Running a business can be an incredibly satisfying and profitable, allowing you to take control of your own work and income and shape your company to suit your own outlook and business ethos. However, if there are disagreements over the direction of the business or poor interpersonal relationships between directors or shareholders, company disputes can easily arise and can prove extremely damaging and costly – not to mention highly stressful.
We represent shareholders and directors in company disputes both locally in Wiltshire, Hampshire, Dorset and Somerset – and nationwide England and Wales – from our offices in Salisbury, Andover, Fordingbridge and Amesbury.
Worried about a company dispute? Put your mind at rest – for FREE initial legal advice simply call us now on FREEPHONE 0800 1404544 or Salisbury (01722) 422300.
And if you instruct us here Bonallack and Bishop, you can be sure you have a committed and experienced team on your side.
The head of our business dispute team, David Patterson, is a member of the Commercial Litigation Association (CLA) – the UK’s only group of expert commercial litigation solicitors and mediation professionals.
Common causes of company disputes
Among the main reasons for company bust ups and litigation are the following:
• Disputes over shareholder rights and responsibilities — for example when minority shareholders have the same rights and responsibilities as major shareholders
• Company direction and philosophical disputes — What happens when one or more shareholders disagrees with the direction of the company and the business strategy approved by other shareholders?
• Day-to-day business issues — What happens when there is disagreement about internal business practice? For example, if one or more people disagree with the company’s policy on sick pay, overtime, dismissal compensation or just about any other area of regular company policy.
• Salaries, payments and dividends — What happens when one or more shareholders want dividends to be paid on profits and others want them to be redistributed back into the company and this is not dealt with in the Articles of Association or any Shareholders Agreement? Are dividends and payments scheduled to be made monthly, quarterly or annually?
Disputes over money are particularly common, and that’s one of the reasons why it’s so important to make sure you have well drafted articles of association and a shareholder agreement prepared by an experienced commercial law solicitor for your particular business circumstances.
• Breach of directors obligation — What happens when a shareholder, director or member of staff considers that a director has breached his or her duties as a director? Do you have a process for dealing with such a dispute?
Knowing who controls the board is crucial in situations such as this.
The huge damage the company disputes cause
These kind of internal commercial disputes often overtake all other business – which means that things don’t get done as quickly and easily as they otherwise might have.
Taking your eye off the ball in this way can be very costly for your business. Put simply, it’ll hit your profit margins and should be resolved as quickly and effectively as possible – you really do need to make sure that your company gets back business as usual again as soon as possible.
What’s more, it’s highly likely that the money spent in the short term on proper legal advice will be far outweighed by the potential profits you’ll lose if the dispute isn’t resolved quickly.
But what about disputes in small companies?
In general terms, the larger the company, the more likely that disagreements arise.
However, in a smaller company, disputes can be far more damaging. If you’re part of a two-person business, for example, and you both disagree on a particular point, this can result in a particularly bitter form of deadlock — particularly if you both own 50% of the business and the issue of deadlock isn’t adequately dealt with in your company documentation. In these cases, friendships and relationships can easily break down too, and often as the result of a relatively simple, and perhaps avoidable, business dispute.
These tend to be among the most common company disputes, particularly if a shareholder has other business interests elsewhere. A conflict of interest might arise, causing a dispute within the company which will need to be resolved.
As always, anticipating problems before they arise is always the best advice, and a well drafted shareholders’ agreement should address those potential problems and set out clear methods of resolution in a signed document.
Click here to find out more about Shareholders’ Agreements
The importance of a shareholders’ agreement
In avoiding company disputes, it’s hard to stress the importance of a well drafted shareholders agreement – which should can address aspects of company law including;
· establishing a clear protocol for the sale and purchase of shares
· how a shareholder can buy shares from another
· whether or not a director or shareholder is entitled to compensation for dismissal
· whether a shareholder can invest in a competing business
· the way in which shareholders should behave
These kind of provisions might sound rather obvious, but without a proper shareholders’ agreement clarifying these issues, there really are a number of things which could go wrong.
For example, do minority shareholders have the same rights as majority shareholders? In which way does the percentage of your shareholding affect the rights you have as a shareholder in terms of voting, decision making and other areas of business administration? All of these things need to be set out in advance in order to ensure that disputes are kept to a minimum.
Removing a director
Sacking one of the directors can lead to particularly high tensions in a boardroom.
It’s absolutely essential that you follow the proper procedure when trying to remove a director – as really nasty litigation can arise if it’s not dealt with properly
A director can be removed following a meeting of the shareholders, but that person may well still be an employee of the company and a shareholder. These are not such straightforward processes to address.
Click here to find out more about Director Disputes.
What happens if the director is also an employee
If the director is also employed by the company, he or she will have the same rights as any other employee and cannot simply be removed from their job.
Indeed, the director in question may even have extra rights as a senior member of staff — particularly if these have been written into the original contract of employment. If this is not handled carefully, the company could be open to legal action and potentially damaging legal costs for wrongful and unfair dismissal.
Disputes when a director is a also shareholder
What’s more if the departing director remains as a shareholder in the company, they will also have rights and will be entitled to dividends and voting rights at board meetings. Getting the shares back from a sacked director can be tricky, particularly if the shareholder refuses. In short, without appropriate provisions in your shareholders agreement, you cannot force a shareholder to relinquish his or her shares.
Getting the right legal advice at an early stage is critical
Obtaining proper legal advice from a specialist commercial solicitor is so very important. This will save your business money in the long run and ensure that it can keep on working effectively, delivering profits to the shareholders and operating successfully, as you intended it to.
· Advice on setting up your company
Initially, legal advice should be sought on drafting agreements and contractual documents which will outline the process should disputes arise, ensuring that everyone knows where they stand and the company’s position on different things is clearly understood by everyone involved.
· Advice when disputes arise
Should a dispute arise at a later date, of course, the solicitor will be able to help ensure that it is resolved in a way which does not cost the business or the shareholders more money than it needs to.
Going through the court process to handle a dispute can be costly and take a long time, and it’s very likely that the result will not be satisfactory to one or more of the parties involved. Negotiating a solution before that stage is always highly advisable and can help to avoid an expensive legal process. Mediation is increasingly important, and here at Bonallack & Bishop, we are big supporters of using mediation to resolve disputes whenever possible.
In fact, David Patterson, the head of our dispute resolution team, is also a qualified civil mediator himself, with plenty of mediation experience. As a result we know how to get the most out of mediation for our clients
Failing to negotiate and consider mediation -the potential costs
Increasingly, the courts expect that the parties involved have tried to come to a resolution and to have considered mediation in doing so and done all they can to avoid going to court, which should always be a last resort. The costs implications of failing to consider mediation can be considerable.
The very real risks of an unresolved company dispute
Having a dispute in your business can be extremely damaging, and it puts an awful lot at risk.
Not only do you risk the normal daily operation of the business, but also everything attached to that.
Your own shareholding and income are at risk, as are the incomes and livelihoods of all of the company’s employees if the dispute impacts negatively on the running of the company as a whole.