Most of the time, directors within a company get on fine. However, when tensions do rise and directors fall out - the consequences can be very damaging. Our expert team has advised 100's directors over the years and helped resolve many difficult situations.
One of the most common areas of dispute that we see time and time again in company dispute situations are when directors fall out.
Common reasons for dispute amongst directors
This scenario is more frequently the case where a business is run by a small number of directors who know each other particularly well. For example,
- it may be that friends who came together with a common business interest in order to create a company who have subsequently had a difference of opinion on the direction to take the company; or
- it may be a family business and the directors will be family members who have fallen out.
In a company where there are very few directors and they all started in business together, it is usual each director will bring a different skill set to the company. Initially this might work out well because when the different parts join together, they bring a range of different benefits to the company. This will be one of the reasons why they got together to incorporate a company in the first place.
However, as is often the case with friends who have to work together particularly in a stressful environment, resentment towards each other can grow for various reasons, and they may lose trust and confidence in each other.
Each director may have started out with a different expectation of their various roles and reward, and if this doesn’t come to pass then there may be frustration and resentment. If the channels of communication close down as a result, this can make matters worse.
Unfortunately we frequently see disputes in family run businesses. For example,
- where a father has set up a business and eventually the children join as directors;
- each may have very different expectations of what being a director in these circumstances mean;
- the siblings may believe that their other siblings are being treated preferentially, or it may be that the parent refuses to relinquish control and allow the ‘child’ directors to have a proper say in the direction of the company, causing resentment.
It can also be the case that the matriarch or patriarch are no longer directors, but remain as shareholders, controlling the company using their position as the head of the family rather than acting as a director and bound by certain duties. For more information on what this might mean – read more about shadow directors and de facto directors.
How does this affect a company?
There can be many reasons why directors may not get on by reason of culture expectations or just simply a personality clash. However, this can have serious consequences on the running of a company, and particularly in ensuring the company is adhering to its legislative requirements and duties. In particular, if there are expectations of a particular director, for example, to maintain the finances, and that director fails to do so, there can be consequences for all of the directors in terms of failing to file accounts or maintain adequate books and records, as well as consequences for the company itself.
If one director decides to make decisions without consulting the others that impacts the direction of the company, then this can cause serious issues.
What action may be taken to prevent disputes?
Inevitably directors will not always get on. However, if they can keep lines of communication open, hold regular board meetings and record these, then this will be a good start. This can avoid misunderstandings leading to disputes that could have been headed off quickly with the right communication.
Set up directors’ service level agreements
A director’s service level agreement (SLA) is highly beneficial for all parties. It can establish expectations and boundaries for all directors, and can provide for remedies should things go wrong. While it is advisable to have a well drafted SLA in place from the outset when starting up a business or when bringing a new director, it is never too late to put an SLA in place. Just the discussion around the drafting can help clear the air in some cases.
At Francis Wilks & Jones we frequently advise directors who have fallen out and require assistance in disputes with fellow directors. Our preference of course is to avoid this altogether and we therefore also advise and act for companies to put in place a well drafted service level agreements so that everybody is clear on their expectations. This can avoid costly litigation and damage to all parties in the event of a dispute. Contact us to discuss today for a chat if any of these areas are relevant to you.