
This is a typical structure for many SMEs/owner-managed businesses, and the same issues arise time and time again. Companies are usually set up with a common understanding (albeit not recorded in a written agreement) as to how the business will be run. When the good faith disappears and things start to go wrong, what issues arise as a result?
Deadlock
A deadlock scenario can arise where, for example, there are two directors and they are each 50 per cent shareholders. Without unanimity in relation to a decision, there is a deadlock. Neither individual can pass a board (director) resolution or a shareholder resolution on his own. If a decision cannot be reached, the court will often order that one of the shareholders buys the other one out for a fair sum. In practical terms, a buyout may not be possible and therefore this option is often a last resort.Dismissal from employment
Alternatively, the company may seek to dismiss the rogue director on the grounds of performance-related issues. However, in order to avoid jeopardising its own position, the company should ensure that a fair process of performance management is undertaken prior to the dismissal.- Boardroom disputes: A guide to avoiding them
- Dealing with shareholder disputes
- How to manage earn-outs and avoid the grief of a dispute
Removing directorship
Companies should also bear in mind that even if the company has a legitimate dismissal action, this would not automatically take away the individual’s statutory directorship.Effect on shareholding
Even if the director has been dismissed from employment and removed as a director, without any written agreement, his position as a shareholder would remain unaffected. This could prove extremely problematic for the remaining director who would be unable to pass a simple majority vote without the other shareholder’s approval. This is a common issue faced by private companies and highlights the importance of effective shareholders’ agreements and director service contracts. By having these documents in place, misbehaving directors can be removed and forced to sell their shares.Joanne Gallagher is a partner in the corporate and commercial team at Thomson Snell & Passmore.
Have you had a boardroom dispute? Let us know how you dealt with it in the comments box below.
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