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Bad blood: What to do when business relationships fail

Relationships end and friendships fail, it’s a sad fact of life. But what options are there when a relationship between business shareholders is irreconcilably damaged? 

At the commencement of a business, it can seem an unlikely scenario to the excited owners working to build something together, that they may later find they have different ideas about many issues that have soured their relationships and possibly led to bitter feuds. Too often, that lack of foresight leads to the demise of partnerships, friendships and sometimes the business itself.

It’s a fact of life that common sense sometimes gives way to the excitement and emotion that goes into creating a business and as a result proper planning around the business structure can be overlooked.

Businesses that commence operation without giving due consideration to an appropriate Shareholders Agreement do so at their own risk and are setting themselves up for great challenges to owners and their business more broadly.

However, that’s cold comfort for those people who find themselves in irreconcilable conflicts with a fellow shareholder, and begs the question: what options are there when a relationship between shareholders is irreconcilably damaged?

Conflict between shareholders that goes beyond the daily trials of running a business manifests itself in a number of ways. One of the most prevalent, and most damaging ways it presents, is through shareholder oppression.

When shareholder oppression has been found to occur, Australian courts are empowered to order a variety of actions to resolve the conflict. These powers mean that shareholder oppression is one of the most powerful legal means available to resolve an otherwise unresolvable conflict between shareholders.

What is shareholder oppression?

Broadly speaking, ‘shareholder oppression’ can be used to describe any number of issues within the conduct of a business, their underlying similarity being the marginalisation of one shareholder or group of shareholders.

The overwhelming majority of oppressed conduct claims heard in Australian courts are in situations where a minority shareholder (or shareholders) are being unfairly treated by a larger (and usually a majority) shareholder.

Shareholder oppression is an important concept to come to grips with for people who are considering litigation as a means of resolving shareholder conflict in Australia. The oppressive conduct provisions of the Corporations Act are commonly used in conjunction with a claim of breach of director’s duty or in bringing an application to wind up the company entirely.

It is important to remember that every situation is different, and you should seek individual advice where appropriate. However, some of the more common behaviours which could be considered, in legal terms, as acts of shareholder oppression include:

–        The company’s affairs being handled in such a way that it is against the interest of shareholders or the company as a whole;

–        The company’s decision making processes being perverted to isolate or ignore the wishes of one shareholder, or one group of shareholders;

–        Information about the running of the company being unreasonably withheld from a shareholder;

–        Use of company funds for improper purposes like personal expenditure;

–        Denying a fellow director or directors the opportunity to carry out their functions – for example, failing to call directors’ meetings when required;

–        Excessive remuneration being paid to a person or persons having control of the company; and

–        Trying to force a shareholder to sell their share of the business where improper exclusion from management has occurred and there is no reasonable offer to buy the shares.

As with most areas of law, the technicalities can be hard to get a handle on, but most shareholders involved in a business will inherently sense when they are being treated unfairly. As a shareholder, if you feel like you are being marginalised, the onus is on you to be proactive and not to be afraid to ask questions of your fellow shareholders.

What isn’t shareholder oppression?

It is important to realise that conflict between owners of a business in and of itself is not shareholder oppression, even if the two concepts often present similar symptoms. If there is fundamental conflict, it may give rise to other options regarding the winding up of the business, but simply disagreeing with your fellow shareholders is not going to be enough. There must be conduct that is unfair or discriminatory, not just simple disagreement.

What can the courts do?

The court has very wide powers to make orders to remedy conflicts if it finds there has been oppression, such as regulating the conduct of the company in the future; ordering the purchase of the shares from one shareholder by others; ordering the company to start, conclude or defend legal proceedings; appointing a receiver or even winding the company up altogether.

Litigation should be a last resort

It’s not uncommon for the bad blood between warring shareholders to allow common sense to be overruled. On the whole, most shareholder disputes are better resolved at the negotiating table as opposed to the courtroom, but it can sometimes be necessary to begin that process before sense prevails.

By way of example, in a case brought before the Victorian Supreme Court last year, the part owner of a business (he held 18 percent) sought relief against his fellow shareholders under the oppressive conduct provisions of the Corporations Act.

The part-owner, who we will call Mr G, was found by the court to have been oppressed by the other shareholders on four counts:

–       the exclusion of Mr G from management of the company;

–       the re-characterisation of amounts contributed by other shareholders as loans instead of capital;

–       refusing to reimburse Mr G for company expenses incurred on his personal credit card; and

–       transferring assets of the company to another entity controlled by the other shareholders.

The court found that because of these factors, the most appropriate remedy to the situation was to order the other shareholders to buy Mr G out. The court found that the value of the shares (itself a difficult issue) came to slightly more than $30,000.

Mr G’s dispute was years in the making. This latest judgement was actually an appeal from an earlier decision. In all likelihood, Mr G’s legal bills alone would have far exceeded the $30,000 odd his shares were worth – not to mention the time wasted and stress undoubtedly endured.

This is not uncommon in disputes of this type – for shareholders to spend significant good money after bad in the pursuit of ‘winning the fight’ as opposed to recovering their investment. In these cases, common sense is often the biggest loser.

What should you do?

If you don’t have a shareholders’ agreement that sets out how the problem can be resolved, and you feel a fight is brewing, the single most important thing you can do as a shareholder is to seek early assistance from a lawyer or advisor experienced in resolving such disputes. This can allow a full exploration of all avenues to be considered, perhaps with a view to setting up the oppressing party to ‘give them enough rope’ for example, or begin a mediation process before emotional baggage gets in the way of allowing any simple resolution to work effectively.