The likelihood of such disputes, and the impact of them, increases in proportion to the share of ownership in the business held by the board members. This means that SMEs, who are often owner-managed, are particularly prone to board room fall-outs, the impact of which can destroy the company.
All boards and directors should accept that disagreements are part of business life. A wise board will take steps in advance which might nip a dispute in the bud or at least prevent a falling out from becoming a damaging war.
Top tips to boards for avoiding or managing boardroom conflict, particularly in owner-managed businesses, are as follows:
- Get yourself a shareholders agreement;
- Make sure your articles of association are fit for purpose;
- Consider putting employment contracts in place for all directors;
- Avoid a potential deadlock situation; and
- Be careful who you appoint to the board.
A well drafted shareholders agreement will set out the rights and obligation of shareholder directors, define what decisions must be made by shareholders and contain mechanisms to help defuse or manage disputes. These mechanisms can include informal dispute resolution provisions, the use of third parties to act as independent arbiters or procedures that will apply in the event of deadlock.
Such agreements can also provide detailed exit mechanisms in the event of both an amicable or hostile exit of a director or shareholder.
Where everybody knows where they stand and the mechanisms are clear there is then little scope for disputes to escalate and a falling out can be sensibly managed all the way to exit from the company. In the absence of such an agreement the law is a very blunt tool and achieving a smooth resolution is much less likely.
A shareholders agreement is best implemented when everybody is still friends and before battle lines are drawn as it requires everyone to agree. An alternative is a bespoke set of articles of association which can contain many similar provisions. These can be put in place with the support of 75 per cent of the shareholders (although care must be taken not to do anything which is blatantly unfair to a minority shareholder otherwise you will give them a legal claim).
Another set of documents which can assist is employment contracts for all directors. Many disputes arise because directors have differing views about their role or the role of others. Arguments about somebody not pulling their weight are common. Properly drafted employment contracts can clarify roles and provide a framework to enable differences of opinion to be resolved. Under-performance can be more easily addressed and removal by the board of a troublemaker as an employee / director more easily defended if things go that far.
If things have already gone a bit sour and documentation is unlikely to be agreed or put in place then from the company’s perspective the avoidance of deadlock at board level is critical. Deadlock can paralyse a business and seriously damage it. A shareholders agreement will normally contain detailed provisions to deal with deadlock and in the absence of this a 50/50 shareholding and a board made up of the two shareholders can be a recipe for disaster.
However, never rush to appoint somebody to the board simply to avoid deadlock. At the heart of every dispute, whatever it is about on the surface, is the relationship between people. Appointing the wrong person can cause multiple problems. Beware of bringing in a cuckoo, an animal which has no investment in the outcome of the nest. In the absence of specific rights to dismiss then getting rid of a director will require a greater than 50 per cent shareholder vote to achieve. Getting the mix of people on a board right is therefore an important way to avoid disputes down the line.
SMEs are often successful as a result of the synergy between different people with different abilities. Typically there is the sales guy who brings in business, the numbers guy who ensures this business converts into profit and the manager who holds it all together. Whilst it seems a cliché, these people often do have very different personalities, reflecting their skills. When the mix is right these differences are a source of strength. When something goes wrong then the differences can be toxic and disputes as bitter as any divorce. An investment in documentation which governs these relationships and anticipates problems can mean that you will never have the misfortune of having to instruct a litigation lawyer who specialises in shareholder disputes.
Ed Weeks is Cripps’ head of commercial dispute resolution.
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