Corporate disputes: What are they and how can they be resolved

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Disputes in business are inevitable. What is important, is that these can be resolved without any negative impact on the company.

Examples of common disputes include disagreements between shareholders, disqualification of directors and board deadlocks. Although most will be easily resolved, without the correct mechanisms in place, others may escalate into unmanageable situations which can ultimately force a company to end.

Shareholder disagreements

A common area of disagreement is between shareholders. Individual shareholders will have different expectations of the company, as well as how the future of the company may look. Common shareholders disputes include:

  • Disagreement over management of a company
  • Distribution of dividends, company development
  • Respect received by minority shareholders
  • Personal problems affecting the business.

A Shareholder Agreement is key in anticipating and preventing disputes, and so it is recommended that every company has one. This is a contract agreed by all shareholders as to how they will work together, their relationship with the management of the company and the action which will be taken were a dispute to arise. Without a Shareholder Agreement, ascertaining the rights of individual shareholders is more difficult. A company can consider holding a general meeting to pass a resolution on the issue, checking the company Articles, or appointing an advisor to assist. If the issue persists, the company may consider negotiation or mediation to reach a resolution.

Disqualification of Directors

A director of a company must ensure the company is compliant with the law and regulations, ensure adequate skill and care are being exercised by the company and to perform all duties and responsibilities honestly. A failure to meet their legal responsibilities can result in a director being disqualified.

A director can be reported as ‘unfit’ by anyone. Actions amounting to a failure to satisfy legal responsibilities can include anything from continuing to trade while the company is in debt, to spending company money for personal benefit.

Insolvency does not mean a director will be disqualified automatically, but a director will be expected to carefully review why the company has entered liquidation, and exactly where the money has gone. It is possible the Insolvency Service will investigate and if they believe a director has failed to meet any legal responsibilities, they will enact court proceedings. A director is then entitled to defend their action, or to voluntarily disqualify themselves by giving The Insolvency Service a ‘disqualification undertaking’. Disqualification lasts for up to 15 years and prevents the individual from being a director or involved in the forming, marketing, and running of any UK registered company or an oversees company connected to a UK registered company.

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Shareholder deadlock

In a company where directors hold an equal shareholding, disagreements can result in a deadlock. An obvious example is a company with two directors who each hold a 50% shareholding and disagree, resulting in deadlock.

The first step is to look at the Articles of the company. The Articles may contain any of the following:

  • A casting vote clause - a casting vote may be appointed to a chairman in the event of a deadlock.
  • Conflict of interest - a director may have a conflict of interest in the matter at hand and so depending on what is contained in the Articles of the company, he may be unable to vote.
  • Delegation of decision-making power - the board could delegate a portion of its decision- making powers to either a group of directors or an individual director to make decisions in event of a deadlock.
  • Shareholding - if the Articles provide no resolution, then there is the possibility for shareholders to intervene. If one director has a greater percentage of the shareholding then their vote will be decisive in the event of a deadlock.

If none of the above options offer any relief to the deadlock, directors ought to be reminded of any personal guarantees they have. Personal guarantees hold them responsible for outstanding liabilities of the company in the event of the company shutting down. The risks involved in shutting down the business may make cooperation with one another more appealing than the repayment of personal guarantees.

If you find yourself facing any of the above challenges, MBM Commercial have an expert Dispute Resolution team who can advise you of your options and provide a strategy moving forward.

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