Healthy debate between business partners and company officers is not uncommon, however disagreements that turn into protracted conflict or result in a stalemate can have devastating effects on an otherwise thriving business.
Typical disputes between business and company members may concern:
- the general management and daily operations of the business or company including the allocation of authority, range of products or services to be offered, plans for expansion, administration and choice of service providers;
employment and recruitment issues;
- employment and recruitment issues;
- the appointment, remuneration and / or removal of partners or company officers;
- the provision of capital, sourcing of finance, personal guarantees and the allocation of risk;
- the distribution of profits;
- financial and taxation issues;
- minority shareholder disputes.
Minimising partnership and company disputes
Disagreements arise for many reasons, even from circumstances that do not start off as a dispute. For example, the unexpected injury or ill health of a business partner, where there is no pre-existing agreement to deal with such an event, causes uncertainty and may result in a dispute with the remaining partner/s an /or their family members.
An effective way to minimise disputes between business partners and company members is to have a partnership or shareholder agreement professionally drafted from the beginning of the relationship.
A partnership or shareholder agreement is a private contract made between partners or company shareholders that sets out their respective rights, obligations and liabilities. The agreement should contemplate various unforeseen events and set out processes for dealing with these matters and for settling disputes.
Typical terms of a shareholder agreement include:
- Alternative dispute resolution clauses that require members to make a genuine attempt to resolve matters or to participate in mediation or conciliation before commencing legal proceedings.
- Deadlock breakers to deal with circumstances where shareholders cannot agree on the management of the company such as:
- a shotgun clause, allowing a shareholder to break a deadlock by purchasing the shares of the other shareholder at a nominated price;
- a chairman clause, allowing one shareholder to become the chairman with a casting vote; or
- a liquidation clause, providing for the company to be voluntarily wound up if the deadlock continues for a set period of time.
- Pre-emptive rights which impose restrictions on the transfer of shares.
- Mandatory sale events stipulating specific events that trigger a mandatory sale of shares in certain circumstances (for example, if a director dies, resigns or files for personal bankruptcy).
- Share valuation methods to value shares in relation to pre-emptive rights and mandatory sale events.
- Conflict and non-compete clauses to prevent shareholders from investing in or engaging with competing businesses.
Partnership agreements may contain similar provisions.
Resolving company disputes
Whether or not a partnership or shareholder agreement is in place, it is important for all parties to work towards a commercial resolution of a dispute before it turns into protracted proceedings that damage relationships and the profitability and reputation of the business.
A range of options are available to settle disputes between partners and company members. In most instances a dispute can be resolved with considered communication and negotiation between the parties and/or their representatives. When negotiating a settlement, it is important to have a clear understanding of your legal rights and obligations under the laws governing partnerships and companies.
The Corporations Act 2001 (Cth) sets out the framework for the conduct of companies and directors in Australia. The Act provides a range of remedies for a breach of directors’ duties or if the company’s affairs have been oppressive, unfairly prejudicial or contrary to the interests of its members. If the parties to a dispute are intractable and the relationship has completely broken down, the Act also facilitates an application for the company to be wound up.
Being involved in a legal dispute exhausts valuable time and resources of a business entity and its members. A commercial lawyer can assist the parties to reach a fair and practical resolution to provide an optimum outcome for those involved and to minimise disruption and loss to the business.