5 Ways to Deal with a Director Dispute

In Short

• Act swiftly: Address director disputes promptly to prevent operational disruptions.

• Consider mediation: Engage in negotiation or mediation to resolve conflicts amicably.

• Review governance documents: Examine the company’s constitution or shareholders’ agreement for dispute resolution procedures.

Tips for Businesses

Establish clear roles and expectations among directors from the outset. Implement a comprehensive shareholders’ agreement that includes dispute resolution mechanisms. Encourage open communication to address issues early and consider professional mediation services to facilitate resolution. Regularly review governance documents to ensure they remain effective.

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Table of Contents

• 1. Negotiate and Mediate
• 2. Shareholder Solutions
• 3. Resign or Sell Up
• 4. Voluntary Administration
• 5. Go to Court
• Key Takeaways

Disagreements between directors of a company are common. If not resolved quickly, however, they can cause significant damage to a business. If one or more of the directors are also shareholders, dealing with the dispute can be more complex. Directors’ disputes can arise for many reasons, such as disagreements about the management of a business, the direction and future of the business or it could be the simple breakdown of a relationship. This article will outline your options to deal with a director dispute and minimise the impact on your business. 

1. Negotiate and Mediate

It is important to move quickly when a dispute arises between directors. The first step should always be to attempt to resolve the dispute internally within the company. You should rely on common alternative dispute resolution strategies, which include negotiation and mediation.

You should open the channels of communication and recommend a meeting to discuss the: 

• issues at hand – ensure you have a list of specific issues or concerns; and 
• desired outcomes – encourage all parties to express their desired resolution. 

To ensure a structured and productive discussion, create an agenda for the meeting and diligently document the meeting’s outcomes. If initial discussions are unsuccessful, you may wish to engage a neutral third party to assist the resolution process.

For example, when directors fail to reach a consensus on a critical company decision that negatively impacts the success of a company, alternative dispute resolution can be a crucial resource. An independent mediator can help the parties to work through the issues in dispute and reach a compromise or resolution through the facilitation and encouragement to engage with different resolutions.

Additionally, at this stage, you may also wish to seek legal advice on your position and the potential implications of the dispute. A dispute lawyer can provide you with a comprehensive understanding of the situation and your available options. 

2. Shareholder Solutions

Depending on the size of the company, it is common for directors to also be shareholders. If so, a shareholders’ agreement may outline a procedure for dealing with shareholder or director disputes. It is important to review your shareholders’ agreement and see if there is anything that could provide guidance on dispute resolution mechanisms, the decision-making process and the removal of directors. 

For example, a shareholders’ agreement may include:

• penalties for directors or shareholders who breach their duties; or
• a resignation or buy-out process. 

Importantly, a shareholders’ agreement can allow a director to be forced out if they breach certain provisions of the agreement. A breach could be:

• investing in or advising a competitor; 
• creating a rival business; or 
• stealing money or intellectual property from the business. 

These provisions provide a structured framework for handling director disputes, ensuring that the company’s interests are protected and that there are well-defined consequences for actions that undermine the business.

3. Resign or Sell Up

If the dispute cannot be resolved easily, you may consider resigning from the directorship. Whether you are able to do this will depend on various factors, including the financial success of the company.

If you are also a shareholder, you could consider selling your shareholding as well as resigning from the directorship. The company’s constitution will set out the rules under which this can occur. To ensure transparency and fairness, it is advisable to engage an independent valuer to value the company so you have an accurate indication of the value of your shares if needed.

Alternatively, depending on your situation, you could also consider buying out the other shareholders and remain in the company. This approach could resolve the dispute and allow you to remain actively engaged in the company’s operations.

4. Voluntary Administration

In some cases, a dispute between directors or shareholders may be so damaging that the only option is to place the company into voluntary administration. This decision will depend on the: 

• financial health of the company; and 
• attitudes of other shareholders. 

Again, the company’s constitution should contain rules for dealing with this option. It is important to ensure this process is carried out in compliance with the company’s internal regulations and legal requirements.  

5. Go to Court

If all other attempts to resolve the dispute have failed, you may need to take the matter to court. The type of court proceedings will depend on the: 

• nature of the dispute; and
• remedies required. 

For example, if another director or shareholder has breached their duties or behaved in a manner that is damaging to the company, you may issue a claim against them for damages. 

You should seek legal advice to confirm your position in any dispute and your options before commencing any legal proceedings. Keep in mind that legal proceedings are time-consuming and expensive. Further, if you are not successful, you may be ordered to pay the legal costs of the other party. Consider court as a last option once all other efforts to resolve the dispute have failed, as this process is costly and lengthy.

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Key Takeaways

You may be able to deal with a director dispute quickly and easily with clear, calm communications between the parties and an open mind about possible solutions. If parties remain transparent and are willing to explore all solutions, the dispute may be resolved without needing legal assistance. It is crucial to follow the steps set out above to attempt to resolve the dispute before it escalates. If it does, you could consider alternative dispute resolution or take legal action.

If you need help identifying the best way to resolve your director dispute, contact our experienced dispute resolution lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.