Q&A - What happens to the business when co-Directors fall out?

Q: I am a director and shareholder of a small local company.  My friend and I set up the business and we each have 50% of the shares.  Until recently everything was working well, but we have had a major disagreement and now neither of us wants to continue working with the other. What can we do?

A: The first thing to look at is what the articles of association of the company say, along with whether or not you and your friend had a written shareholders' agreement drawn up when you started the company.  Usually a shareholders' agreement will set out how and when each shareholder can offer to sell their shareholding and resign from the company, and the mechanism by which this should happen.  A properly drafted shareholders' agreement will set out the means by which your shares should be valued and how they are to be offered for sale to the other shareholders.

In your situation, if reconciliation is not an option you both need to consider the possible closure of the business or which of you will continue with the business and who will sell to the other.  You also need to consider how you will split the assets (such as equipment and stock), the profits (or losses), and other trading liabilities.  These are likely to be difficult issues and may prove controversial, but it is usually possible to arrange a reasonably amicable split, and a carefully drafted settlement agreement should assist in recording what has been agreed.

Company disputes such as this are often fraught with difficulties, and as a director you must be very careful to avoid breaching your fiduciary duties to the company. If necessary you should seek legal advice.