Best practices to avoid or handle director disputes

It is inevitable that conflicts or disagreements are going to arise at some point when acting as a director of a private limited company. They can often occur at board level between your fellow directors during the course of business and take on various different shapes and sizes – disagreements about the strategy and direction of the company generally, the appointment or removal of other directors, the governance of the company or even the conduct of a particular director.

Certain disputes are often necessary to enable you to challenge each other’s views and to ultimately work together to reach consensus on commercial strategy. However, disputes can also affect the board’s ability to make decisions in the usual way and at worst can create deadlock situations or cause rifts that threaten the livelihood of your business. Depending on the nature of the dispute, there are varying levels of risk involved that need to be taken into account as early as possible.

These are steps and actions that can be taken by you and other directors to avoid issues developing or to deal with them effectively when they do arise:

Encourage a culture of transparency and openness between directors

A good step to take to facilitate this is to ensure that each director understands their own role and responsibilities within the company, as well as which director has authority to take which designated action. This could be set out in writing in your director’s service agreement, through a job description for each director or simply by a common understanding between the board. It is fundamental to understand when a director can take actions on their own initiative or whether the approval of the board or shareholders is required, as this is often a starting point for director disputes.

Identify the cause of the dispute

By doing so, this can often determine the approach to resolving it. For example, if there are concerns about how to grow the company’s business and you are unable to agree this with your directors or concern over the company’s finances, a more controlled and collaborative resolution process may be the most effective way of breaking the deadlock. On the other hand if a director is engaging in fraudulent activity or other suspected criminal activity, there are huge risks that both the company and other directors could be liable for a director’s actions and legal advice should be sought as soon as possible.

Set a disputes process

Consider agreeing a set process with your fellow directors that should be followed in the event that any major dispute arises. Although bringing a court claim against a director may seem like the intuitive option to take, alternative options such as negotiation or mediation between the concerned parties may be more cost-effective in the short-term and enable directors to resolve their disputes amicably and for a mutually-agreeable solution to be reached.

Consider removing a director

Where the dispute relates to the conduct of a director, for example a breach of the duties owed by a director to the company under the Companies Act 2006, it may become necessary to consider removing one of your fellow directors for the business to run smoothly in the future. This depends on the nature and severity of the breach, but may be required where a director is not promoting the success of the company or acting dishonestly for example. You should understand and familiarise yourself with the process for removing a director from the company and whether it is achievable given the views of the rest of the board. This should by no means be a first resort option, but review your company’s articles of association or any other agreements which may set out qualifying criteria for a director to be removed or even disqualified, outside of the rules set out in the Companies Act 2006. Ultimately, the process of removing a director is likely to be contentious and the outgoing director has a right to protest against their removal, so it is important to plan and strategise before taking this step.

Is the director also a shareholder of the company?

If so, it does not follow that the removal or dismissal of a director will mean that they are obliged to transfer or sell their shares to the remaining shareholders. The result is that you could be left with a situation where a disgruntled departing director retains their shares and, depending on the level of their shareholding, has the power to disrupt any shareholder-level decision making in the future. It is crucial to try and use joined-up thinking where possible and consider covering off this issue in a well-drafted shareholder agreement or looking to negotiate a complete exit from the company when removing the individual as a director.

Avoid escalation – seek legal advice early

Try to deal with disputes in an open and consensual manner where possible to avoid escalation. However, in the event that some of the steps set out above are not effective, we would recommend taking independent legal advice where possible at an early stage to understand what steps can and should be taken by the company. Given that directors are all individuals but at the same time representatives owing duties to the company, there is a significant risk that a dispute with directors will become subject to conflicts of interest, meaning that the company’s legal representatives will not be able to advise both the company and its directors at the same time. It is crucial to understand your own rights and obligations as an individual as well as understanding the company’s legal position by obtaining separate legal advice where possible.