Disputes between shareholders, directors and business partners can arise for all sorts of reasons, from disagreements over the direction and development of a company to poor personal relationships. Conflicts of interest where individuals have interests in another business can also cause problems. If a dispute erupts in your business, take advice immediately. Establishing what the legal position is from the outset helps you identify the best course to take. The right advice helps limit the amount of time and money you spend sorting out a dispute and its effects on your business.
A company’s articles of association, coupled with a shareholders’ agreement, can cover many of the potential areas of dispute between directors and shareholders. Anticipating potential problems often means it’s less likely that things will go wrong. A shareholders’ agreement can also provide a mechanism for resolving any serious disputes that do arise. Ultimately, agreements may also need to set out a way for shareholders to part company: for example, by establishing how other shareholders or the company itself can buy the shares of an aggrieved shareholder. Employment contracts should also anticipate the consequences of key individuals leaving the business. For example, a departing director may have the right to compensation for dismissal. Contracts should also set out any restrictions such as preventing former employees from starting a competing business, or poaching staff or clients.
Similar issues arise in business partnerships. Too often, business partnerships trade without a clear written agreement between the partners. In the absence of an agreement, profits, losses and management control are automatically shared equally between the partners and individual partners can be personally liable for partnership debts. What is more, the departure of a partner – for example, as the result of a partnership dispute - may automatically dissolve the partnership with important legal and tax consequences. A clear, written partnership agreement is essential.
Good corporate governance helps reduce the risk of disputes and ensure that directors comply with their legal obligations. As a minimum, directors should be aware of their rights and responsibilities. This should include knowing what powers they have and when they need shareholder authorisation. Directors have a legal duty to act in the interests of the company. Simple rules on conflicts of interest can reduce risks: for example, requiring directors to declare a potential conflict of interest and abstain from votes where appropriate.
Legal action in court can be costly and expensive, and even so may not produce a satisfactory result. It’s almost invariably better to negotiate a solution, using your strict legal rights as a bargaining counter, than to end up in court. If shareholders are in dispute with directors, there are often alternatives to legal action. For example, shareholders may be able to require a general meeting to consider a resolution to dismiss a director. Alternatively, negotiating the sale of your shares could offer a better outcome than a drawn-out dispute.