Disputes amongst directors

The high-profile departure of Sir Martin Sorrell earlier this year from WPP, the advertising agency he started surprised many people and it is unfortunately common that at some point there will be a serious disagreement or issue to deal with at board level for most businesses.

If directors no longer agree how to run the business, what are the options available?

Hindsight is always wonderful and planning ahead for such a situation is vital, but still one which is often overlooked.

The starting point is to consider whether there is a director’s agreement or a shareholder agreement in place which will help to resolve the issue.

Without an agreement it would be necessary to try to resolve the dispute using the Articles of Association, employment legislation and shareholder protection rights under company law.

It is worth noting that when setting up a company it is always better to avoid a 50/50 shareholding to avoid a deadlock situation where the director and shareholder’s vote are equally split. This can be especially hard to resolve without further legal action.

The company can dismiss a director according to their employment contract or director’s service agreement. In the absence of these documents then statutory notice provisions apply. Where a dispute is about a performance or other disciplinary issue, the company should make sure it follows the correct steps set out in the contract of employment or risk a claim for unfair dismissal.  However, this only deals with the end of employment and will not remove the director as a director / shareholder. The Articles and company law should be consulted as to how to achieve this.

Court action would be expensive and could result in the shareholders being held personally liable for the costs. A shareholder agreement or detailed provisions in the Articles are needed to provide for the automatic transfer of shares on the shareholder stopping their employment or directorship.

It is important to have the procedure in place at the outset, no matter how amicable the business relationship starts, as people and relationships can change over time.