Keeping it above board... a guide to handling disputes with directors


The past 18 months have placed unprecedented pressures on most businesses, and in many sectors the challenges will persist into the autumn, with the impact of Brexit, supply chain difficulties and labour shortages, as well as the lingering effects of the pandemic.   When businesses face such challenges, it's not unusual for members of the board to disagree about strategy - and disagreements about business can swiftly harden into bitter personal disputes.  So how should businesses respond when a director is at odds with the rest of the Board?

There isn't a one-size-fits-all strategy.  But there are some key issues which businesses need to consider. 

1. Double (or triple) vision

Executive directors have a dual role as both directors and employees.   Although the employment aspects will need to be handled in tandem with the corporate governance aspects, the legal issues and potential risks are very different.   So it's essential to keep both aspects in focus as you determine the business' strategy. 

In fact many directors wear three 'hats', as employee, director and shareholder.  This can create additional complications as action taken against the director could result in him/her threatening or making an unfair prejudice application in Court.  This places the other shareholders under additional pressure as they bear the costs of responding personally rather than these being paid by the Company. 

2.  Check the fine print

It's essential to be clear on what powers the remaining directors and the Company's shareholders have to take action against a rogue director.  If the Company adopted standard form articles of association on incorporation and did not tailor them, the process for removing a director may be cumbersome, particularly if the Company needs to use the Companies Act procedure for removal.   In some cases, it may in fact be simpler to amend the articles of association rather than invoking the statutory procedure.   

Likewise, it's essential to scrutinise the service agreement to ascertain whether the Company has grounds for immediate termination or termination on notice, whether the Company would have the right to put the director on garden leave or make a payment in lieu of notice, and what the impact of termination would be on any bonuses or benefits. 

Of course, if the director is a shareholder, any shareholders' agreement will also need to be considered carefully to assess what forfeiture provisions may apply and whether the director will have potential claims for breach of this agreement. 

3.  Prepare the ground

These disputes are often most bitter in privately-owned companies.   The legalities are important but so are the practical aspects.  One of the most key (and where many businesses come unstuck) is doing some basic due diligence before embarking on the process of removing a director:  check how much support you have from other shareholders and directors.  If you don't have sufficient support in terms of voting rights, you risk the worst of both worlds: inflaming the situation through a formal process without resolving it.   However, any private discussions about this need to be handled very carefully to ensure that they don't give rise to potential legal claims by the director (such as claims for constructive dismissal).   Likewise, you should be wary of creating documents (especially emails) which might be disclosable in legal proceedings or in response to a data subject access request. 

In the heat of a dispute, it's tempting to take action immediately.  But investing some time in looking at these issues with a cool head can save considerable time, cost and trouble in the long run.

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