Director and Shareholder Dispute FAQs

Director and shareholder disputes can arise due to various factors, including: differences in strategic vision; mismanagement; conflicts of interest; breach of fiduciary duties; communication breakdowns; personal animosities; and disagreements over company policies, financial decisions, or future direction.

Fiduciary duties are the legal obligations that directors owe to the company and its shareholders to ultimately act in the best interests of the company. These duties are set out in the Companies Act 2006 (sections 171 – 177) and include, amongst others, a duty to promote the success of the company, a duty to avoid conflicts of interest, and  a duty to exercise reasonable care, skill and diligence.

Director and shareholder disputes can often stem from allegations of breaches of fiduciary duty, such as self-dealing, using company resources for personal gain, or failing to act in the company’s best interests.

Directors who breach their fiduciary duties can face legal action from shareholders or the company itself. They might be required to compensate the company for any losses incurred due to their actions, and in extreme cases, they could be removed from their position and barred from future directorships in any company. They might also be subject to regulatory investigations and fines.

Shareholders can take legal action known as a “derivative action”. A derivative action is a claim brought by a shareholder of a company, ultimately on behalf of the company, and usually in respect of alleged breaches of duty by the directors.

This means that the shareholders bringing the claim are effectively seeking to step into the company’s shoes to pursue the director(s) for wrongs allegedly committed against the company. Shareholders usually initiate a derivative action if the directors fail to take action in respect of the alleged wrongdoing.

The shareholders might seek damages or equitable remedies – however, any damages recovered will typically go to the company, not the shareholders who initiated the claim.

A minority shareholder may also take legal action known as an “Unfair Prejudice Petition” if the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to their interests as a shareholder. Breaches of fiduciary duty by directors (usually where the directors are also fellow shareholders) are a common ground relied on in unfair prejudice petitions.

The Court has a wide discretion as to the remedies available, but a very common remedy granted by the Court is a “buy-out” order (whereby the majority shareholder(s) are ordered by the Court to purchase the  shareholding of the minority at a “fair” price (to be determined by the Court or an independent valuer).

The process for removing a director varies depending on the company’s governing documents (Articles of Association) and relevant laws. Some Articles of Association may provide that the board of directors has the authority to remove a fellow director through a formal vote or resolution. This will usually require a certain majority vote or adherence to specific procedures outlined in the company’s Articles of Association.

Additionally, the Companies Act 2006 provides shareholders with the power to remove a director in certain circumstances. However, this is subject to strict procedures, processes and requirements as set out by the Act.

It is worth noting that the removal of a director can create further issues, including employment law issues and, where the director is also a shareholder, potential legal claims by that shareholder-director (such as an unfair prejudice claim).

A deadlock within the board of directors can impede decision-making and potentially hinder the company’s operations. In such cases, depending on the company’s Articles of Association and any shareholders agreement, alternative mechanisms may be in place to break the deadlock, such as mediation, arbitration, or involving an independent third party to help facilitate resolution. If these efforts fail, legal action might be necessary to resolve the deadlock, potentially leading to a court-ordered resolution.

Alternative Dispute Resolution (ADR) refers to methods of resolving conflicts outside of traditional litigation, such as mediation or arbitration. ADR can be used in director disputes to facilitate discussions, negotiations, and resolution without resorting to lengthy and costly court proceedings. Mediation involves a neutral third party helping the parties reach a mutually acceptable solution, while arbitration is a more formal process where an arbitrator renders a binding decision after considering evidence presented by both sides.

When managing conflicts of interest, directors must prioritise the best interests of the company and its shareholders. Key considerations include:

• Transparency: Disclose any potential conflicts to the board and relevant parties.
• Recusal: Avoid participating in decisions where a conflict exists.
• Fairness: Ensure that decisions are not biased or unduly influenced by personal interests.
• Accountability: Uphold and comply with fiduciary duties and act in ways that promote the company’s interests.
• Avoidance of Self-Dealing: Refrain from using one’s position for personal gain at the company’s expense.