Directors in deadlock

• Directors’ decisions

  Have a look at your articles on how directors are to take decisions. Things to consider include:

  1. – Is a unanimous decision required for particular matters?
  2. – Is there a provision for the company only having one director?
  3. – How many votes does each director have?
  4. – Does the chairperson have a casting vote in the event of a deadlock?
  5. – In the event of a conflict, is there a mechanism for the quorum of  the directors’ meeting being just one non-conflicted director?
  6. – Is a majority required (which clearly will not work with just two directors)?

  

   

• Shareholders’ rights

  Many companies have one class of shares with equal rights for shareholders, but creating different classes with different rights may enable the appointment of additional directors or increased voting rights

• Chairperson’s role

  It is very unlikely that a deadlock comes out of the blue. A strong board and chair should be able to pre-empt a disgruntled director, ensuring grievance and frustrations are openly aired and discussed before the relationship has materially broken down to such an extent that a deadlock situation arises

• Employment contracts

  How robust are your employment contracts? Do they work in conjunction with your articles (and shareholder agreement, if you have one)? To what extent do they anticipate the processes for what will happen in any given scenario?

  They should also consider in advance, the possibility of a parting of the ways: what non-competes/restrictive covenants are in place; what are the confidentiality provisions to protect the business; is there a requirement to resign from a directorship if an employment relationship has ended?

• Cost considerations

  Both financial and emotional capital will be spent in seeking to untangle the deadlock

  The only resolution may be the buy-out of the disgruntled co-shareholder/director by the company or the other shareholder(s). Emotions can run high, particularly when one party’s interests no longer appear to be aligned with the others and/or the business

  There is potential for damaging publicity to the company and for your employees to be destabilised which may well affect their productivity and well-being, particularly if not addressed: employees, customers and key stakeholders may all need to be reassured if a co-founder publicly moves on

• Avoiding court action

  Although there are legal mechanisms under the Companies Acts which can be used to resolve deadlocked companies, these are expensive and time consuming and may not be available in every circumstance

  Planning for an independent third party to be appointed to assist in decision making, or for the appointment of an expert third party to adjudicate on decision making, may be appropriate in the short term to ensure day-to-day decisions can still be taken. However, these measures are also costly, potentially disruptive to the efficient running of the business and do little to address the underlying fundamental problem directly. Which brings us back to our pre-nup…

• Shareholders’ Agreement

  Addressing these potential uncertainties head on in a shareholders agreement will provide clarity for all parties, and pre-emptively set out frameworks and mechanisms for resolving disputes between co-founders/shareholder directors

  This can help to protect your business, so it continues to operate effectively when it does encounter those bumps in the road

Shareholder agreements are like a pre-nuptial for your business. Whilst it is not a legal requirement to have one, it makes dealing with any future falling out much easier to navigate

If you’d like to find out more on how we can help, please get in touch