A Handy Guide to Resolving Board Disputes

Board disputes can be triggered by a variety of factors, and it is crucial that companies have procedures in place to manage and resolve these disagreements effectively. Directors in boardrooms are often both an employee and shareholder, and whilst healthy debate is promoted, conflict can negatively impact the productivity and efficiency of a company if left unresolved.

This blog outlines some practical guidance on how to resolve board disputes to ensure that they are handled successfully. 

  1. Refer to written code of conduct

Establishing a written code of conduct defining the board's roles and responsibilities is an effective method of resolving a board dispute. Implementing a written code of conduct promotes more effective management whilst also reducing the risk of disputes which can ultimately hinder the governance of the company. If a dispute materialises, the first step of seeking a resolution should be to reference the code of conduct which will clarify the role of individuals on the board, ensuring that they are aware of how to manage conflicts of interests, their duties (see our handy guide to directors' duties) and responsibilities.

2. Consult the company's legal documentation 

If a company does not possess a written code of conduct, it is important to consult the other legal paperwork that may include provisions on resolving disputes. A company's articles of association define the rules and relationships that exist between the company, directors, and shareholders. The articles of association therefore commonly include provisions relating to the resolution of board disputes, such as providing for a "casting vote" mechanism, often afforded to a chairman of the board. Such a provision comes into force if the board cannot agree on certain matters relating to the business of the company. Furthermore, there may also be a provision in place that affords certain directors (often a director appointed by a certain class of shareholder) with the right to consent to certain reserved matters as set out in a company's articles of association or shareholders' agreement. Ensuring that a company's constitution is fit for purpose and being able to refer to it when disputes arise will reduce the likelihood of disputes materialising in a way that stunts the business's capacity to function effectively.

3. Employ alternative dispute resolution techniques

Employing dispute resolution mechanisms, such as mediation, often results in disputes being resolved in a civilised manner, providing a platform for parties to voice their concerns and resolve issues. Using an independent chairman who is not a shareholder to hear director disputes is a common mechanism. Alternatively, appointing the services of an external independent mediator where the directors have perhaps exhausted exploring all common ground internally is a time efficient method of handling disputes. Such mechanisms also avoid potentially costly legal proceedings that in some cases disable a company's ability to operate the business.

4. Understand the process of removing a director

Where all other avenues have been exhausted and an agreement is out of reach, it is often the case that one of the parties involved in a dispute will leave the company. It is therefore important to understand the process of removing a director from a company.

There may be provisions within the articles that deal with the removal of a director in these worst-case scenarios. Should the articles stay silent on this, then there may be a possibility of negotiating with the director their removal from the company through an agreed settlement. If this route is unsuccessful, section 168 of the Companies Act 2006 provides that a director can be removed by the shareholders if they give special notice to the board (notice to the shareholders outlining their proposition) 28 days before a meeting of the shareholders. The general meeting of the company's shareholders will be conducted to decide whether to pass this ordinary resolution (requiring more than 50% of votes). The director in question has the right to be notified of the proposed resolution and can provide written or oral representations at this meeting.

The key takeaway for being able to resolve board disputes is to plan in advance and ensure that the legal documentation governing the company has adequate measures in place to handle  disagreements. Enforcing a written code of conduct will promote a positive culture of accountability whilst ensuring that individuals recognise the scope of their position within the company. Furthermore, ensuring that there are prescribed dispute resolution mechanisms in place will dramatically reduce the possibility of court action and allow for more cost and time efficient methods of dispute resolution to be utilised.

If you are seeking to implement or update company documentation to deal with potential board disputes or alternatively you are seeking assistance in handling a live dispute, then please get in touch with your regular Brodies contact or one of the contacts listed below.