Occasionally business partners do not shape up to be the dynamic market leader they appear to be. Whilst you are diligently growing your business, your business partner may be failing to achieve, absent or at worst fraudulent.
If the relationship has broken down, you need to know where you stand, what are your rights and what is the best strategy to extricate yourself from such a business partner.
How is the Relationship Governed?
Your rights and obligations are largely determined by the agreements you have in place and the role of the difficult partner. The original bargain struck between business partners should be documented as an agreement, such as a Shareholders’ Agreement, and any registered company should have a Constitution.
Officers of company also have obligations to the company under the Corporations Act 2001 (Cth) sections 180 – 184, a fiduciary duty to the Company and various other statutory obligations to institutions for example the Australian Taxation Office.
Even with thoughtful planning and documentation, many of our clients find that the relationship breaks down irretrievably yet the rogue remains a director and/or shareholder of the Company. The rogue may also be an employee or a consultant for the company, adding a further layer of complication. In this way, the rogue can still create considerable headaches by exercising shareholder rights and possibly claiming shareholder oppression.
A common error is to assume that when mischief is discovered, the managing director can demand that the rogue transfer his shares in the company and force the rogue to resign in disgrace. The reality is, even if you are convinced of the rogue’s misdeeds and poor contribution to the company, the rogue is not required to sell his shares, unless there is a specific provision in the company’s Constitution permitting acquisition after particular conditions are met. There is the ability to remove a director within the Replaceable Rules, however this will not resolve the shareholder dispute and provide a complete answer to the dispute.
If you are registering a business with a partner, who will be a director, consider:
- Discussing the relationship with your partner to reach an agreement on the key terms of the arrangement including what happens on dissolution of the relationship, how can shareholders sell their shares? This must be done before you commence your business with your partner. In our experience, the more challenging director deadlocks generally arise when the parties fail to discuss the terms and reach a clear agreement in the first place;
- Create a company Constitution;
- Document the agreement between any shareholders;
- Document the agreement with any employees or contractors; and
- Seek legal advice. A solicitor can assist you to agree on key terms, protect the party’s position and consider issues you hope will never arise. Although this requires some initial costs upfront, it will greatly impact on your ability to terminate the relationship later if necessary.
If you are concerned that you have not properly documented your new or existing business arrangement or your relationship with your business partner has broken down, we wold love to help.