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Shareholder Disputes – When Business Owners Fall Out

Most businesses are started by friends or family co-operating to build a successful venture.  Whether it is two friends in a 50/50 partnership or a family working together in the family company, most businesses have multiple owners.

Unfortunately, just like many marriages end in divorce, many businesses with multiple owners end up in dispute over the management of the business.   The usual human vices of money, power, jealousy, or misunderstanding can undermine and devalue what are otherwise profitable businesses.

Disputes between business owners may be described as shareholder disputes or director disputes, if the relevant entity is a company.  Or they may be partnership disputes, if the business is a partnership.  They may even be trust or beneficiary disputes, if the entity is a trust.  But they all have similar underlying issues – a dispute between the owners of a business.

While our previous article dealt with how to avoid these kind of disputes (https://tauruslawyers.com.au/disputes-between-business-owners/) this article deals with how to manage disputes when they arise.

Negotiated Outcomes

The best outcome will always be a negotiated solution that allows one party to exit the business and be paid fair value for their interest.  But it may not be possible to reach agreement on the exit – often there is significant disagreement and mudslinging on who has done the wrong thing, who should exit, the terms of the exit and how much they should be paid.

A lawyer may be approached at that point and attempt to broker a resolution.  Unless the parties have a well drafted shareholder agreement (or partnership agreement) there may be no way for one party to force the other party to give up their shares.

We have dealt with owners who have had long-running disagreements with their partners but have been forced to put up with them for years.

Court Outcomes

If you can’t negotiate an exit, you will have no choice but to go to Court for a solution.  Generally that is done by issuing proceedings alleging the other party is:

  1. Breaching the shareholder agreement, constitution or other agreement;
  2. Breaching directors’ duties or fiduciary duties in general law and/or the Corporations Act;
  3. Engaging in “oppressive conduct” under the Corporations Act.

All owners and managers must comply with any shareholder agreement (or partnership agreement) and the company constitution in governing the company.  Failure to comply may render decisions invalid or individuals liable for damages.

All directors are also required to act with reasonable care and diligence, for a proper purpose and in the best interests of the company.  They are also prohibited from using company resources and information for their own personal gain or the benefit of someone else.  These duties overlap with the oppressive conduct requirements set out below.

To prove oppressive conduct it is necessary to show the actions of the other party are either contrary to the interests of the shareholders as a whole or oppressive/unfairly prejudicial/unfairly discriminatory towards a shareholder or class of shareholders.  Common examples of oppressive conduct include:

  1. Unfair payment or refusal of payment of dividends;
  2. Refusing access to financial information about the company;
  3. Use of company funds for payment of personal expenses;
  4. Exclusion from company accounts, meetings or management of the company; and
  5. Paying excessive bonuses or remuneration.

It is important to remember that poor management is not the same as oppression.   There must be more than a breakdown in relationship or a disagreement about how to manage the business. The Court must be satisfied that one party has taken one or more actions in an unfair or improper way to cause harm to other owners.

If oppression is proven, the Court has very wide powers to make orders:

  1. Winding up the company;
  2. Appointing a receiver or a receiver and manager of the property of the company;
  3. Regulating the conduct of affairs of the company in the future;
  4. For the purchase of the shares of any shareholders by other shareholders;
  5. That a person is to restrain from engaging in specified conduct or do a specified act or thing;
  6. Modifying or repealing the constitution of the company.

Generally, litigation between owners is settled well ahead of any final Court hearing.  The most common outcome is someone is bought out of the business.  So while the parties may focus on who was right and who was wrong, often the most important issue is determining the value of the share in the company.  Getting an independent valuation early in the process is often the best way of securing an early settlement.

Conclusion

Disputes between business owners are common, stressful and damaging.

Where an amicable resolution cannot be reached, the Court have strong powers to intervene and address illegal behaviour.   The Court process is normally enough to push the parties to negotiate a resolution involving one party buying out the other.

A skilled lawyer engaged early in the dispute can use tactical litigation (or the threat of litigation) to maximise the chance of a successful resolution so the parties can get on with their lives and running a successful business.

If you need assistance with a dispute, or to understand your obligations as a director, please contact a member of Taurus Legal Management on (03) 9481 2000 or at info@tauruslawyers.com.au.

Posted by Taurus Legal Management