A shareholder agreement is a contract made between two or more shareholders. It outlines the relationship between a company's directors and its shareholders. It can cover matters such as new shares and sales of existing shares, the directors' duties, codes of conduct and perhaps, most importantly, dispute resolution. For new businesses and startups, it's often overlooked as it's not a legal requirement – that being said, at Sajen Legal we urge you strongly to invest now in this important document and save the heartache later on.
Let's run through a familiar scenario: You and a friend have a great business idea, you've done some due diligence and a tonne of research, you both got a modest amount of capital to inject into the business idea. One of you has the know-how to get the business rolling and because you're both passionate about the project, you're willing to sweat, bleed and cry to see it become a success. Eventually, over the years your blood, sweat and tears pay off and your business is working. It's been a bit of a slog but anything worth doing is worth the sacrifice, right? It's not quite a roaring success, but with some investment back into the business you know it will be humming...
Your friend, now business partner, seemingly out of the blue, wants to instead open up the business to investors and withdraw profits.
People and times change. Priorities shift, life happens. Navigating these waters is made so, so, so much easier with a shareholder agreement as it sets a precedent for the 'what-ifs' of owning a business with a shareholder. This in turn allows for a swift dispute resolution that doesn't eat into the company's margins.
Common Causes of Shareholder Disputes
There are many causes of disputes in businesses. Your business is unique as are the conflicts that may arise. The below offers insights into the more commonplace disputes:
- Capital v. Sweat Investment. Many ventures are launched with one partner providing the seed capital (cash) and one investing 'sweat equity' (the know-how). Sweat equity can be tricky to place a value on. As the business grows and becomes successful the capital investor may want to see a return of financial investment whilst the 'Sweat Investor' may believe their share has increased and their input into the business should increase.
- Investment v. Disbursement. This is similar to the above scenario. Some changes are driven by life events which can impact strategic preferences. One partner may wish to distribute funds to the shareholders – for example, to deal with a life emergency or life change – while another with a longer time horizon may be keen to invest for growth.
- Retirement or Departure. Even where relations have remained positive, a dispute can arise in the absence of good financial and corporate planning. If one partner wishes to depart the venture but no provisions have been made to buy him out, then they may see no other option but to dismantle the company, even if the other partner strongly wishes to continue successful operations.
- Trust Breakdown. Too frequently disputes among shareholders arise from a breakdown in relations. One partner may feel he is working harder and more effectively than the other. The parties may suspect that they are no longer working towards a common goal, or are even purposefully working against each other. Questions of transparency and the reliability of financial and other corporate information can become matters of sharp dispute.
Whatever the reason, when there is a breakdown in communication among the shareholders, legal action can follow. In the absence of a Shareholder Agreement, this can result in two outcomes: negotiated settlement or court proceedings.
Resolving Shareholder Disputes without an agreement is possible.
Sajen Legal has become an authority on resolving Shareholder Disputes. Our approach has always been to achieve a cordial and early settlement wherever possible. We retain the capacity and expertise for tactful negotiation, of course, but our experience has taught us that effective dispute resolution also means cost efficiency for the company.
Shareholder Dispute Resolution
Shareholder Dispute ending in Negotiated Settlement:
This option is generally preferred, but it has potential drawbacks. A negotiated settlement involves compromise, there is rarely an "Aha, I won" moment. It is also likely to result in a lower financial return. However, a negotiated settlement is often preferable because it results in less risk and is much cheaper than going to court.
Shareholder Dispute ending in Court Proceedings:
The Corporations Act of 2001 provides an avenue for shareholder disputes to be taken to court. Usually, this entails one party accusing the other of 'breaching director's duties' and/or engaging in 'oppressive conduct'.' In the case of alleged fraud, mismanagement or self-dealing, a party may bring a statutory derivative action – that is, a claim brought on behalf of the corporation on the basis that directors have failed to exercise their duty for the benefit of all shareholders. Remedies sought can include injunctions, specific personal remedies or, in extremis, the winding up of the company.
The venue for any litigation is determined by the scale, complexity and location of the company and its operations.
The Long and Short of Shareholder Agreements and Shareholder Disputes
All business partners start out with the best intentions. A shareholder agreement simply puts some rules and regulations in place to minimise the damage of a dispute. It's not necessary, sure, but it's very useful. It can be an awkward conversation to have with your business partners at a time when everything is exciting and everyone is optimistic, and it can be an expense that not everyone is willing to commit to. But, at Sajen Legal we've become familiar with more than a few shareholders who wish that they had secured this vital agreement at the outset.
The team at Sajen legal bring extensive experience in both amicable and hostile negotiated processes and incorporate litigation at all levels. Where it may come to a court proceeding, it is vital to have a robust and experienced team hard at work on your behalf, while always open to settlement opportunities that may arise.
No one likes a shareholder dispute. The experienced team at Sajen Legal works hard to provide our clients with the full support and information they need to manage a difficult situation with clarity and confidence. The ultimate goal is to achieve the best solution for our clients in the most cost-effective and efficient way possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.