In part 1 of this series, we considered what the usual causes are for company management disputes. This next article explores what measures you may wish to take in response to an internal dispute in order to remedy the situation.

What course of action can you take?

Governing documents:

If a dispute has sparked due to a director failing to comply with their statutory and fiduciary duties, then your first point of call should be reviewing the company’s governing documents, such as the articles of association and/or a shareholders’ agreement. You should check the documents to see if there are any express requirements for how a breach of director duties should be dealt with.

Setting out the mechanisms for how a breach should be dealt with is something you may wish to consider when you are preparing your articles of association in the early days of your company incorporation. Clear instructions in your governing documents can help avoid uncertainty and complications in the future.

Alternative dispute resolution:

The most cost-effective way to resolve certain internal disputes can simply be through informal conversations between the conflicting parties. Legal avenues for dispute resolution can be costly, so it is always best practice to see if a resolution can be reached in the first instance by way of a discussion between the parties. In any case, your articles of association may dictate that negotiations or mediation must be attempted when a dispute first arises.

In any event, you may wish to engage in mediation as a more formal form of alternative dispute resolution, especially if you believe the dispute can be resolved swiftly. If the director in question is a valuable asset to the success of the company, an amicable resolution to the conflict may be in your best interests. A third-party mediator can help stimulate constructive conversation and encourage a solution whilst avoiding the breakdown of working relationships.

Derivative action:

Although litigation can be costly, in certain circumstances it might be the most viable option, especially if working relationships have already broken down to an irreparable extent.

Disgruntled shareholders may wish to bring a derivative claim against the director on behalf of the company. This type of claim can be brought against a director who has either been negligent, breached their duties and/ or committed a breach of trust.

It is worth noting that derivative claims should only be considered when there has been a significant breach or neglect on the part of the director, especially considering that the court’s permission is needed for such a claim to continue. In order for the court to grant its permission, the applying shareholder must prove that:

• Such a claim would not damage the success of the company;
• The company initially authorised the act or omission by the director which prompted the claim; or
• The act or omission by the director has since been ratified.

If a shareholder is successful in their derivative action, the court has the discretion to grant various remedies in the company’s favour, including monetary damages and injunctions against the offending director.

Unfair prejudice petition:

Shareholders also have the right to petition to the court for relief from unfair prejudice caused by a director. This course of action is available when the director’s conduct is unfairly prejudicial to the shareholder’s interests. For example, a claim for unfair prejudice would arise if an individual became a member of the company on the basis they would have a managerial role, and then subsequently were excluded from managerial decisions.

If the court finds in favour of the unfair prejudice petition, they have a wide discretion to grant remedies to the applying shareholder.

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 part 3 of this series, where we discuss what remedies can be granted as a result of an internal company dispute.