Even at the best of times, the boardroom can be an intense place as big personalities go head to head in an attempt to steer the business in a unified direction. Step in a global pandemic. No boardroom has had to contend with such an indiscriminate issue – one that has made a mockery of business continuity planning and placed pressure on every type of operation. Any potential fragility in the boardroom has only been exacerbated because of Covid.
The last year has placed significant pressure on senior management teams, as they try to protect jobs, bolster dwindling revenue streams, strengthen cash flow and reinvigorate order books in the face of adversity. Undoubtedly, the number of boardroom battles, and subsequent dispute resolution cases, will have risen since March 2020. Periods of intense economic activity are usually accompanied by an increase in tension across the boardroom table.
Fractures in relationships often develop as a consequence of issues such as the perceived contribution of directors and shareholders, and disagreements regarding the direction and future strategy of the company. These problems can happen in large businesses, but are most often seen in smaller companies, often family organisations that are more personality driven.
In challenging times, there is a temptation to try to reduce costs from the business by removing well-paid directors or partners. When a business is doing well, the lubrication of healthy profits helps to keep relationships between directors and partners running smoothly. However, when those profits dry up, stress lines can emerge.
There are some basic contractual arrangements that should be put in place as a starting point in any company or partnership. A shareholders’ agreement clearly sets out the relationship between company shareholders, dealing with the management of the company, how shares are owned and the protection of shareholders.
This agreement, which will often sit alongside an articles of association document, will try to anticipate what should happen if those individuals fall out, as well as other issues such as the transfer of shares, valuation of shareholdings and what happens in a deadlock situation. A well-drafted shareholders’ agreement will save a lot of time, anxiety and costs if a dispute develops between the shareholders.
What are the implications if it is a partnership or an LLP?
A partnership or limited liability partnership (LLP), meanwhile, will have a partnership agreement or, in the case of an LLP, a members’ agreement. These are essential if you want to avoid your partnership being governed by the Partnership Act 1890, which lacks the scope and subtlety needed for modern partnerships. The agreement provides certainty about how the partnership is operated – for example, regarding distribution of profits and how to expel or admit partners. It will also provide clarity around partners' liabilities.
Another document that will go a long way in avoiding costly and damaging disputes is the directors’ service agreement. This document is similar to a contract of employment for a director and will typically set out what roles and responsibilities the director is expected to assume. In addition, the agreement will deal with issues such as remuneration, notice period and restrictive covenants, following the exit of a director from a business.
Addressing the problem early
A boardroom dispute can be difficult and stressful for the individuals concerned – not to mention being corrosive and debilitating for staff and customers. Recent examples of high-profile boardroom disputes include Amigo, Stobart, Aviva and Charlton Athletic Football Club.
Resolving disputes under normal trading circumstances can be costly and time consuming – this will only be intensified in the current climate. The time taken to resolve this type of dispute is a significant distraction from the core business and can often lead to deterioration in performance and damage to the company's brand. However, if a dispute does occur, tackling the issue at an early stage is key. The ‘contracts’ may contain provisions that anticipate a dispute and require the respective parties to try and resolve their differences using a neutral third party – a trained mediator, for example. Maintaining a positive dialogue, rather than allowing a hardening of people's positions, is important. The longer a dispute carries on, the more entrenched the respective positions become.
It’s clear the UK economy has taken a significant hit from the pandemic. The shape and size of the downturn and the subsequent rebound remains to be seen. However, for businesses that have been severely affected by Covid, with profits suppressed and directors' lifestyles harder to maintain, the likelihood of a fallout at board level is greater than ever. Taking the right steps, and ensuring the most appropriate framework is in place, will help prevent widespread damage to the business and ensure the battle doesn’t destroy the boardroom beyond repair.
Paul Jonson is a partner in the dispute resolution team at Pannone Corporate