Disputes between directors are one of the most complex problems a business can face. They can significantly impact business growth as directors are forced to focus on the dispute at hand, rather than the growth of the business. Directors’ disputes can occur for many reasons, including:
- disagreement over the direction of the business;
- directors failing to fulfil their duties; or
- directors stealing funds or intellectual property.
As a company director, there are different options for resolving a dispute with another director. However, these will depend on the circumstances and the governing documents (such as a shareholders agreement) that your business has in place. This article outlines the steps you can take if a directors’ dispute occurs and how to minimise the damage it has on your business.
How You Can Reduce the Impact of a Directors’ Dispute
Our top tip for minimising the impact of a directors’ dispute is to have a shareholders agreement in place. This document is vital because directors usually own shares in the companies they direct. Without a shareholders agreement, Australian law doesn’t give your company the right to take back a director’s shares.
With a shareholders agreement, you can set out penalties for directors that have behaved badly or damaged the business. For example, a well-drafted shareholders agreement can set out that a director must resign and sell their shares if they breach the document. A breach may be:
- investing in or advising a competitor;
- creating a rival business;
- stealing money or intellectual property from the business; or
- not performing their duties.
Penalties can vary in their severity. Common penalties include:
- forcing the director to sell their shares and exit as a shareholder as well as a director; or
- selling shares back to the company at a discount.
On the other hand, without a shareholders agreement, a company can be left in the position of an ex-director still being a shareholder in the company. This likely means the director has voting rights and can have an impact on the direction of the company. Therefore, we strongly recommend that a Pty Ltd (i.e. private) company with more than one shareholder has a shareholders agreement.
What to Do When a Directors’ Dispute Occurs?
If a dispute between directors occurs, your first step should be to seek legal advice on the company’s position, whether you have a shareholders agreement in place or not. This will help you understand your company’s options and how to approach the problem.
Meeting With the Director
Depending on the advice, your next step may be to meet with the director to discuss what went wrong and what outcome you both want. You should base your discussion on the legal advice you have received. It’s a good idea to meet in person in a neutral location. It also helps to come prepared with facts written down and an agenda for the meeting. This will help you keep the meeting on track and retain a clear vision of the outcome you want. Your lawyer does not need to attend the meeting. However, if the dispute has progressed and the meeting is a more formal mediation, you can appoint a mediator to oversee discussions. In this case, your lawyer can attend.
Going to Court
If you have not been able to resolve the dispute through meetings, mediation or other methods, then your only option may be to take the matter to court. Litigation is expensive, and you should only consider it if you have exhausted all other options. Your lawyer will work with you to create a statement of claim, which is a court document setting out your arguments. The other side usually has a chance to respond. After this, you and the other side will gather evidence and go to court.
What Outcome Can I Expect From Going to Court?
If the matter goes to court, then you and the other side will argue over what you owe each other. The outcomes of court cases differ. We’ve seen the court decide that a director must resign, sell their shares back to the company and also provide a public apology. In other situations, a director in the wrong has had to pay damages (i.e. compensation) for the harm caused, in addition to giving up their shares. Other options can include:
- one director buying the other out;
- both parties agreeing to sell the company and reach an agreement over the split of the profits; or
- both parties agreeing that one will run the company and the other will no longer have a say in any decisions made.
Each dispute is different and the outcome will depend on the circumstances.
To reduce the damage a dispute with a director can have on your company, you should ensure that you have a shareholders agreement in place. This document sets out what happens to a director and a director’s shares if they do something wrong. Without a shareholders agreement, making a director sell back their shares and step down as a director is complex. Furthermore, obtaining advice from a solicitor is invaluable for you to be able to understand the company’s legal position and the way forward.
If you are experiencing a dispute with a director or have any questions, you can call LegalVision on 1300 544 755 or visit the LegalVision website.
Author: Chloe Sevil. Chloe is a Lawyer and Senior Legal Project Manager at LegalVision. Chloe’s work experience in small to medium enterprise, startups and her degree in economics gives her insight into the challenges of running a business.