How to Deal with Financial Disputes Between Directors and Shareholders

Financial disputes between directors and shareholders can derail even the most promising business. Whether it’s disagreement over dividend payments, reinvestment strategies, or company spending, unresolved conflict can harm operations, morale, and even the company’s reputation.

In the UK, directors have legal duties under the Companies Act 2006, and shareholders have rights set out in the company’s Articles of Association and any shareholders’ agreement. When financial disagreements arise, it’s important to act promptly, fairly, and within the law.

This post explores the main causes of financial disputes, the legal framework around them, practical steps for resolution, and ways to prevent them in the first place.

Common Causes of Financial Disputes

Financial disputes between directors and shareholders can occur in companies of any size from small owner-managed businesses to large corporates. While every case has its own dynamics, several recurring themes tend to cause friction:

• Dividend Disagreements – Shareholders often expect a return on their investment through dividends, while directors may prefer to reinvest profits into the business for growth. UK company law gives directors discretion on declaring dividends (provided the company has sufficient distributable profits), which can lead to frustration for income-focused shareholders.
  More on dividend rules: GOV.UK – Pay dividends.
• Salary and Bonus Disputes – Disputes can arise over directors’ remuneration, especially if business performance is weak or if shareholders perceive that pay packages are disproportionate to results.
• Capital Expenditure Decisions – Disagreement on whether to commit funds to major purchases, expansion projects, or acquisitions can divide boards and investors. Directors have a duty under the Companies Act 2006 to act in the company’s best interests but stakeholders may disagree on what that looks like in practice.
• Perceived Misuse of Company Funds – Allegations of unauthorised spending, poor financial control, or misuse of corporate assets are among the most serious triggers of disputes. These can quickly escalate into formal investigations or legal action.
• Valuation Disagreements – Particularly relevant during buyouts, shareholder exits, or external investment rounds, disputes over how the business or its shares are valued can derail negotiations.
• Exit or Succession Planning – Clashes often occur over the timing, strategy, or terms of selling the business or transferring ownership, especially in family-run or long-established companies.

Tip: Many of these disputes can be mitigated by having a robust Shareholders’ Agreement in place from the outset, clearly defining decision-making processes, profit distribution policies, and dispute resolution mechanisms. The Institute of Directors and the Chartered Governance Institute UK & Ireland provide guidance on creating effective governance structures.

Legal Duties and Rights

In the UK, directors and shareholders operate under clearly defined legal frameworks, but their roles and powers differ significantly. Understanding these boundaries is crucial for resolving and avoiding financial disputes.

• Directors’ Duties – Under the Companies Act 2006 – Directors’ Duties, directors must act in the best interests of the company as a whole, rather than serving their own personal interests or favouring particular shareholders. Core duties include:
  • Promoting the success of the company for the benefit of its members.
  • Exercising independent judgment.
  • Exercising reasonable care, skill, and diligence.
  • Avoiding conflicts of interest.
  • Declaring any interest in proposed transactions or arrangements.
• Shareholders’ Rights – Shareholders are entitled to certain rights under UK law, including:
  • Receiving dividends (if declared by directors).
  • Inspecting certain company records, such as the register of members.
  • Attending and voting at general meetings on key company decisions, such as changes to the Articles of Association or approval of major transactions.

It’s important to note that shareholders do not manage the day-to-day operations of the company that responsibility lies with the directors. However, shareholders can influence the strategic direction of the business through their voting rights, shareholders’ agreements, and (in some cases) statutory powers to remove directors.

For more detail on shareholder powers, see: GOV.UK – Running a Limited Company and Companies Act 2006 – Part 13: Resolutions and Meetings.