What are my rights in a dispute with another Director or Shareholder?

This article was originally published by Pitmans LLP in 2015.

Many private companies start life informally and, over time, differences can emerge between the Directors or Shareholders. This can happen, for example, if one shareholder is not pulling his weight, is taking too much out of the business, or is diverting business or opportunities to a new business which he intends to join.

Solutions

In an ideal world, the Shareholders (and Directors) would agree a Shareholders agreement early in the life of the business. This can provide for when decisions must be made unanimously, voting rights and provisions attaching to the transfer of shares.

In many cases, no such agreement is in place. The position then is governed by The Companies Act 2006 and the normal rule is that a simple majority of shareholders can remove a Director from office. However, if that Director is also an employee, this could give rise to dismissal claims.

A minority Shareholder who holds less than 50% of the shares is, conversely, in a weak position as he is unable to control the board. If he has complaints about how he is being treated (for example, being excluded from management) he may be able to apply to the Court for relief on the ground that the affairs of the company are being conducted in a way which is unfairly prejudicial to him. This is a claim under Section 994 of the Companies Act 2006. In some cases he may also be able to bring an action in the name of the company (a ‘derivative action’) against the Directors.

What to do now?

Boardroom disputes can be complex and involve both employment law and company law issues. To assess the position, you should consider the Articles of Association, any Shareholders’ agreement, board minutes and employment contracts. By understanding where you stand with these, you may be able to resolve the situation using board control or a Shareholders’ resolution. If not, careful consideration needs to be given to Directors’ duties, Shareholder rights and employment rights. In such a case, legal advice should be taken and the earlier this can be done, the greater the chance of managing the position without recourse to the Courts.