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Resolving Directors’ disputes

By Stephen Cowburn

As business advisers working with MDs we are used to solving business problems and recommending courses of action across the range of business disciplines. Recently we have been involved in a number of cases where we have sought to resolve disputes between Directors and/or shareholders across a range of issues, markets and company size.

The purpose of this blog is to show how these disputes have arisen, the process we have followed to resolve them and to give reassurance to readers that you are not alone if you are faced with a potential disagreement and that help could be at hand.

How have these disputes arisen?

The businesses we have been working in have all been operating for at least 2 years, and in some cases, considerably longer. The theme has been a change in circumstances. From the heady days of starting up, with grand plans, a desire to work with business colleagues without a boss, the reality of running a business has caused cracks to appear, that may have partially been fixed but disagreements have become more frequent or that initial buzz has started to wane.

Our summary of the reasons for the cracks appearing are:

  • Differing expectations over time: the perceived freedom of running one’s own business masked a lack of clarity about what individual Directors really wanted to achieve eg earning more money as a Director vs building a business with the ultimate aim of selling it.
  • Initial (often verbal) agreements not met: in the desire to establish the business quickly, win business and generate cash, verbal promises made at the time have now been raised but the business situation is such that these verbal promises are going to be challenging to implement.
  • Conflicting management styles: what seemed to be the perfect mix of operations and sales; strategic thinking and detail is now causing a problem as the extremes of these styles are causing communication difficulties in resolving current matters such that an impasse is being reached “why can’t he understand my point and agree to move ahead with it?”
  • Perceptions of inequality of effort and value put into the business: said in different ways but statements like these may be familiar; “I work longer hours so l should get paid more”, ”l bring in all the business, she wants to improve all the processes, which don’t generate the cash”
  • Initial structures put in place for the wrong reasons: initial pay structures or shareholdings were expedient to attract Directors but as the business has grown and evolved something different is needed.

What is the process?

Disputes are often presented as financial challenges, reflecting something that notionally can be measured, but this usually hides other problems such as lack of clarity on goals, roles, or contradictory objectives.

Our process often starts by understanding the financial position, or looking at employment issues, and from this get a view of business performance over time. By listening to and questioning the perceived issues affecting the business we are able to get to the core of the problem.

Some cases have been resolvable by getting written clarification on agreed solutions following individual and Board discussions to identify, explore and resolve issues. Such was the case when there was a disagreement about the definition of profit as part of a minority shareholders remuneration package.

Others disputes have resulted in business divorce with one Director/Owner leaving. Whilst sorting out the financial ‘deal’ for the departing shareholder may be straight forward (as the Director has more or less decided to leave), equally there have been lengthy negotiations where the resulting deal has been structured in a fairly complex way to meet the conflicting needs of the remaining and departing Directors. This latter situation requires the ability to be able to structure a compromise deal with both parties able to talk to the other party with a deal in mind. A recent case involves splitting of the company’s tangible assets, common rights to shared intangible assets (IP), share sale, compensation for loss of office and loans to the business. All of which has to legally documented.

Common threads of late have been:

  • Utilising company share buy-back to deal with Director Shareholding;
  • Settlement agreements to formalise end of employment relationship (even when
  • contracts didn’t exist) and maintain confidentiality
  • Documenting decisions on future activity
  • Splitting the company to facilitate the deal.

What roles do we take to resolve the issue?

The start point is often a business review, starting with the overt issues, but analysing the finances and resources to assess the likely reasons for the dispute. In doing this we will open up communication channels and aid discussion. This might be seen as classic consultancy, but it is much more hands on, facilitating resolution. The outcome being to devise a strategy that fits the culture and personal objectives of the key players through asking Directors not only what they want to achieve, but what they think is achievable. We will often introduce ideas that had not been considered.

Where there is a majority shareholder and hence a minority one, our role is to educate the parties in what is allowed (in law, through the shareholders agreement and articles of association) and then facilitate/negotiate an agreement and solution.

This will involve a range of roles including mentoring, advising on various options and coaching on how to consider, present and respond to different options. This may be done with the Board together or on behalf of separate Directors acting as a buffer where the temperature is high!

We are used to wearing different hats and straddling the line between working in the interests of a sustainable business first, acknowledging that the business is represented by Directors, so meeting the needs and requirements of the Directors at the same time is often in the best interests of the business.

What learning would we share?

The problem may be presented as a financial issue as this is easy to state. However it is seldom just about money – the business may not be doing as well as it could/should or there are differing expectations around the effort/reward equation. This then leads to discussion around clarity of roles, skills, expectations, management style and other softer issues.

We have also seen confusion around the expectations of directors and shareholders and the roles and responsibilities of each, which may further be compounded by the fact that Directors and shareholders may also be employees.

Other concerns may also raise their head – staff are picking up on the tension and may be starting to think about moving employers impacting the potential viability of the business as the business cannot afford to lose key staff.

So tensions/disputes need to be dealt with quickly and in a business- like manner, whatever the underlying feelings may be. As far as possible we would recommend a timeframe is put in place to give parties a deadline to work to otherwise matters can drift.

We have tried to highlight some key points. For a confidential discussion contact C Stephen Cowburn or use the Get In Touch link below.

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