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 or 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 within the company. You should open the channels of communication and recommend a meeting to discuss the: 

  • issues at hand; and 
  • desired outcomes. 

Make an agenda for any meeting and take notes recording the outcome. If initial discussions are unsuccessful, you may wish to engage a third party to assist through a mediation. An independent mediator can help the parties to work through the issues in dispute and reach a compromise or resolution. At this stage, you may also wish to seek legal advice on your position and the implications of the dispute. 

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. 

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. 

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 other factors, such as 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. You should get an independent valuer to value the company so you have an accurate indication of any potential selling figures if needed.

Depending on your situation, you could also consider buying out the other shareholders and remaining in the company.

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.  

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. 

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. 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.  A lawyer can advise you on the best course of action for your business. If you have any questions about how to deal with a director or shareholder dispute, contact LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

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