Dealing with bad blood in your small business – Part 2

Despite everyone’s best intentions, disputes commonly arise when one party feels like the other party is not contributing to the business equally, where one party’s personal circumstances change or where the parties have a different vision for the business.

Try to negotiate a commercial solution

If a dispute does arise, the parties should first consult the company constitution and any shareholders agreement.   If those agreements do not assist in resolving the dispute, the parties should do everything reasonably available to try to negotiate a solution.  Often, that will involve one party buying the other out at a fair or market value.  Reaching a compromise will usually be much cheaper than engaging in a legal dispute to pursue everything to which you think you are entitled.

Negotiations can often be assisted by bringing in independent third parties, such as an independent accountant, valuer or mediator.

Find out your legal options

If the dispute is so intractable that a commercial solution is not possible, the parties should seek legal advice about their rights.  This typically arises where one or all of the directors have been accused of breaching their director’s duties or where no party wants to sell their shares, but instead wants to buy the other or others out.

The Corporations Act 2001 (Cth) provides various rights and remedies to shareholders to deal with this situation, including the right to seek court orders:

(a) to address conduct that is oppressive to a shareholder;

(b) for breach of director’s duties;

(c) for access to company information; or

(d) winding up the company on ‘just and equitable’ grounds.

The courts have extensive powers under the Corporations Act 2001 (Cth) to make orders to resolve disputes between directors, between shareholders or between directors and shareholders, including orders:

(a) that the company or a director or a majority shareholder be restrained from doing a certain act;

(b) that the affairs of the company in the future be regulated in a certain way;

(c) that one shareholder purchase the shares of another shareholder at a price determined by the court;

(d) that the company purchase a shareholder’s shares; and

(e) that the company be wound up and a liquidator appointed.

In practice, these remedies take time and are costly to obtain.  They require a party to commence proceedings in court against either the company or the other shareholders and result in control being taken out of all of the parties’ hands.  Often neither party is happy with the court ordered outcome.

It is, however, important to be aware of the rights and obligations of directors and shareholders and the remedies available to address unfair or improper conduct.  The threat or commencement of proceedings can be a powerful tactic in negotiating a resolution.

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