Boardroom disputes & shareholder fall-outs: How to weather the storm

 

Sharokh Koussari | Commercial Litigation

Sharokh Koussari
Partner in our Employment and Dispute resolution department


I recently read the very interesting book “Family Wars” by Grant Gordon and Nigel Nicholson, (https://www.amazon.co.uk/Family-Wars-Stories-Insights-Business/dp/0749460555) .The book, amongst other things, traces the roots of success and feuds amongst some of the best known business families.  Many of these conflicts had to be resolved by way of legal action.

I noted similarities with many boardroom disputes that I have dealt with over the years.  Obviously not all of those disputes involved family members but the dynamics when dealing with entrepreneurs who have worked together for many years was similar.

When personalities clash, often this causes irreparable damage to the business/the company. In the case of the disputes that Nicholson and Gordon consider, this could mean members of the family completely losing control of the business. When one gets involved in conflict it is very easy for to lose sight of the bigger issues facing the business. I have seen this first hand. Therefore, when setting up a business, in smaller limited companies, it is essential that the founders turn their attention to potential for disputes that could arise.

From a legal standpoint, when we  deal with boardroom disputes  we often deal with individuals who assume the multiple roles of employee/ shareholder / Director with rights and obligations implied by each of those roles.

It is important that the correct documents and procedures are put in place to regulate individuals’ dealings with each other and with the company. In case of dispute these help set out the parameters within which disputes are decided.

Here are some tips as to documents and processes which would become useful in dealing with disputes:

  1.    Give some thought to dispute resolution clauses.

One doesn’t walk down the aisle thinking of getting divorced.  However thinking about putting in place procedures which would be used to resolve conflict will no doubt help bring some certainty and clarity to the process. Dispute resolution clauses can be included in shareholders agreements or other company documents. In the context of small companies this would no doubt help contain costs, they also allow for matters to be dealt with confidentially and with a lower profile than a full court case.

  1.    Make sure you use well drafted employment contracts

Many founders do not put employment contracts in place, others try and save costs by downloading these documents from the internet using documents from other business. In my experience this can create all sorts of problems and is certainly not advisable. I have even seen employers using employment contracts used in other jurisdictions and this can cause a great deal of confusion. Certain employers feel not having contracts would give them more room to manoeuvre .That is certainly not my experience.

  1.   Having a good Staff handbook can be very useful

Many employers feel that having an employment contract is sufficient and there is no need for any other ancillary documents. However, staff handbooks containing many policies which can become very useful to the management, for example, it would be difficult to try and manage a simple flexible working request without the relevant policy.

  1.   Do not forget to put Shareholders agreements in place

Many founders of businesses feel that they can do without Shareholder s Agreements or simply use templates which they download from the internet. This would be ill-advised.  Without shareholders agreements the shareholders will have to rely on provisions of the articles of association which are generally standardised and often not relevant to particular situations. In preparing a shareholders agreement one would have to consider the rights and obligations of various minority shareholders, issues relating to potential valuation of the shares, mechanism for purchasing shares, anti-dilution clauses, restrictive covenants, deadlock provisions, dispute resolution provisions, tag along rights (these are clauses which allow minority shareholders to sell their minority shares in case the majority shareholders sells theirs), drag along rights (these are clauses which ensure that if the majority sell their stake, minority holders are forced to join the deal). All these clauses become extremely important in a dispute situation but are also relevant to friendly exits.

  1.   Ensure all your company documents are clear and deal with all eventualities.

Having vague clauses, ill-defined terms, conflicting documents, outdated ones etc., use of archaic wording will only aggravate a situation.

  1.   Take advice regarding other important documents that the company may put in place

Examples include debentures securing loans made by director to the company, guarantees, leases etc. These documents also become relevant in cases of disputes.

  1.   Ensure you keep your company documents fully updated

Many small companies ignore this but it’s essential that all relevant minutes and other documents relating to governance are safely preserved.

Conclusion

Whilst reading about  boardroom disputes in books such as “ Family Wars “ can be very entertaining, to be involved in conflict with fellow shareholders and directors can be dreadfully unpleasant , stressful and expensive. In the most extreme cases it can result in the business suffering seriously or even becoming insolvent. Following the above steps could help minimise the effect of any dispute and safeguard the business from its worst repercussions. However, those involved must appreciate that they will be bound by the processes that they agree, which is all the more reason to decide on them whilst the parties are on good terms and there is no dispute.   It‘s important for parties to take specialist advice when setting up a new business but also when a dispute has occurred or is about to take place.

If you have any questions pertaining to the subject above or have any questions relating to employment or dispute resolution matters please contact Sharokh Koussari at Sharokh.koussari@dwfmbeckman.com or on 020 7408 8888.