Going into business with family and friends? What could possibly go wrong!

Starting a business with family members or friends may seem like a good idea. But what happens when the gloss wears off? As shareholders with a financial interest, the fall out can be costly. Caroline Callegari, Associate Principal and Head of our Disputes & Litigation team explains.

Introduction

Too often, we hear the phrase, “but it was all good until” in the context of disputes between shareholders of a private and usually friend/family-owned company. It usually comes after we ask whether or not there is a Shareholders Agreement in place that can be referred to when providing advice on the dispute. More often than not, the answer is no! The shareholders started out as friends and didn’t think they would need one.

Unfortunately, this is a common mistake and usually leads to angst and arguments when the parties find themselves no longer agreeing on how the company should be run or how to resolve the dispute.

Advantages of a Shareholders Agreement

Our advice to customers when starting a new business is to have  a Shareholders Agreement in place from the outset. It is much easier to set the ground rules at the beginning. In this regard, Sharrock Pitman Legal’s commercial law team headed, by an Accredited Specialist in Commercial Law, is here to help.  If you are starting a new venture and want some protection in case things go “pear shaped”, contact our commercial lawyers for advice on a Shareholders Agreement.

That being said, however, even with a detailed Shareholders Agreement in place, parties can still find themselves in dispute and, in the worst case scenario, in Court. 

In most cases where there is a shareholder’s dispute it can be resolved through effective communication and discussions beforehand involving lawyers to help highlight the issues; the duties of each member of the Company; and the risks to the business of prolonged disagreement. Our Disputes & Litigation team has practical experience in guiding you through the dispute and helping you find solutions that will result in you and the other shareholders getting things back in order and everyone again working towards the same goal.

When a dispute cannot be resolved

Sometimes, however, the dispute cannot be resolved, or the actions of one party are just so serious and contrary to your interests as a shareholder and the company as a whole, that Court proceedings cannot be avoided.  

Court proceedings can take various forms but is usually in the form of a Shareholder’s Oppression Action under Section 232 of the Corporations Act 2001 (C’th).  This section provides as follows:

 The Court may make an order under section 233 if:

a) the conduct of a company's affairs; or

b) an actual or proposed act or omission by or on behalf of a company; or

c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

d) contrary to the interests of the members as a whole; or

e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

The remedies available are wide and varied. But usually, one or more shareholders is asking the Court to find that a certain action shall take place or be stopped, or are seeking an order that they should no longer be involved in the affairs of the company and that they should sell their shares at an appropriate amount to the remaining shareholders as a means of resolving the dispute.

So, what is oppressive conduct?

It is not a simple disagreement on how to run the company.  The conduct has to be more serious than that. It must be conduct which is unjust or commercially unfair, such that it prejudices or causes detriment to a minority shareholder.  

Oppressive conduct can include:

  • Exclusion from management
  • Refusal to provide information and documentation
  • Making decisions that favour someone personally and which is unfairly prejudicial to the other shareholders, and can include diverting business to a related entity
  • Failing to take action
  • Oppressive conduct at board meetings or the refusal to have the same
  • One person managing the affairs of the company without proper oversight and decision making
  • Misuse of company funds
  • Continuous deadlocks resulting in the inability to advance the interests of the company
  • Improper dealings with shares or unfair transfers of shares or issuing of new shares
  • Breach of director duties

It is a fairly high bar to prove oppressive conduct, as it ultimately involves the Court balancing the prejudice or detriment suffered by the shareholder against the benefit provided to the company as a whole.

Oppression proceedings should be seen as a means of last resort. Not only can they be difficult to prove, but they can be costly and time consuming and usually result in the breakdown of what may have originally been a close friendship or family connection.

How Sharrock Pitman Legal can help

If you are involved in a business and find yourself saying “but it was all good until” – contact a member of our litigation team for guidance and assistance. From our experience, the sooner steps can be taken to get things back on track, the better for all involved.

Please do not hesitate to contact us on 1300205 506 or email litigation@sharrockpitman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

For further information contact  
Caroline Callegari

Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324.

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