Disputes within companies are often highly personal and spiteful. There are three areas where, time and again I see what should be easy wins turn to dust. Today – the dangers of people wearing too many hats.
It is common to find people wearing multiple hats – being at the same time a director, shareholder, employee and commercial ‘partner’ (landlord, supplier, customer, distributor, lender, guarantor, etc.).
All is good until a dispute arises, then a price is paid for giving no prior thought to how all those relationships overlap.
Each has its own unique powers/authority and obligations/responsibilities. Although most don’t realise it, directors carry the heaviest burden (shareholders the lightest).
In a dispute, a lawyer would say that each role needs to be handled distinctly. But, of course, few companies use a lawyer during early stages. Instead, they focus on the one problem person, instead of (legally speaking) the three, four, or five problem roles.
Cue a chaotic mini-Brexit
Let its hope you don’t end up in this situation – a senior employee has been caught committing fraud, and given the black bin liner treatment; fired and kicked out on the spot.
He later returns for the scheduled board meeting. In this scenario, he hadn’t been fired as a director and cannot be turned away. The company starts the statutory (slow) process to terminate his directorship.
He then turns up at the shareholders’ meeting called to approve his termination – and he votes against. Not having majority support, he’s let go as a director. But, like Banquo’s Ghost, he keeps reappearing in his role of shareholder as there is no mechanism to force sale of his shares.
Then, that ‘spite’ thing I mentioned above kicks in, and he starts to use his position as a key supplier to the company to make life difficult. Never quite breaking his supplier’s contract, he becomes a one-man awkward squad, never quite crossing the line.
Banquo’s Ghost gains substance. His supplier contract is not linked to any of his other roles, and therefore his fraud cannot automatically be used as a reason to end the supply contract.
Different permutations of the above happen every day. What starts out as a one-day crisis (discovery, summary dismissal, ejection from the building) becomes a year-long grinding battle looking at each of his numerous hats independently and addressing them independently.
What’s to be done? As is so often the case, prevention is hugely easier (and cheaper) than cure.
Each person’s situation is different, and the solution must be tailored but, broadly speaking, think about linking everything by contractual agreement and via the company’s articles of association.
For example, if someone ceases being an employee then their directorship should automatically terminate, and vice versa. If they ceased to be involved with the company, then they must sell their shares back at fair market value (if they leave on good terms) and at face value (usually £1 per share) if they leave as a fabled ‘Bad Leaver’. If they have a commercial relationship with the company, then that contract must build in linkage in the same way as above.
Don’t wait until you have a dispute to find out that you’ve been running an invisible hat shop!
Lord Banquo is a character in Shakespeare’s Macbeth. He is, at first, an ally of Macbeth. After prophesying that Macbeth will become king, the three witches tell Banquo that he will not be king himself, but that his descendants will be.
Later, Macbeth, in his lust for power sees Banquo as a threat and has him murdered by three hired assassins. Banquo’s Ghost returns in a later scene, causing Macbeth to react with alarm in public during a feast.
James O’Connell, Partner (Commercial Team), Mayo Wynne Baxter
T: 01273 223209