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Shareholder Disputes: Conflict Resolution Between Two Business Owners

Commercial Law

Atkinson Vinden regularly assists business owners in conflict with one another. Sometimes the issues can be resolved; sometimes court intervention is needed.

Many small and medium-sized businesses are run like partnerships between individuals, despite being set up in a Pty Limited company.  Oftentimes shareholders are also directors who are also the senior employees of the company, and these individuals rather than the company, are the key generators of the goodwill and revenue of the business.

An arrangement like this is a common and effective way of doing business, so long as the individuals involved are getting along and cooperating.  However, where the individuals involved stop cooperating, it can be a complete disaster, as the company can stop functioning effectively altogether. Bitterness can boil over to all aspects of the business, with all trust lost, and dysfunction affecting staff relationships. These issues can lead to the demise of any business, no matter how its underlying potential may be.

Relationships can breakdown suddenly or gradually.  Often it can arise from a sense that a particular individual is not pulling their weight, or has a vision of the future of the company that is incompatible with the vision of the other individuals.  Sometimes it is prompted by a catastrophic life event (health issues with one individual, or even one individual’s wife/husband/child).  In any event, it pays to be prepared for the possibility, and to be aware of what your options might be if such a disaster arises.

Entering A Shareholders Agreement

Prevention is the better part of cure, and for this reason, having the right documents in place before problems arise is crucial. A good shareholders agreement should incorporate proper dispute resolution mechanisms (including, as a last resort, a buy-out mechanism) which, if exercisable in your particular circumstances, may place you in a position to avoid a dispute altogether. Shareholders agreements are often entered into in a tokenistic way, without a close consideration of what is wanted or needed in a specific instance, or they may not be entered into at all. Such casual attitudes reflect a lack of understanding of how important this document is.

A shareholders agreement alone is not sufficient.  You will need documentation in place to cover each role performed by an individual: this will include their role as shareholder, as director and as employee.  In a ‘partnership’ style company of the nature described above, these roles will be inextricably linked, and the documentation should be drafted accordingly. However even a broad buy-out mechanism in an effective shareholders agreement will not be exercisable in every instance.  Sometimes it is necessary to seek the intervention of the court to force an outcome.

What can the court do to help?

The Supreme Court has the power to wind a company up (or, more relevantly, order a buy-out of one party or another), where it is “just and equitable” to do so.

The Court is likely to exercise this power where it is satisfied that there has been a breakdown of relationships between director/shareholders.  When assessing the breakdown of a relationship in the company, the court will look at various factors.  These will include the following:

  • When there has been an irretrievable relationship breakdown between the people in control of the company. This is to the point that the directors cannot deal with the day to day management of the company.
  • Where there was a personal relationship involving mutual confidence, but the confidence has broken down to the point where it would be futile to continue working together.
  • A breakdown of relations or loss of confidence amongst members, as it frustrates the commercial operations. However, an applicant responsible for that breakdown of the relationship may be less likely granted relief under the application, although not an absolute bar.
  • A director of the company making personal payments from the company and misdescribing those payments in the company’s accounts and records.

This list is not exhaustive and it is not necessary to “tick off” each of these points.  However, it serves in providing an indication of the sort of scenarios where a court will assess the breakdown of a relationship, and then impose orders in accordance with those findings.

In taking any action to ‘push’ a shareholder out, you may be accused of engaging in oppressive conduct.  Steps should not be taken in this direction without first seeking legal advice.

If you find yourself in a brewing partnership disagreement, it might be time to sit down with one of our Disputes Team to see whether urgent intervention is needed, and what that intervention might look like.