Jordans Solicitors acted for a client who was a Director and Shareholder of a company but who had fallen out with his co-Director and Shareholder and the parties could not agree how to resolve the dispute.
Our client and a longstanding friend of his set up a limited company. They were both Directors of the company and 50/50 Shareholders. They had worked well together for a number of years but more recently had not been seeing eye to eye about the direction the company should be taken in. In addition, our client felt that the co-Director was not pulling his weight and that the business was only thriving due to the hard work and dedication shown by our client.
The problem which Jordans Solicitors were instructed to assist our client with was finding a way to resolve the disagreement between the Directors. Once we had explored with our client the prospect of the two Directors continuing to work together and had identified that unfortunately the relationship had deteriorated to such an extent that it would not be possible for the differences to be resolved, a plan of action was required in order that the parties could go their separate ways.
The parties could not take affirmative action on their own because no one Director would dismiss the other Director and because they were 50/50 Shareholders no one of them could vote the other Shareholder out at an AGM. This deadlock had to be resolved by agreement, and with the assistance of a Mediator, Jordans Solicitors were able to help our client agree terms whereby our client bought out the other Shareholder’s shares in the company and for that person to resign as a Director. The terms agreed a structure for payment of the shares and parameters under which the exiting Director would be able to set up another business.
How Jordans Solicitors Helped Our Client
By identifying the client’s aims and objectives and providing legal advice about the options available to our client, we were able to best help the client identify how the dispute should be resolved. Through negotiation the deadlock between the two parties was broken down and terms for the Directors to go their separate ways were reached.
The period had been very stressful for our client and it was important that a resolution was agreed as quickly as possible as our client felt that the company was being damaged by the difficulties between the two Directors and that this was having a negative impact upon the morale of the staff employed by the company.
The agreement enabled our client to continue in the business unfettered making his own decisions and affected a clean break between both of the parties.
Thoughts on the Case
This case was very typical in that frequently Directors of companies find that they disagree amongst themselves about important strategic decisions for the company’s future. This discord often then filters into more day to day decisions which have to be taken in the business and, if allowed to continue, can have a devastating effect on the business to the detriment of everybody involved. Where there are only two Directors and Shareholders there is an inherent deadlock which cannot be resolved. It means that all important decisions have to be made by both of the Directors and Shareholders agreeing on the same course of action. This deadlock can be avoided by appointing a third Director and Shareholder or by considering how the shares are to be held. If one party starts the business or puts most of the capital in to starting the business, consideration should be given as to whether that Director ought to be given the ‘whip hand’ in terms of having the final decision whenever there is a deadlock situation.
It is also important to have a Shareholders’ Agreement and a Directors’ Service Agreement to set out what all parties can and cannot do on their own and what type of action or omission could amount to a breach of a duty leading to the automatic resignation of that Director. This clarification as to what behaviour is or is not tolerated within the business can help if you find yourself in the unenviable situation of having a rogue Director who cannot see that their actions are damaging the company.