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Resolving Director Disputes

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Director Disputes

Responsible for the day-to-day management of the company, directors should be working together to promote the success of the business. Whilst reasonable disagreement at board level is to be expected, what happens when those directors are at a deadlock, or a director has gone rogue and is not acting in the interest of the company, or the directors are also the shareholders?

Firstly, have you put in place written agreements and procedures to:

1) Protect the business and enable it to move forward where there is deadlock;

2) Deal with the appointment or removal of directors from the board; and

3) Where the director is also a shareholder, address what happens in relation to their shares?

Bonds are likely to be very strong at a company’s foundation stage, but putting in relevant agreements at the start of your relationship to deal with any potential future disputes can save time and costs down the road.

If you don’t have such agreements or procedures, then how are you going to resolve this dispute? Is it possible to resolve the conflict in a neutral setting such as mediation? Or are you going to need to appoint more directors or remove one or more of the directors to resolve the situation.

Where the dispute is strategic, or there has been a breakdown in relationships, trying to work through those issues in a mediation setting can be a productive method to move beyond the impasse.

Appointing a director must be done in line with the procedures set out in the company’s articles of association whilst also being aware of anything else said in a shareholders’ agreement. An appointed director will have the right to participate in director board meetings and decision making. If they are excluded, then they may bring an action against the other directors for preventing their involvement.

 

Disputes:

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Removing a director can be a potential minefield for dispute and litigation. You should be aware of the distinction in roles the individual has, especially where they may be an employee, director and shareholder, as there will be different issues to consider in respect of each position. From an employment perspective, there must be a fair reason and fair procedure followed when dismissing an employee director.

However, dismissing an employee director does not result in that person ceasing to be a statutory director. To remove someone as a statutory director, this must be done in accordance with the articles of association and the Companies Act 2006. This will usually involve sending the relevant director special notice of the proposed removal, and allowing them to attend a shareholders meeting to defend their removal. There must be strict compliance with the Companies Act procedure to ensure the effective removal of a statutory director.

What about a director who is also a shareholder? Do you have provisions in the articles of association or a shareholders’ agreement specifying what happens to a director’s shares when they cease to be a director. Without such provisions, it may be that the removed director can continue to be involved in the business as a shareholder.

Where there is an allegation of fraud or serious fiduciary breaches of a director, then there are likely to be wider issues in addition to the removal of such a director.

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How Loch Law can help

Director disputes need to be handled carefully, but also quickly so that the company can get back to doing what it does best, running its business.

We can help you to navigate the interaction between a company’s articles of association, employment law protections and shareholder protections when dealing with, or facing, a director dispute.

Included in Loch Law’s help might be ensuring you have the right documentation in place to deal with director disputes arising; and advising you on how to manage a director dispute – whether that be by removal, or alternative procedures.

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Is a director an employee?

A director is considered an officeholder rather than an employee. What sets these two roles apart is the absence or presence of an employment or service contract. If the director has an employment or service contract with a company, they are considered an employee director.

Can a Director be Removed?

A director can be removed from their position if the requirements outlined in the articles of association are met. If removal through articles of association is not possible, the director can also be removed by shareholders as part of an “ordinary resolution” in line with the Companies Act 2006.

Ideally removal should be a last resort, with alternative resolution strategies being explored first.

The reputational and relationship damage that can occur should also be taken into account. So too should the financial implications. After all, failure to follow proper procedures could be expensive for your business. A director who is also an employee might feel like they have experienced unfair dismissal, resulting in a costly employment tribunal claim. Likewise, a director with shares in your company could claim unfair prejudice and petition for the winding up of the company to the court.

Can a director be held personally liable?

We often assume that company and personal responsibilities are two very different things. In fact, a director can be held personally liable for a company's offences if they have consented or connived in an illegal activity or caused it through their negligence.

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