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It is common for disputes to arise between directors of a company. They can arise for many different reasons. Such disputes can become complex where directors are also shareholders in a company so that any resolution should take this into account. If these disputes continue, they can have a detrimental impact on the company’s business. This article will explore the options available to directors (and shareholders) in attempting to resolve director disputes. It also shares some tips that may help prevent director disputes from occurring or assist directors in dealing with them.

How Do Director Disputes Arise?

Disputes between directors of a company can arise for a variety of situations, including where:  

  • directors fail to fulfil or breach their duties;
  • there is a breakdown of the business or personal relationship between the directors. For example, the directors may disagree on the management or direction of the company; and 
  • where a director is prevented from accessing the company’s books and records.

Options for Dealing With Disputes

Disagreements between directors of a company are common. However, if you do not resolve such disagreements quickly, they can cause significant damage to the company’s business. 

Dealing with the dispute can become even more complex if one or more of the directors are also shareholders in the company. 

When you come across such a dispute, it is important that you move proactively and minimise the impact on your business as quickly as possible. There are various options for dealing with a director dispute that we explore below. 

1. Negotiate and Mediate

The first step should always be to try to resolve the dispute informally. This option is ideal for minimising costs and time in negotiating a commercial outcome to the dispute. 

You can recommend a meeting with the other director(s) to discuss the:

  • issues at hand; and 
  • desired outcomes. 

Additionally, you should make an agenda for any meeting and take notes recording the outcome. Often, the issues discussed can span a number of meetings. 

If these initial discussions are unsuccessful, you may wish to engage in a mediation where an independent third party (like a mediator or an arbitrator) can assist the parties in resolving the dispute. You may also decide to seek legal advice at this stage on your position and the implications of the dispute. 

If the company has a constitution, you should review it as it may outline a dispute resolution procedure for dealing with director disputes.

2. Shareholder Solutions

Depending on the company’s size, it is common for directors also to be shareholders of a company. If so, the company may have a shareholders’ agreement that sets out certain methods or procedures for dealing with disputes between shareholders or directors. For example, a shareholders’ agreement may include penalties for directors or shareholders who breach their duties or a resignation or buy-out process.

Notably, a shareholders’ agreement can allow a director to be forced out if they breach specific provisions of the agreement. Common types of breaches include where a director:

  • invests in or advises a competing company; 
  • creates a rival business; or 
  • steals money or intellectual property from the company.

If there is no shareholders’ agreement, there is no set procedure. However, in these circumstances, there are other potential avenues for a resolution that can include: 

Selling or Splitting the Business

The shareholders may agree: 

  • that neither party will continue to run the company. For example, if there are no other shareholders, they can then agree to sell the business to a third party; or
  • to close the existing business and split its assets in an agreed manner. 

These options can be helpful in situations where one shareholder has:

  • created most or all of the business’s intellectual property; or 
  • significantly contributed to building its reputation, and would like to continue using it.

In these circumstances, a well-written contract (such as a sale of business contract) will document exactly what each shareholder will receive. 

Negotiate a Share Sale and Resignation

One party may keep their shares and continue running the business, and the other party may sell their shares. The process and rights connected with selling shares may be documented in a shareholders’ agreement. This sale will be to the other shareholder or the remaining shareholders in most cases. However, a shareholder may also sell their shares to an independent third party.

If a  shareholder proposes to sell their shares to a third party, it is important to find someone who can bring value to the business. If the remaining shareholder(s) disagree(s)  with the proposed buyer, they may have a right to refuse the transfer of shares under the company’s shareholder agreement or constitution.

Another important factor to consider is the value of the shares. Parties will usually disagree on the value of the shares and the company. If a shareholders agreement is in place, it may stipulate valuation mechanisms. Otherwise, it is beneficial to obtain an independent valuation of the company and its shares. Doing so can assist in the negotiation process.  

Suppose the relationship between the parties has deteriorated to the extent that they cannot reach an agreement. In that case, they could also simultaneously submit private bids to each other or the proposed third party where the highest bidder buys out the other party (or parties). This is commonly referred to as ‘sealed envelope bids’. 

Company Buy-Back of Shares.

A shareholder may also negotiate to sell their shares back to the company, called a ‘buy-back’. A ‘selective buy-back’ occurs where the company only buys back one shareholder’s shares.

In the first instance, you should check whether the company’s constitution or shareholders’ agreement deals with this process. Otherwise, under section 257A of the Corporations Act 2001 (Cth) (the Act), a company can buy back its shares if the purchase:

  • does not materially affect the company’s ability to pay its creditors; and
  • complies with the procedures in the Act.

It is vital to have legal guidance during a share buy-back process as it can be quite technical with different rules depending on how many shares are being sold.

3. Resign or Sell Up

If you cannot easily resolve the dispute, you may consider resigning from the directorship. Whether you can do this will depend on other factors, such as: 

  • the financial success of the company; and 
  • any requirements in the company’s constitution. 

Once you resign, you have no longer have control over the company’s affairs.

If you are also a shareholder, you could consider selling your shareholding as well as resigning from the directorship. Again, the company’s constitution or any shareholders’ agreement will set out the rules under which this can occur. 

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4. Voluntary Administration or Liquidation

In some instances, the only option available to resolve a dispute between directors or shareholders is to place the company into voluntary administration or liquidation. 

Suppose the company is or is likely to become insolvent. In that case, the directors can resolve to appoint a voluntary administrator who will take control of the company in an attempt to save the company or its business.

A solvent company can also enter into voluntary liquidation. Voluntary liquidation is a self-imposed wind-up of the company approved by a special resolution (75% vote) of its shareholders. The purpose of a voluntary liquidation is to formally wind up a company’s operations, financial affairs, and corporate structure, while ensuring that creditors are repaid in priority.

In certain limited circumstances, a company may also apply for voluntary deregistration. 

Again, the company’s constitution should contain rules for dealing with these options.

5. Go to Court

If the parties are unable to resolve their director and shareholder dispute informally, you may need to commence a case in court. The type of claims you can make in court will depend on the nature of the dispute and what remedies you seek. For example, suppose another shareholder’s behaviour has damaged the company and its other shareholders, or another director breached their duties. In those circumstances, you may make a claim on behalf of the company against them for damages.

Going to court is usually considered the last option once all other efforts to resolve the dispute have failed. Therefore, before commencing a claim in court, it is important to seek legal advice on your position and available options. You should also note that court cases are a costly and time-consuming process. There is also a risk that if you are unsuccessful in your claim, the court could order you to pay the other party’s legal costs. 

The Court has a wide range of powers to make orders it deems necessary, such as: 

  • winding up the company; 
  • ordering the sale/purchase of the shares; 
  • appointing a receiver to take control of the company and manage its affairs; 
  • ordering the company to institute, defend or discontinue court proceedings; 
  • restraining or directing the conduct of a party; and 
  • modifying or repealing the company’s constitution.

Avoiding Director Disputes 

As the age-old expression goes, “prevention is always better than cure”. In this case, while director disputes can arise, it is helpful to have plans and documents in place to minimise their likelihood or assist you in dealing with them. This can include: 

  1. being upfront and honest with the other directors at the outset of your company venture and taking the time to understand each director’s expectations and roles in the business;
  2. having regular directors meetings to discuss any updates, the status and the future of the company and its business. Also, make sure to document the content of these meetings in minutes signed by all directors;
  3. if the directors are employed by the company, making sure there is an employment agreement in place that outlines each director’s roles and remuneration;
  4. ensuring that the company has a well-drafted constitution in place. This document should set out each director’s roles and responsibilities, the decision-making processes, the dispute resolution processes and rights to access documents; and
  5. in circumstances where directors are also shareholders in a company, it is essential that the company has a well-drafted shareholders’ agreement in place. This agreement should clearly set out the rights and responsibilities of shareholders, dispute resolution mechanisms when dealing with directors who have breached the agreement or in dealing with a director or shareholder dispute.

Key Takeaways

There are various methods of dealing with company director disputes, including informal negotiations, resignations, voluntary liquidation or administration or deregistration, and commencing a court case to resolve the dispute. The options expand further where a director is also a shareholder in the company. The most suitable option for you will depend on the specific facts and circumstances of your director dispute.

If you need help dealing with a director dispute, our experienced dispute lawyers can assist 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.

Frequently Asked Questions

What are some common circumstances where a directors dispute may arise?

Disputes often arise where directors fail to fulfil or breach their duties. Additionally, they may occur where the business or personal relationship between the directors has broken down.

What are some ways to deal with a director dispute?

Negotiation or mediation is usually the first step to resolve the dispute informally. Where the director is also a shareholder, there is often a set procedure to deal with disputes in the shareholders’ agreement. Additionally, you may consider resigning from the directorship, placing the company into voluntary administration or liquidation or going to court.

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