In part 1 of this 3-part series, Emma Clissold discusses the various causes of disputes amongst directors and shareholders.

No one goes into a business venture preparing for the worst and/or expecting professional relationships to break down. However, disputes between directors and shareholders alike can occur no matter your best intentions. Therefore, if you are considering setting up a new company or want to sustain the life of an already established business, it’s important to bear in mind the most common causes of internal disputes to anticipate how best to keep the peace.

Causes of company disputes

There are different approaches you may wish to consider when you have crossed wires with another director or shareholder; however, your options will depend on why the disagreement has occurred in the first place.

Director Duties under the Companies Act 2006

If you are dissatisfied with the conduct of a fellow director, your first point of call might be to consider whether their conduct amounts to a breach of any of their duties as a director. The Companies Act 2006 (CA 2006) sets out a number of duties that a director must uphold, namely:

• To act within their powers – A breach of this duty includes when a director fails to abide by the company’s Articles of Association.
• To promote the success of the company –This includes having consideration of how their decisions impact the interests of the employees, shareholders, or the company itself.
• To exercise independent judgement – This duty requires directors to use their own judgement, rather than acting purely on the wishes and instructions of a member of the company. This does not mean that a director should refuse the advice of another; however, they should use their own discretion when considering this advice and making their decisions.
• To exercise reasonable care, skill and diligence – Directors must display the knowledge and skill as would be reasonably expected of them. Directors are also required to act diligently by keeping up to date with the company’s affairs. A director may be found to have breached this duty if they are lax in their attendance at board meetings and are not pulling their weight in comparison to other directors.
• To avoid conflicts of interest – A director must avoid a situation where there is a conflict between their duties as a director and their personal interests. Directors with a personal interest in something can partake in a decision so long as they are authorised to do so by the company shareholders or board of directors.
• To refuse benefits from third parties – This duty ensures that directors do not use their position in the company for personal gain, such as basing their decisions on the gifts or bribes received from a third party.
• To declare any interest in a proposed transaction – Full and frank disclosure is required by the director in order to allow the remaining company directors to decide whether they can be included in a proposed transaction or arrangement.

Fiduciary Director Duties

As well as the duties listed in CA 2006, directors also have general fiduciary duties to uphold whilst in office. Some of the duties do overlap with those referred to in CA 3006, such as the duty of good faith, care, and loyalty, however, other fiduciary duties include:

• Duty of obedience – A director has the responsibility to ensure the company is compliant with UK law. An example of a breach of this duty includes when a director fails to file financial information at Companies House within the prescribed deadline.
• Duty or prudence – Directors must be highly diligent and professional when conducting business on behalf of the company.
• Duty of confidentiality – This covers both confidential client information and confidential information about the company itself.
• Duty of disclosure – A director must declare all relevant information to the company’s shareholders in relation to any decision or transaction. In other words, they cannot hide certain unfavourable elements of a proposed transaction in order to keep the favour of the shareholders.

Performance issues

As in any place of work, disagreements can occur if there appears to be a misbalance in the amount of work being conducted amongst the directors. You may wish to bring a grievance against a fellow director if you feel like you are carrying a disproportionate amount of the workload, or if you feel they are not contributing enough for the company to reach its full potential.

A dispute may also arise based on a failure to comply with provisions of a shareholder’s agreement.

Deadlocks

A deadlock can transpire when directors/ shareholders who own an equal number of shares and voting rights in a company oppose each other in a decision. This can be resolved by allowing the director who is chairing the board meeting to have a casting vote; however this is not always a viable option, especially if you cannot decide which director should be appointed as chair.

If you are in a disagreement with another company director or shareholder or are concerned that anything in this article affects you, then the Geldards’ Commercial Disputes Resolution team will be happy to assist and guide you through your concerns. In the meantime, look out for parts 2 and 3 of this series, where we discuss what actions you can take when a dispute arises and what remedies may be open to you.