Navigating Directorial Disputes in Private Companies Limited by Share
Disclaimer: This Article is Not Legal Advice
This article aims to provide a basic understanding of company management in the context of Model Articles of Association for Private Companies Limited by Shares ‘Private Limited Companies’. However, please remember that this is not legal advice. Every individual’s situation is different, so it is important to get personalised advice from a qualified legal expert for your particular circumstances. This article is for information only and should not replace professional legal advice.
Introduction:
The incorporation of a Private Limited Company in the UK may typically start with an alignment of visions among the subscribers (the founding partners). However, as the company grows and evolves, differences in management philosophies can emerge, potentially leading to conflicts among directors.
These disagreements can obstruct decision-making processes and adversely impact the company’s operational efficiency and growth trajectory. Addressing these disputes effectively is crucial and often involves a careful examination of the company’s Articles of Association.
The Importance of the Articles of Association:
The Articles of Association are not only fundamental to understanding how the company is run but also how internal disputes within the company can be managed and resolved.
These articles set out the governance framework for the company, detailing the powers and responsibilities of directors as well as the procedures for their appointment and removal. For many Private Limited Companies, the Model Articles of Association are adopted.
Key Provisions in the Model Articles of Association:
The Model Articles incorporate several provisions that can be pivotal in resolving directorial
disputes:
- Article 7: Stipulates that decisions of directors are generally taken by a majority vote at meetings, thereby not requiring unanimity. This provision allows for decision-making even when consensus is not achievable.
- Article 17: Facilitates the appointment of directors through an ordinary resolution of the shareholders, which can be passed either at a general meeting or via written resolutions.
Applying the Model Articles to Resolve Directorial Disputes:
Imagine a scenario where two directors, who are also the sole shareholders of a Private Limited Company, find themselves unable to agree on key business decisions.
If one director holds more than 50% shareholding, they could leverage Article 17 to propose the appointment of an additional director who shares their strategic vision.
With this new appointment, the majority shareholder director can form a new majority on the board. Therefore, these two directors (the newly appointed and the majority shareholder director) would then be able to run the company more effectively, aligning management decisions with their shared strategic outlook in accordance with Article 7 of the Model Articles of Association.
It is crucial that an agreement is in place between the newly appointed director and the company, detailing every aspect of their directorial role, such as through a director’s service agreement. This agreement should clearly outline the director’s responsibilities, obligations, and entitlements to ensure that both parties have a clear understanding of the expectations and legal implications of the role.
Step-by-Step Approach:
- Assessment: Conduct a thorough review of the existing board composition and the shareholding distribution.
- Drafting a Resolution: Prepare an ordinary resolution proposing the appointment of a new director. This resolution should outline the reasons for the appointment and its expected benefits to the company.
- Meeting and Notice Requirements: Comply with the procedural requirements for issuing notices and conducting a shareholders’ meeting or issuing a written resolution.
- Voting and Implementation: Ensure that the vote on the resolution is conducted fairly. If the resolution passes, proceed with the formal appointment of the new director.
- Documentation and Regulatory Compliance: Document the proceedings of the meeting meticulously, including the resolution passed and its outcome. Update the company’s statutory registers and notify the Companies House as required.
Conclusion
Successfully resolving directorial disputes requires a balanced approach that respects legal frameworks while acknowledging the human elements of business operations.
The Model Articles of Association provide mechanisms that, if used judiciously, can facilitate effective resolution of conflicts, allowing the company to focus on growth and success.
It is prudent for directors to seek legal advice to ensure that all actions are justified and executed within the bounds of the Companies Act 2006 and the Articles of Association of the Company, thereby safeguarding the interests of all parties and the company.
By adhering to a structured approach and maintaining high standards of corporate governance, companies can navigate through internal conflicts effectively and maintain their path towards strategic objectives.
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