If a boardroom dispute arises between the directors of a company that disrupts the running of the business, it is vital to resolve it as quickly and as smoothly as the legal position of the company allows. We understand the need to resolve disputes quickly to minimise any damage to the business’s ability to operate efficiently, and to protect the company’s reputation if the dispute becomes public.
Directors must always be mindful of the duties that they owe to the company in question. Compliance with those duties, even in the case of an aggrieved party, can soon become compromised in the event of a dispute.
A company’s Articles of Association and any shareholders’ agreement will tend to govern the management of a company. In the absence of agreement to the contrary, decisions will be passed at board level by a simple majority. It is, therefore, not unusual for company shareholders and/or directors who hold equal shares to find themselves in a ‘deadlock’ situation, unable to resolve a dispute or carry on trading. Alternatively, particularly where there is an unequal division of shares, the majority shareholder(s) may seek to take control of the board to the detriment of the minority shareholder(s).
View video transcript
Hello. I'm Steve Morris. I'm a Partner in the Commercial Litigation department at JMW. In the disputes that I see, it's often the case that there's misunderstanding or blurring of the lines between directors and shareholders.
The directors are appointed by the company to act on its behalf shareholders or members as they're often referred to own some or all of the company through their investments. They have an entitlement to sharing the profits of the company. Duty are typically owned by directors rather than shareholders. Director's duties arise from a number of sources So the company's articles, statute, the most obvious example is the company's Act, the requirement, the director acts in the best interests of the company.
There's also common law duties, so duty of confidence and also our fiduciary duty to act in good faith. The articles of association are compulsory company has to have articles, whereas the shareholders' agreement is a voluntary document. The articles bind the company its members, its shareholders and its directors, and there are public documents. The shareholders agreement is a private document, and it's only by the parties to the agreement, typically the shareholders themselves.
So shareholders' rights are typically enacted through their ability to vote at shareholders' meetings. A shareholder with over fifty percent of the shares in in a company can pass of itself an ordinary resolution. More serious decisions are made by way of special resolution which requires over seventy five percent of the shareholders to vote in favor of Well, in the case of minority shareholders, the sorts of examples we tend to see is directors acting in breach of their high judiciary duties, actions being taken which benefit a certain class of shareholders over others in the case of equal shareholdings.
The usual classic problem is a deadlock situation whereby each set of fifty percent shareholders can block an ordinary resolution being passed but can't actively make that decision of themselves and that creates a deadlock situation. Well, these sorts of disputes highlight why it's so important to have a properly drafted set of articles from the outset and also ideally shareholders' agreement in place. Monarch shareholders can issue a petition to the court if they believe that their minority interest has been unfairly prejudiced. Alternatively, a minority shareholder could issue a set of proceedings called a derivative action, which is where the shareholder effectively seeks the court's permission to step into the shoes of the company and take action usually against directors who are acting unlawfully or in breach of their fiduciary duties on the part of the company.
A last resort is also for an application to be made to court for an order for the winding up of the company.
JMW’s expert solicitors can provide advice and guidance on how to proceed through negotiations while finding a solution that works for you and other parties involved in a dispute. To speak to a solicitor for legal assistance on boardroom disputes, contact us on 0345 872 6666, or fill in our online enquiry form and we will get back to you.
How JMW Can Help
Our litigation lawyers have extensive experience in resolving disputes between directors, whether through negotiation or legal proceedings. We have an impressive track record of successfully negotiating and advising on senior executive terminations, restrictive covenants and any serious underlying issues central to each individual boardroom.
We pride ourselves on providing cost-effective and commercial advice, and ensure that such matters are dealt with expeditiously, and with a high level of technical expertise. Our litigation lawyers can also draw on the specialist expertise of colleagues in corporate, corporate restructuring and employment, according to the complexities and requirements of the case.
Ultimately, the resolution of a boardroom dispute will potentially involve any one or more of the following:
- Finding an amicable solution
- The removal of one or more of the directors in dispute
- The commencement of unfair prejudice proceedings
- The commencement of a derivative action
- The winding up of the company, whether on a just and equitable or voluntary basis
In each case, it is necessary to establish the legal position of the company, which depends on a complex area of the law and on the internal regulation of the company itself. We provide strategic advice in respect of all of these options and work with our clients to find the best solutions in each individual case.
Working Towards an Amicable Solution
Once a dispute escalates and the parties’ positions become entrenched, it can be difficult to resolve the dispute amicably. However, court proceedings should be the last resort and our litigation lawyers work closely with our clients to resolve boardroom disputes through negotiation wherever possible. The earlier those negotiations take place within a dispute, generally the better, but we can assist in the negotiation and documentation of an agreed strategy at any stage during the life cycle of a dispute.
While court proceedings are often a last resort, our lawyers will not shy away from issuing proceedings as long as it meets the agreed strategy and can deliver a successful outcome for the client.
Removal of a Director
The Articles of Association of a company should set out the processes through which a director may be removed from office, but this must be examined together with the director’s service agreement and any relevant shareholders’ agreement. The terms of all these documents must be considered in the context of the relevant legislation, such as the Companies Act 2006 and with regard to the potential that the director to be removed may be:
- due compensation for unfair dismissal;
- in a position to assert other rights if also a shareholder.
The complexity and antagonism involved in the removal of a director may lead to a drawn-out process that, while legally accurate, continues to damage the interests of the business until the eventual conclusion of the dismissal. In many cases, it is wiser to negotiate a solution that satisfies both sides of the argument or, when that is not possible, one that allows one side to withdraw from the business under an arrangement that appropriately recompenses that withdrawal.
Unfair Prejudice Proceedings
Where a company’s affairs are being conducted (or are proposed to be conducted) in a way that is ‘unfairly prejudicial’ to one or other of the shareholders (who may or may not be a director), the prejudiced shareholder may petition the court for legal relief and remedies, where it will be noted that the court has wide-ranging powers at its disposal.
Most commonly, the court will order that the petitioning shareholder have their shares bought out at a value to be assessed by the court. However, the court may make other orders, including orders regulating the management of the company.
A common example of unfairly prejudicial conduct is a breach of duty by a director, for instance, misappropriation of company assets, or the exclusion of a director from the management of a company. The unfair prejudice procedure can, therefore, be a useful tool to minority shareholders in particular. This is particularly relevant where the relationship of the shareholders is viewed as being akin to a partnership.
Derivative Claims
If you are a shareholder in a company, and you feel like the company has the benefit of a claim that the board of directors will not approve because the claim is directed at one or more of those directors, it may be possible for you to bring the claim on behalf of the company. This is called a ‘derivative claim’.
If the court permits this claim to be pursued, it will give guidance as to how the claim is pursued and will usually order the company to pay the costs of the action.
Winding Up
Ultimately, directors whose relationships have irrevocably broken down may elect to voluntarily wind up the company. In summary, there are three types of liquidation:
- Members’ Voluntary Liquidation (MVL) - the directors declare the company is solvent and put it into liquidation and all the company debts are paid in full
- Creditors’ Voluntary Liquidation (CVL) - the directors determine the company is not viable and put the insolvent company into liquidation
- Compulsory Liquidation - usually brought by company director(s) where shareholders will not agree to a CVL, the insolvent company is wound up by the court on presentation of a winding-up petition
Should there be assets in the liquidation, existing directors, shareholders and third parties may, through the liquidator, bid for the assets of the company, such as office equipment, stock and the company name. The duties owed by a director to the company and its creditors survive the company’s entry into liquidation and so directors must ensure that if they buy back assets from the insolvent company they do so at market value.
Should the directors not be able to agree to liquidate the company, it may be possible for a director who is also a shareholder to petition the court to wind up the company on a ‘just and equitable basis’.
Our partner-led team of skilled ligation lawyers understand the issues arising out of the breakdown of business relationships, and provide timely and effective support and advice in order to find the best outcome for the client in each case.
Talk to Us
If you need legal advice in relation to a boardroom dispute, contact JMW today by calling 0345 872 6666. Alternatively, fill in our online enquiry form and we will get back to you.
