Legal

An HR guide to resolving directors’ boardroom disputes

23 Nov 2018 By Jennifer Smith

Harmony between directors is key to the smooth running of any company, so when differences arise, how can they best be resolved? Jennifer Smith reports

Feuds are much better resolved than tolerated. However, when it comes to boardroom disputes, you are often dealing with individuals who assume the multiple roles of employee, shareholder and director, with each carrying different rights and obligations, which can be tricky to manage and navigate. 

The good news is that many of the disputes that typically arise between shareholders and/or board members can be prepared for in advance, by ensuring the parties have properly agreed and documented how the business is to be run.

As with any dispute, if an amicable resolution can be found, this is in the best interests of all parties. The first thing you may wish to consider is bringing in an independent third party to mediate – they will be able to assess both sides of the argument and suggest pathways to resolution, without being biased by their own interest in the company. Although it may sound strange coming from a solicitor, often the best solutions are those found without setting foot inside a courtroom.

If an informal resolution is out of reach, you should review the company’s key documentation for details of how to resolve the dispute. All companies should clearly state in their articles of association how these issues should be dealt with; all directors should also have a signed director’s service agreement in place to ensure that when these issues do occur, there is a clear road map with regards to how to proceed.

But what if you don’t have these documents in place? In this situation, things can – and unfortunately often do – become messy and protracted.

Where a dispute between directors cannot be resolved, this almost inevitably results in the exit of one of the parties. Consider the balance of power with shareholders – if one side has a majority of shareholders on their side, then a directors’ or shareholders’ resolution may be passed to dismiss the other. You will require a board resolution to do this. 

Where the dispute is related to performance issues, a proper procedure must be followed before dismissal can occur. This will include a performance management procedure, which, although it may take time to complete, could successfully help to avoid a claim for constructive or unfair dismissal. Similarly, in cases where a director is suspected of dishonesty, a proper disciplinary and investigatory process must be undertaken before dismissal to avoid legal action.

Planning ahead is the best advice, as prevention is always better than cure. While no one walks down the aisle thinking of getting divorced, it is imperative to plan ahead and put in place procedures that can be used to resolve conflict. 

Have documents in place from the outset: dealing with dispute resolution can make the difference between company failure and survival. In addition to articles of association and a shareholders’ agreement, you should also have directors’ service agreements in place. 

Not having the appropriate contracts in place causes uncertainty and can create a multitude of issues on exit, not least in terms of restrictive covenants and confidentiality. Following the advice to plan ahead, can help minimise the effect of any dispute and safeguard the business from the worst repercussions.

Jennifer Smith is a partner in the employment team at JMW Solicitors

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