Feb 24

The Board of Directors cannot agree anything

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

A guide for directors: what you should know before accepting the appointment.

This is article 3 from a series of 10 written by Jonathan Mortimer, a Dispute Resolution Partner at Raworths.  The guide is written from the viewpoint of where things may become contentious and involve legal proceedings. It presents a snapshot of the some of the legal issues which impact upon directors.  It is not a substitute for taking specific legal advice on a particular set of circumstances.

3. The board of directors cannot agree anything

The Board of Directors is ordinarily the engine room of the company.

Almost all of the decisions of the company are made by the Board either by a majority or sometimes a unanimous vote.  Directors are individuals and like any relationship, there can be ups and downs.

For example:

• the directors come from different specialist areas – for example sales and finance, and as such look at problems from a different perspective.
• one director is more entrepreneurial and the other very cautious.

These differences can manifest themselves in smaller companies where there may only be two directors both owning the same number of shares.  If agreement cannot be reached, the difficult decisions are not taken, growth and profits may stall and ultimately resentment steps in.  As a result, a deadlock company is created – a company which appears to be functioning but in fact only going through the motions.

How can such problems be avoided in the first place?

The key is to have your paper work in order from the start.

Ensure that the directors’ service agreements spell out what is expected of each director, make sure the articles of association are fit for purpose and most importantly ensure that there is a shareholders agreement in place.

A shareholders agreement is a private contract between the shareholders who are usually some or all of the directors and will set out how the expectations of the company will be met in practice and also provide a mechanism for resolving any serious conflict between the directors.

In the absence of the paperwork helping, if the relationship is thought to be rescuable then there are a number of steps which can be taken.  For example:

• Appoint more and an uneven number of directors to help the decision making.
• Appoint a non-executive director who may be able to advise on a way through for the directors.
• Appoint an independent and trained mediator to try and save the relationship.

If the relationship cannot be saved, then a separation may be the only suitable way to proceed.

A separation can be achieved by three possible options.

• The company buys back the shares of a director who is leaving the company subject to strict rules as to the company having sufficient profits to do so.
• The remaining director to agree to buy the shares of the other subject to agreeing an appropriate mechanism to agree the value of the company.
• Seek a third party buyer for the outgoing director’s shares although that would usually require the agreement of the remaining director.

If none of these are possible the equivalent of a formal divorce may be required with the company being disbanded and the assets distributed amongst the shareholders.  In order to do so, one party would need to apply to the Court for the company to be wound up on just and equitable grounds relying upon the deadlock of the parties. If the Court felt there was no realistic alternative, the court will impose the drastic end to the company.

As with all relationships, it may be worthwhile to consider if the grass really is greener and embrace instead the principle that robust debates amongst directors are in fact healthy, productive and lead to good governance.

A guide for directors: What you should know before accepting the appointment.

Links to other articles in the full series can be found here when they are published:

1. You have been appointed – but what kind of director are you?
2. The top 5 things directors do wrong – including the consequences
3. The Board of Directors cannot agree anything
4. Shareholders – the director’s ultimate master
5. Directors’ loan accounts – the best overdraft you can get?
6. Personal liability – so much for limited liability
7. Becoming a non-executive director – the risk free option?
8. Wrongful trading – the risks facing directors when the company is insolvent
9. The wound-up company – it’s not all over yet for directors
10. The phoenix that rises from the ashes – the company which refuses to die

Jonathan Mortimer has significant experience dealing with contentious company matters including the issues covered in this guide.   Jonathan can be contacted by email at jonathan.mortimer@raworths.co.uk or telephone 01423 566 666

Published on 20 February 2024