19 FAQs about shareholder and boardroom disputes.
- What are the most common causes of shareholders' disputes?
- How can I minimise the likelihood of a shareholders' dispute?
- What are the most common causes of disputes between directors?
- How can I minimise the likelihood of a directors' dispute?
- What happens if the directors cannot reach agreement on a decision?
- Do all directors have the same voting rights?
- What happens if there aren't enough directors at a board meeting to take a decision?
- What can I do as a director if I disagree with a decision taken at a meeting I didn't attend?
- What should I do as a director if I feel that the board is acting improperly?
- Can the shareholders overrule the board of directors?
- What decisions do the directors need shareholder approval for?
- What happens if the shareholders are not satisfied with the accounts?
- What happens if I disagree with the other shareholders about what to do?
- What happens if I own shares jointly with someone else and we disagree?
- Can the shareholders dismiss a director?
- How can the board of directors dismiss a director?
- What can I do if I feel I can no longer work with the other shareholders or directors?
- How can I enforce my rights as a shareholder?
- How long will it take to enforce my rights as a shareholder take and what will it cost?
1. What are the most common causes of shareholders' disputes?
Common causes of disputes include disagreements over:
- the company's strategy
- the level of dividends
- salaries paid to shareholders who also work for the business
- disproportionate contributions of money and/or time from each shareholder
- dealings between the company and a private business owned by one of the shareholders
- the price to be paid when a shareholder is bought out
The problems can be particularly acute where one shareholder, or group of shareholders acting together, can override the wishes of a minority shareholder.
2. How can I minimise the likelihood of a shareholders' dispute?
In a private company, particularly one with a relatively small number of shareholders who also manage the business, the best method is usually a shareholders' agreement. As well as providing an agreement covering the most likely causes of dispute, the process of preparing the agreement helps shareholders to work through some key issues which could give rise to potential problems later on and encourages them to work through the problems at the outset whilst relationships are still good.
Amongst other things, a shareholders’ agreement will usually cover:
- when your board should get shareholders’ approval;
- whether any important decisions, such as issuing more shares which dilute the power of existing shareholders or purchasing another business, need consent from all or nearly all shareholders;
- if any shareholder can transfer their shares as they think fit without first offering them to the other shareholders; and
- when your business is sold and how you go about this.
As far as possible, the agreement will anticipate potential future issues: for example, what will happen if the company needs to raise additional financing, enter into high value contracts or engage a number of highly paid new employees. The agreement will specify that a majority, or possibly all the shareholders, need to give approval before the company can be bound.
The agreement will also usually cover how a shareholder can realise his or her investment in the company: for example, whether to impose any restrictions on selling shares, and how the shareholding will be valued if the other shareholders or the company have the right to buy it. This is particularly important where a shareholder's exit from the company is not amicable and a valuation of the shares cannot be agreed. A standard shareholders' agreement would be expected to provide a timetable for sale, and allow for the appointment of an independent third party to value the shares.
In addition the agreement may also deal with 'deemed transfers'. This will be a list of events which automatically trigger a requirement for a shareholder to offer to sell his shares to the other shareholders and sets out the sale process. For example, this might include the death of a shareholder, or the departure of a director with a shareholding.
3. What are the most common causes of disputes between directors?
Common causes of disputes include:
- disagreements over strategy
- power struggles and poor personal relationships
- conflicts of interest, and dealings between the company and a private business owned by one of the directors
- concern as to whether the board is meeting its legal responsibilities
- concern over financial issues and potential insolvency
- service contracts and remuneration
- a change in personal circumstances of one of the key parties
4. How can I minimise the likelihood of a directors' dispute?
There is no one way of creating a happy and effective board. Here are some suggestions:
- A culture of open communication can help. For example, ensuring that all directors receive full briefing notes on all the issues to be considered well before any board meeting. You might consider discussing potentially controversial issues with other directors before any formal board meeting. This can help to facilitate agreement at the meeting itself and avoid surprises.
- An experienced chairperson will know how to run a board meeting. For example, ensuring that directors stick to the agenda, limiting the time devoted to each item, and knowing when to put matters to a vote (or alternatively to postpone decisions for further discussions outside the meeting).
- The board needs easy access to advice on any legal matters. One option is to ensure that the directors and company secretary (if the company has appointed one) has appropriate training and to invite legal advisers to attend meetings where appropriate.
- Directors are legally obliged to declare any potential conflict of interest, and must not use their position to make private profits at the company's expense. Suitable policies - requiring directors to declare conflicts and to abstain from votes where they may have a conflict - should be strictly enforced and recorded.
- As your company grows, you might consider introducing non-executive directors to the board. These individuals usually come at a cost, but can bring a wealth of business and management experience with them. They can also offer a fresh viewpoint, unfettered by personal interests.
5. What happens if the directors cannot reach agreement on a decision?
Rules on how board decisions (known as ‘board resolutions’) are taken should be included in the company's articles of association and/or a shareholders' agreement (if you have one). The chairperson should refer to these in situations of potential deadlock or conflict.
Many SME and start-up companies are governed by the default model articles of association. These provide that board resolutions are passed by the approval of a majority of the directors present at a meeting, or unanimously if agreed in writing. They also give the chairperson a casting vote where the directors are split 50/50. The model articles also specify that at least two directors must be present at a meeting ('quorum') for any decisions to be taken.
6. Do all directors have the same voting rights?
Yes, if you are one of the many SME and start-up companies with the default model articles of association. Each director will have one vote, and decisions will be carried by a simple majority on a show of hands at a meeting. The chairperson has the right to exercise a casting vote if votes for and against a motion are equal. It should also be remembered that on certain issues individual directors may be prevented from voting by a conflict of interest.
It is, however, possible for the company's articles of association or a shareholders' agreement to establish some other system. For instance, a company may wish to avoid deadlock by adopting a provision giving weighted voting rights, possibly in proportion to the directors' shareholdings in the company, on certain matters. You should check the terms of any shareholders’ agreement to identify the voting rights of your directors. You should also check your articles of association, if you do not use the default model articles described above.
7. What happens if there aren't enough directors at a board meeting to take a decision?
If the number of directors is below the quorum required by the articles of association to take a decision, then no decision can be taken.
Many SME and start-up companies use the default model articles of association. These require at least two directors to be present at a board meeting, for it to be valid.
If you are holding a board meeting where the number of directors present falls below two, you will need to adjourn the meeting or postpone it until it can be reconvened. This might occur where a director becomes disconnected from a board meeting held by video conference, for instance.
If your fellow director(s) become more permanently unable to attend board meetings – for instance if they are ill or are incapacitated for any reason, you may need to take further action. You might consider having the director appoint an alternate to enable meetings to take place, or reviewing the terms of their service agreement to identify what should happen next. If you find yourself in such a situation, you should obtain legal advice to work out the best course of action.
Even if you are unable to convene a valid board meeting, or reach company decisions, remember your directors and any secretary will still have a duty to meet your company’s ongoing record-keeping and filing obligations.
8. What can I as a director if I disagree with a decision taken at a meeting I didn't attend?
Your company's articles of association will usually require directors to be given notice of any board meetings. Under the default model articles of association used by many SMEs and start-ups, all directors must be given ‘reasonable notice’ before any board meeting. If you are not given reasonable notice of a meeting, any decisions reached at such meeting may be legally invalid. You could advise the rest of the board of this fact, and suggest that a properly constituted board meeting be re-convened to consider the matter in question. Failing that, you could potentially apply to the court for the decision to be overturned, but you will need to obtain separate legal advice to make any such application.
In practice, healthy boards rely more on negotiation and discussion than legal compulsion. There is no reason why you should agree with every decision that is taken - but if a decision is deliberately taken behind your back, you might feel that you can no longer serve as a director. If you feel that the board or any of the directors was acting improperly, see 9 below.
9. What should I do as a director if I feel that the board is acting improperly?
Directors have far-reaching legal responsibilities and owe legal duties to the company they serve. They have wide ranging duties of loyalty and good faith to their company, and are also under duties of care, diligence and skill to promote the success of the company. Failing to observe their responsibilities and perform their duties could lead to disqualification as a director, fines, criminal prosecution, or being made personally liable for the company's debts.
Directors must keep themselves informed about what is going on in the business, and participate in its management. They should not sit by and let other directors act without being prepared to challenge them, no matter how dominant the others are.
You should always take action if you feel that the board is acting improperly. The most appropriate course will depend on the circumstances. For example, if the board has simply overlooked something, such as filing a required document with Companies House, you could just say so and ensure that the situation was dealt with.
However, you might feel that one or more members of the board are deliberately acting improperly - for example, by profiting privately at the expense of the company, or ordering goods and services on behalf of the company at a time when it is unlikely that the company will be able to pay for those goods or services. In these circumstances, you should ensure that there is evidence of your objections, eg by writing to the chairperson or by asking that your objections are noted in the minutes. In such circumstances, you should always take legal advice on other steps you may need to take to protect yourself.
If you believe the board is acting improperly, you might also consider resigning as a director. This does not completely absolve you from responsibility, however. You will still be responsible for board decisions reached prior to your resignation, and might still face action if, for example, the company subsequently becomes insolvent as a result of decisions taken whilst you were a director. If you are considering resignation as a director in such circumstances, you should always seek separate legal advice.
10. Can the shareholders overrule the board of directors?
This depends on the circumstances, but as a general rule if the board of directors have power under the company's articles to make the decision, and (as would be usual) there is nothing in the company's articles giving the shareholders power to immediately overrule the directors, the answer is "not directly".
Under the default model articles of association used by many SMEs and start-ups, the directors of a company have general responsibility for all day-to-day management and decisions. Only a few specific matters (such as changes to the company's share capital, or to its articles) have to be referred back to shareholders for a decision.
There are, however, various potential options open to shareholders who do not agree with a board decision:
- Shareholder(s) with at least 5% of the voting capital can require the directors to call a general meeting of the shareholders to consider a resolution overruling the decision. However, any aggrieved shareholder(s) should think carefully about their reasons for calling any such meeting. Unless they hold more than 50% of the voting rights, they are unlikely to be able to pass any resolution at the subsequent meeting.
- Shareholders can also attempt to dismiss a director (see 15) or appoint new directors to the board, in the hope that they will outvote the existing board members.
- Shareholders can take legal action if they feel the directors are acting improperly.
- Minority shareholders can take legal action if they feel their rights are being unfairly prejudiced.
Legal advice would be needed before taking any of the options above.
Even if shareholders take one of these actions, the board decision in question will still stand in the meantime.
11. What decisions do the directors need shareholder approval for?
Your articles of association and any shareholders’ agreement can specify that certain decisions require shareholder approval. In addition, certain decisions will always require shareholder approval by law. You should always check the terms of your articles and any shareholders’ agreement to identify whether shareholder approval is required.
The most common decisions requiring shareholder approval are:
- changes to your articles of association
- grant of authority to issue new shares
- disapplication of pre-emption rights before offering new shares to a new investor
- changes your company name
- removal a director
12. What happens if the shareholders are not satisfied with the accounts?
The directors must ensure that the accounts are circulated to the shareholders, but there is no longer a requirement to present them to the shareholders for approval.
In practice, shareholder dissatisfaction with the accounts would usually reflect an underlying problem - for example, if the shareholders felt that the directors were trying to mislead them or to run the company for the directors' benefit. The shareholders might then consider taking action (see 17).
13. What happens if I disagree with the other shareholders about what to do?
Decisions among shareholders are taken by a vote (either on a written resolution, or at a general meeting). As a general rule, written resolutions are quicker and easier than general meetings, which require a very prescribed process to be followed.
In most cases, a shareholder decision requires a simple majority of votes in order to be passed. Some decisions require a higher majority: for example, a special resolution to change the company's articles of association requires a majority of 75% of votes cast. Most disagreements between shareholders will eventually be resolved simply by voting power.
However, protection is also available in certain circumstances for minority shareholders where the majority shareholders are abusing their position.
One way in which disagreements can be circumvented is through a shareholders' agreement. These will often contain clauses detailing how the shareholders should act in certain circumstances. A carefully thought out shareholders' agreement can often help a company to run more smoothly, with fewer distractions or delays caused by shareholder disputes.
14. What happens if I own shares jointly with someone else and we disagree?
The company's articles of association should specify who will have the voting rights for jointly owned shares. Normally, the shareholder whose name appears first on the register of shareholders will have the voting rights on that share.
15. Can the shareholders dismiss a director?
In theory, yes, but the procedure to follow is complex and strict. You should always seek legal advice if seeking to dismiss a director from office.
In outline, shareholders representing at least 5% of the company's voting rights can require the board to call a general meeting of the shareholders to consider a resolution to dismiss a director. To be effective, the resolution must be passed at the meeting by more than 50% of the votes cast.
The director is entitled to be given special notice of the meeting and to present their case, both by written representations to the members beforehand and at the meeting. This means that the resolution cannot be passed using a written resolution in lieu of a meeting - there must be an actual meeting.
The Companies Act 2006 says a director can be removed in this way irrespective of anything to the contrary in their contract of employment, or in the company's articles of association. However, directors who are also shareholders sometimes have special voting rights on resolutions to remove them, set out in the company's articles. Despite what it says in the Act, these are effective, because they mean the necessary majority vote cannot be obtained to pass the resolution. You must also bear in mind the director’s rights as an employee. Always seek advice.
16. How can the board of directors dismiss a director?
Shareholder approval is required to dismiss a director from office entirely. The directors themselves might have the right to remove a director from the position of managing director or chairperson - but he or she will still be a director. The board would therefore need to call a general meeting in order to remove the director from office, if desired (see 15).
If the director is also an employee of the company, the directors will need to ensure that the dismissal respects their employment rights - in particular their notice period under their contract or as specified by law, and their right not to be unfairly dismissed - or they may be entitled to claim compensation for breach of those rights.
In practice, it is more common for directors to be encouraged to resign rather than actively forced out of office. In such circumstances a compromise agreement will often be drawn up, to cover future claims and possibly the departing director's involvement in competing businesses.
Always seek legal advice if seeking to dismiss a director from office.
17. What can I do if I feel I can no longer work with the other shareholders or directors?
You need to reflect on whether you are a shareholder, a director and an employee because you may have rights in each capacity. In order to understand your negotiating position you will need to look at the company's articles, your employment contract and any shareholders’ agreement. These may be inter-related.
If you decide to resign as an employee, you may lose your employment rights; you may also be compelled to sell your shares. You need to be clear about what you want to achieve and take advice on the best course of action to achieve this.
As a shareholder, if you want to realise your investment, your best course might be to negotiate the sale of your shares to the company, other shareholders, or a third party. Your ability to do this, and the price you receive, may depend on any restrictions in the company's articles of association or a shareholders' agreement. There may be a mechanism laid down for calculating value if you are a minority shareholder, but this may well be calculated as a minority holding, rather than a straight percentage of the total value of the company. If the shareholder and board cannot agree a price for your shareholding, then there may be provision for an independent expert (usually a chartered accountant) to value the shareholding.
As a director, you may have no alternative but to resign. If you simply disagree with the strategy being pursued by the board, this provides a straightforward solution. However, if your resignation is prompted by concerns over the legality of the board's actions, you should take legal advice; resigning might not protect you from potential future liability for decisions taken while you were a director.
18. How can I enforce my rights as a shareholder?
There are various options, including:
- proposing a resolution at a general meeting which redresses the situation
- complaining to the police of any criminal acts
- using a mediation service to settle a dispute
- asking the board of directors to take action in the company's name against an individual director (because generally, the shareholders cannot sue in the company's name)
- applying to the court for an order that the company is acting or has acted unfairly (a so-called 'unfair prejudice' action)
- applying to the courts for the company to be wound up
- suing the directors for negligence by means of a derivative action
If you do plan to take any legal action yourself, take professional advice at an early stage on the best option, the likely outcome, and the likely timescales and costs (see 19).
19. How long will it take enforce my rights as a shareholder take and what will it cost?
As this depends on the circumstances and the type of action, it is difficult to be specific.
A complex, hard-fought court case can end up costing more than the shares were worth in the first place. On the other hand, a mediated settlement might be reached in a day at minimal cost. It is invariably better to try to reach a negotiated settlement.
Bear in mind the importance of ensuring that the money will be there before taking any action. For example, there is little point in pursuing an insolvent company or director.