SHAREHOLDERS DISPUTE – FROM PROFITS TO LOSSES

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Statistics show that up to 70% of business partnerships ultimately fail.

Many companies start out with the best of intentions between friends or colleagues, unified by a common goal of making profit.  Inspired by optimistic outlook, the necessity of formal agreements are often overlooked. However, when disputes between partners get out of control, it can turn a profitable business into losses – not just monetary loss, but also loss of reputation.

What are the reasons for failing?

Firstly, doing business with friends or family is risky.  Friends or family members often fail to maintain a separation between business and personal relationships.

Other common reason for failure include:

  • Unequal contributions by the partners. Nobody likes lazy partners!
  • Personality clashes
  • Loss of trust in each other
  • Differing values and visions.

A simple handshake to start a business is simply not good enough.  The sad thing is that when business fails, the relationships between friends or family will also turn sour.

Incorporated Business – Potential Problems

Where business partnership is undertaken via a company structure, it can become more complex due to the division of management (board of directors) and owners (shareholders).  Under our Company Law, owners have no right to manage the company.  Hence the first potential problem is that shareholders have no control.   If the company, controlled by the director, fails to carry out the objectives of the shareholders, what can the shareholders do?

Moreover, if you are a minority shareholder and the company decides to dilute your shares, what can you do?   In a company where there are 2 equal shareholders in 50/50 arrangement, if there is a deadlock, what can be done?

Case Study – Director’s Misconduct

Our Client was one of 2 shareholders in a company incorporated to pursue investment opportunities in Australia. The other shareholder was the sole Director responsible for the daily running of the company.  The Sole Director used his authority to transfer approximately $500,000.00 from the company for his personal purpose over the period of approximately 3 years.  Our client only became aware of it after several years.  Our client was denied access to the company books.  This is a classic case of director’s misconduct.

There were no formal documents in place to enforce a system of checks and balances on the Director’s conduct and to hold him accountable to shareholders. There are no mechanisms in a formal document to displace the Director for misconduct. What can the shareholder do against the director?

Shareholder v Director

As a shareholder, you have certain rights under the Corporations Act.  Where there is director misconduct, you may have resort to the following:

  • Statutory Derivative Actions – in the event where you suspect or have knowledge of possible skullduggery on the part of one or more of the directors, they may be willfully acting in disregard of the duties owed by a director to their company and shareholders. This may entitle you to apply to the Court to sue the directors in the company’s name.
  • Compensation – where the directors, through a breach of their duties have cause the company to experience loss, a claim for compensation may be available from the Court to address this wrong.
  • Account of Profits – where the breach if directors’ duties has caused the directors to make a gain or profit at the company or the shareholders’ expense, you may apply to the Court to strip them of the gains made in breach of their duties.
  • Disqualification – in circumstances where a director has acted in breach of their duties through quite egregious conduct, the Court may use its power to issue the directors with a ban on managing future companies for a certain time.

Shareholder v Shareholder

Where the dispute is between the shareholders themselves, the following remedies may be available:

  • Oppression Remedies – in the event you are in a dispute with either majority or minority shareholders, and that dispute is connected with unfair or oppressive behaviour, you may be able to seek a large variety of remedies including compulsory buy-outs and amendments to the constitution.
  • Winding Up – an extreme remedy in many cases, entailing the placement of the company into liquidation and selling all of its assets and ending with the company’s eventual de-registration. This remedy is sparingly used and reserved for situations where the Court believes that it is not able to operate further as in the case of deadlocks and other more drastic disputes.

Time to Gain Control

Commercial disputes are an intricate and complex area of law, especially in company law.   Experience and knowledge of your lawyer is extremely important.  Deploying effective litigation tactics can help you gain control of a losing situation.

ABOUT THE WRITER

Stephen Mintz joined Tang Law in November 2017 and was admitted at the Supreme Court of Western Australia as Barrister and Solicitor in 2018. Stephen enjoys working in environments that allow him to use all areas of legal knowledge at his disposal to assist and guide clients to develop creative, practical and effective means to achieve their aims.

Stephen has extensive experience in assisting with the provision migration advice in connection with visa applications, as well as, appealing cancelled or refused visas, including, the preparation of relevant documents and submissions for applications for merits review before the Administrative Appeals Tribunal. He has extensive experience in advising clients in the areas of Commercial Law, Criminal Law, and Civil Litigation matters before the Supreme and District Courts of Western Australia, as well as, the Federal Court of Australia.

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