In any business situation, there may be some tensions between the shareholders and the directors of a business. In most situations, these tensions can be overcome, through effective communication between the directors and shareholders. However, if this communication breaks down, then a dispute might arise. Some of the common reasons why this might occur in a business environment include:
Breaches of a director’s duties
Anyone formally appointed to the board of directors of a UK company has to take on certain legally binding duties as part of their directorship.
The first of these duties requires a director to agree to follow the company’s constitution and acting for proper purposes e.g. not plundering the assets of the company. Directors also have a duty of care, requiring them to carry out their work as a director with a reasonable level of skill and competence. The other duties of a director include avoiding conflicts of interest, agreeing not to take any benefits from a third party, disclosing any self-dealing and, lastly, directors have a duty to promote the success of their company.
If a director breaches one or more of these duties then their company may take legal action, for example taking out an injunction. A dispute between directors and shareholders might occur if some or all of the shareholders feel that a director has breached his or her duties to the company.
The company’s strategy and management
It is quite common for a board of directors to have differences of opinion on the strategy and management of their company. Similarly, shareholders might not necessarily see eye-to-eye with the board on a variety of strategic issues. If these differences cannot be resolved through the usual means of communication, then it may cause tensions that spill over into a dispute.
Another potential source of disputes is the dividend policy of the company, particularly if that dividend policy favours some shareholders over others.
Disparities between salaries
Differences between the salaries of the various directors on the company board can also lead to a dispute, particularly if the reason for the differences in pay is not communicated to all the board members, or if the role of each board member is not properly defined.
Directors having separate or conflicting business interests
Directors of a company not only have a duty to avoid any conflict of interest, but also to avoid the possibility of a conflict of interest. This means that a director of a business must not make use of a business opportunity that could have been used by his or her company without the approval of the company.
A related issue can crop up when one or more directors of the company have separate business interests, in another company for example. Whilst these other business interests might not create a direct conflict of interest, the shareholders or other board members might feel those separate business interests are distracting them from the duties to the company.
A failure to communicate financial information to shareholders
One of the most important jobs the board of directors has with respect to the company’s shareholders is to keep them fully informed about the financial position of the company. Any failure to communicate important financial information to the shareholders, if for example the business is losing money, is a very serious matter and could quite understandably cause a dispute.
Excluding shareholders from board meetings
If shareholders are excluded from meetings held by the board, or if they are not informed that a board meeting is being held, this is likely to create distrust between those shareholders and the board and could result in a dispute.
A breach of a shareholders’ agreement or the company’s articles of association
A shareholders’ agreement is the contract between a company and some or all of its shareholders which details all the aspects of the relationship between the parties, including the rights and obligations of each of the shareholders. The shareholders’ agreement and the company’s articles of association, when taken together, form the internal rules by which the company is governed.
A breach of either the shareholders’ agreement or of the articles of association can therefore quickly create a dispute between shareholders, or between the directors and the shareholders.