How to handle director disputes

Often these can be resolved with a conversation and a bit of negotiation, but in other cases they can escalate to the point where dispute resolution is required.

Over the years, I’ve seen these conflicts arise unexpectedly, often driven by differences over company direction, financial decisions, or personal issues.

These disputes can, in severe cases, jeopardise the stability and growth of your business and it’s always best to resolve these issues quickly and quietly to avoid damaging your company’s reputation and distracting staff from core activities.

If you are a director, here are some common questions you might be having and our advice on answering them.

What are the common causes of director disputes?

In my experience, director disputes often arise due to the following:

• Financial disagreements like budget allocations, compensation, and bonuses.
• Strategic differences like company direction and risk tolerance.
• Governance, management and decision-making authority.
• Personal conflicts and ego clashes.
• Performance issues including director performance and accountability.
• Legal compliance.
• Succession planning.
• External pressures like market conditions and stakeholder influence.

In some cases, it can be a combination of multiple factors which, on their own, can be solved relatively quickly but when combined create serious problems.

What should I do if I disagree with the other director(s)?

When you are in a partnership or there is only one other director, disputes can generally be solved in-house but when they threaten the business, they can be far more disruptive than those within a larger board.

The first step is to have a frank and honest discussion of the issue with the other director with the goal of resolving the dispute internally.

If this fails, we suggest speaking to your solicitor to discuss your next moves.

It might be that we recommend simply entering the mediation process and having a solicitor guide the path to the problem being solved.

Alternatively, you may need to consider more extreme options like selling the company or litigating against your fellow director.

In either case, this is a major disruption to business and could be an existential threat to the company.

If you sit on a larger board of directors and disagree with a decision, you should seek advice from your legal adviser to ensure a quick and satisfactory resolution.

Make sure your objections are properly minuted or have been made by written communications – like email – so that there is a record of your comments.

For serious disagreements, you might want to consider calling a general meeting of the company or contemplating resignation but, in both cases, make sure to seek professional advice first.

What should I do if I believe other directors are doing something illegal?

Fundamentally, the best course of action will depend on the specific circumstances surrounding the disagreement you have.

If the error or omission is relatively minor, the option that has least effect on the business is to give the board an opportunity to rectify the problem before it becomes a serious issue.

However, if the matter is more serious – like theft or fraud – you must act to protect both yourself and the company.

We suggest you formally object to the actions being taken, ensuring your objections are documented in writing or minutes.

If the case ever goes to Court, you’ll have clear evidence of your dissent.

Then, it’s vital to seek legal advice and get guidance on how to proceed, ensuring your actions are aligned with both the law and the best interests of the company.

This may involve advising on specific protective measures, potential legal remedies, or strategies to mitigate any negative impact on the company.

In particularly severe cases, you might need to consider more drastic actions, such as calling a general meeting of the company to address the issue with all stakeholders or contemplating resignation if your position becomes untenable.

Again, you should speak to a solicitor before acting.

How do I resolve disputes among directors

As we’ve said, having an open conversation on the issue is the best way to solve minor problems.

However, if you feel you need to escalate the situation, you have four primary options (although others do exist):

• Mitigation
• Arbitration
• Litigation
• Resignation or sale

The first, mitigation, is really a more structured form of negotiation between the parties with the help of a legal professional who can present all arguments accurately and in a comprehensive manner.

This will not result in public scrutiny or operational disruption, in most cases and is generally seen as the first level of escalation.

If this fails, arbitration is the next step.

An arbitrator will be appointed to hear both sides of the argument and provide a judgement on the case.

This is not legally binding but the presence of a respected and experienced legal professional to make the decision for both parties generally leads to a satisfactory and accepted outcome.

Litigation – taking the issue to Court – is the next stage and will certainly disrupt business and bring the issue to light in the public eye.

At this point, both parties will engage with solicitors to provide a case in front of a judge who will give a legally binding verdict on the case.

Relationships, at this point, are often damaged beyond repair, in our experience, so it’s best to avoid this at all costs.

Finally, resignation and/or the sale of the business is an alternative option.

Again, this is a major step in which there is very little room for going back and, in many cases, will have a significant (if not existential) impact on the business.

As solicitors, we often try to avoid the last two options where possible but accept that this is on a case-by-case basis.

The first step, however, is to speak to a legal professional for advice on moving forward in the dispute resolution process.

We’ll be able to give you tailored advice based on your specific circumstances and the nature of your business to find the best option for you.

If you’re experiencing a dispute between directors and need legal advice, please get in touch with our team.