A director dispute can become all-consuming, taking up the time and attention of the company leadership and paralysing the business.
Director disputes typically arise over:
- One director feeling the other is not doing enough work, or being paid too much
- Disagreement over the company strategy
- Employment of family members within the business
- A perception that a director is using the company for personal gain, at the expense of other directors or shareholders
- Tension between someone’s duties as a director and their role as a large shareholder
Directors will very often have three separate roles, which can come into tension: their director role which, among other things, requires them to act with the utmost good faith in the interest of the company; their status as an employee of the business; and their position as a shareholder. Each of these roles carries rights and responsibilities, which need to be considered when a dispute arises. For example, it might be possible for the company to dismiss someone as a director, but they may still remain as a shareholder.
Many disputes can be resolved informally, but even if they are resolved without too much paperwork, it is still important to check the paperwork. What does the shareholders agreement say? What about the employment contract or service agreement? The business might find later that an informal agreement conflicts with some formal paperwork, creating further problems later. So: step one, even if it seems likely that the dispute can be resolved amicably, is to read the relevant formal agreements so it is clear what the parameters are. If these are unclear, the parties will want to get legal advice at this point.
If the dispute cannot be resolved amicably, all sides should, early in the process, seek their own independent legal advice. A lawyer can advise what the legal consequences of different courses of action would be. This kind of early advice can actually make it easier to resolve a dispute. If everyone knows exactly what the consequences of their actions are likely to be, a way through the dispute can sometimes be clearer. If one, or even both, directors misunderstand their position, this can seriously escalate a dispute and make it much harder to resolve.
One route to resolve director disputes is to appoint a commercial mediator. Mediation is a voluntary process where a skilled neutral party helps the two sides reach a settlement to their dispute. Often, the best time to do this is after everyone has sought some legal advice, but before a formal exchange of solicitor’s letters. Once one solicitor writes a formal letter to the other side, the two sides tend to entrench and harden their position, making it more difficult to find common ground and resolve the dispute.
Although it is never too late to attempt mediation: some cases settle at mediation the day before a trial is due to start.
But if mediation fails, then the two sides will likely need to fight it out in court … and once you launch on that path, the costs and time involved often make it very difficult to escape.
If those involved do try and resolve the dispute without a mediator, here are my three tips to help find a settlement:
- Rather than trying to persuade the other side of the strength of your case, ask questions which will help you understand their point of view.
- Think about all the things which might help reach a settlement: a payment of money; an apology; a commitment to do something; an agreed reference; an asset which might be more valuable to one side than the other; and so on.
- Make sure both sides are very clear on what the consequences are of not settling. Choosing to take a dispute to court, for example, should be an explicit, careful decision, made with a full understanding of the consequences, and not something which the parties just end up doing because the dispute has escalated and drifted into litigation without anyone really wanting that to happen.
Bruce Greig is a director dispute mediator. Prior to becoming a full-time mediator, Bruce built two businesses from start-up to £1m+ sale.