Resolving Director and Shareholder Disputes
7 February 2024
Recognising that disputes are a natural part of the business landscape today is crucial. This foresight allows business owners to establish clear communication channels, solid contractual frameworks, and, if necessary, contingency plans for resolving disputes.
Conflicts among company directors can emerge from differences in strategic vision, decision-making, or fiduciary responsibilities. Shareholder conflicts, often revolving around issues of control, dividends, or disagreements over management decisions, can be particularly sensitive (especially when shareholders are friends and family).
Examples of Director and Shareholder Disputes
Breach of Fiduciary Duty: Directors owe fiduciary duties by law. Claims may arise if a director is accused of self-dealing, conflicts of interest, or failing to act in the best interests of the company.
Breach of Contract: Disputes can arise over contractual agreements, especially if there are allegations of breaches related to shareholder agreements, service contracts, employment contracts, or other agreements between parties.
Unfair Prejudice: Minority shareholders may bring claims of unfair prejudice if they believe they have been unfairly treated or excluded from participating in the company’s affairs.
Derivative Actions: Shareholders may bring derivative actions on behalf of the company if they believe that the directors have breached their duties, and the company has failed to take action against such breaches.
Share Valuation Disputes: Disagreements over the valuation of shares can lead to legal claims, particularly in the context of buyouts, mergers, or disputes regarding the fair value of shares.
Failure to Declare Dividends: Shareholders might bring claims if they believe the company has wrongly failed to declare dividends or if there are disputes over the distribution of profits. The Companies Act 2006 provides the legal framework for such claims.
Misrepresentation or Fraud: Directors and shareholders may bring claims based on allegations of misrepresentation, fraudulent conduct, or nondisclosure of material information affecting the company.
Non-Compete or Non-Disclosure Violations: Claims may arise if directors or shareholders violate non-compete or non-disclosure agreements, especially when such actions harm the interests of the company or fellow shareholders.
Methods for resolving Director and Shareholder Disputes
Negotiation: Parties can engage in negotiations to reach a mutually acceptable agreement. This informal process may involve direct discussions or facilitated negotiations through legal representatives. Negotiation allows for flexibility and may preserve relationships between the parties.
Mediation: Mediation involves a neutral third-party facilitating discussions to help parties reach a resolution. It is a voluntary and confidential process that focuses on finding common ground. Mediation can be a cost-effective and time-efficient way to resolve disputes while maintaining some control over the outcome.
Derivative Actions: Shareholders may bring derivative actions on behalf of the company against directors who have breached their duties. This legal action seeks to remedy the harm caused to the company and its shareholders.
Petitions for Unfair Prejudice: Minority shareholders in closely held companies may petition the court for relief in cases of unfair prejudice. The court can order remedies such as share buyouts, changes in management, or other measures to rectify the unfair treatment.
Specific Performance or Injunctions: Courts may order specific performance, compelling parties to fulfil contractual obligations, or grant injunctions to prevent certain actions. These remedies are discretionary and granted based on the circumstances of the dispute.
Litigation: If alternative methods fail, parties may resort to litigation, bringing the dispute to court. Litigation involves presenting the case before a judge, who will make a final, binding decision. This process is generally more formal, time-consuming, and costly than alternative dispute resolution methods.
The choice of resolution method depends on factors such as the complexity of the dispute, the desired outcome, and the willingness of parties to engage in different processes. MKB Law, plays a crucial role in advising on the most appropriate method and guiding clients through the resolution process.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice.