How A Shareholder Agreement Can Save You More Than Just Money
You may have been on exactly the same page as your business partner when you started your company, but what happens further down the track when your opinions are no longer aligned? Personal and financial circumstances can change at any moment and these can often affect a partner’s attitude towards the business. And without the proper procedures in place, things can get heated, emotional and messy. So how can you avoid such disputes and safeguard your relationship as well as your business?
Talk to your business partner
Communication is key when it comes to running a business. But with so much to think about on a daily basis, it’s easy to overlook the importance of clear communication with your business partner. But in order to ensure that you have the same vision for the company, you must talk to one another.
Make sure you discuss your short term goals as well as your long term vision for the company. Doing so regularly will help make sure that you stay on the same page. Or, if you do eventually want to go in different directions, both parties will be able to understand this early on which will help minimise any disputes or ill-feeling.
Create a shareholders agreement
A shareholder agreement is not compulsory but it is highly recommended. Any company can create a shareholders agreement to govern matters outside of the company’s constitution. This can allow you to tailor a set of rules specific to your business, your relationship and your circumstances. It can cover everything from business arrangements, obligations and liabilities to responsibilities, duties and exit strategies.
Creating a shareholders agreement before things turn sour is essential. And although you are not under any legal obligation to create one, making one at the inception of your company is best practice. You can also update your shareholders agreement on a regular basis should you wish to do so, provided that all parties agree to the changes.
What to do if one person wants out?
Whether it’s an amicable end to a good business partnership or a sour separation, there are several different ways of ending a business relationship. Some are, of course, better than others.
The best way to end the relationship is to come to a negotiated solution. This means sitting down with your business partner, preferably with legal professionals, and agreeing on certain terms in which one partner can buy the other out. This results in a clean and amicable separation which will hopefully allow you and your (ex) business partner to remain friends.
Refer to your shareholders agreement
If you’ve been smart, you will already have an exit or buy-out procedure in place as part of your shareholders agreement. This will make the process as smooth as possible and will eliminate any upsets as the conditions and process will have been agreed upon previously by all parties.
Proving oppressive conduct
In the absence of a shareholders agreement or a provision in the company’s constitution, a shareholder cannot be forced to sell their shares (and cannot be ordered to do so by the court) unless oppression or oppressive conduct can be proven.
Some examples of oppressive conduct as per the Corporations Act are:
- Refusing to provide access to information about the company’s affairs
- Using company funds for personal expenditure or other improper purposes
- Allocating payment of dividends to shareholders unfairly
- Excessive remuneration paid to the person in control of the company
There are many other actions that can be cited as oppressive conduct. And once these are proven and established, a court can order the sale of shares.
As per section 461 of the Corporations Act, a court may order the liquidation of a company if the court believes that it would be “just and equitable” to do so. This is generally the course of action taken when a court believes that the dispute between partners is so serious that it could not be resolved in any other way.
Contact a commercial lawyer
Whatever action you choose to take, seeking legal advice is essential. Trying to do it all yourself could have some serious implications and could cost you a lot more than legal fees.
The ideal scenario is that you and your business partner approach a commercial lawyer to discuss your legal options together. However, if this is simply not possible for whatever reason, you should talk to a lawyer yourself to find out exactly what your rights and obligations are. This will help you understand your situation a little better and will ensure that your next decision is the right one for you and your business.
For legal advice from a team of commercial law experts, contact Atkinson Vinden Lawyers today to set up a consultation.