Just like any other partnership, business partnerships can sour. If you incorporated an entity to put your genius concept into action and divided shares between you and your partner 50/50, and were each appointed a director, you may find yourself in a tricky situation if the relationship has soured, or your separate visions for the business have diverted. A deadlock occurs where no resolutions can be progressed as none proposed can be approved. Put simply, the shareholders dispute has resulted in the company being stuck. If you find yourself in this situation, particularly if the result is a negative impact on day to day trade, you need to act quickly. Here are some the legal issues/ documents that should be considered in planning your next move.
Resolving the Dispute
Shareholders Agreement & Constitution – the governing documents of a company, and in particular the shareholders agreement, often set out what is to occur in the event of a deadlock. Some of the different types of provisions include buy-out orders (sometimes by way of secret offers contained in envelopes), meditation, market sales and / or wind-up. Figuring out what is provided for in your governing documents should always be your first port of call.
Corporations Act – If the answer to your woes does not lie in the governing documents (or you don’t have any) you should look at the avenues for relief per the Corporations Act (‘the Act’). Often, claims of a deadlock coincide with claims of oppression and/ or breaches of directors’ duties.
Under the Act, the power that the Court has includes (but is not limited to) to make orders:
- that one shareholder purchase another’s at a price determined by the Court;
- that the company purchase a shareholder’s shares;
- that a receiver and manager be appointed and the company wound up (section 461 Corporations Act); or
- that an injunction be granted against the company or a director/ majority shareholder to restrain a specific Act.
The Court System
Alternatively, a shareholder could also apply to the Courts under section 461(1)(k) to wind up (liquidate) a company where it would be just and equitable to do so. A breakdown of the relationship of 50/50 shareholders in an operative company has been deemed, on some occasions, a just and equitable basis. Courts are, however, extremely reluctant to grant such applications to wind up a company especially if the company in question is solvent (International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2) (1994) 18 ACSR 603). Note however, that even in cases where the Courts have held that the appropriate remedy is to wind up the company, they do also, in most cases, adjourn or suspend its order to allow the parities to reach a compromise before the formal order is made.
So if you find yourself in a deadlock, it’s important you take action. After all, the future of your business is at stake. Talk to commercial lawyer and they will be able to advise you as to your rights and obligations in dealing with such a process, either through commercial negotiation or court proceedings.