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As a shareholder, you own part of the company and therefore have a vested interest in its success. However, if you have a business partner, there may come a time where you disagree about a company decision. Disagreements can be about minor day-to-day decisions or about significant operational decisions.

In situations where the shareholders own different sized parts of the company, resolving disputes usually happens through the majority shareholder making the final call. In contrast, a disagreement between shareholders with a 50/50 split in a company can be a roadblock to moving forward. Neither party can force their partner to sell their shares, so alternative ways to resolve the dispute will be required. This article explains how to approach a dispute between shareholders with a 50/50 split.

Shareholders Agreement

When a dispute arises, the starting point is the company’s shareholders agreement. The shareholders agreement sets out:

  • key clauses relating to shareholders; and
  • protocol for decision-making.

Most shareholders agreements will have a dispute resolution clause outlining the procedure for resolving a dispute. This typically requires shareholders to pursue a form of alternative dispute resolution before commencing any court proceedings. Alternatively, the dispute resolution clause may require one party to sell their shares to the other to resolve the dispute.

If you already have a shareholders agreement, look for a dispute resolution clause to see how you can resolve your dispute. If you do not have a shareholders agreement, it is best to have a lawyer assist you in drafting one to ensure that the dispute resolution clause suits your needs.

Alternative Dispute Resolution

Negotiation

A negotiation is a form of alternative dispute resolution, typically involving the shareholders meeting to:

  • explain their positions; and
  • come to a compromise.

A successful negotiation involves the parties compromising on their position to achieve a desired resolution between the parties. Though it may not be the exact situation that each party initially wanted, a compromise between the two parties will help to resolve the dispute.

If negotiation does not resolve the dispute, one shareholder can buy the other shareholder’s shares. In other words, one shareholder will part with the company, thereby eliminating the dispute. In this situation, both shareholders will need to agree on a price for the shares. The parties may also decide to sell the entire company to a third party and go their separate ways, Alternatively, they may split the company and its assets in half.

Mediation

Similarly, mediation is a form of alternative dispute resolution, involving the shareholders meeting to try and resolve the dispute. The primary difference between negotiation and mediation is the presence of an impartial third party. In mediation, a third-party mediator is appointed to assist the parties in coming to a resolution.

Parties may choose to nominate a mediator, or can have a mediator appointed to them by the Law Society of their state.

Court Proceedings

Where a company does not have a shareholders agreement or the shareholders are unable to resolve the dispute through negotiation or mediation, the parties may look to the courts to help resolve the matter. Pursuing a dispute in court is a timely and costly process for all parties involved. If solving the problem without court interference is possible, this is an optimal solution for both shareholders.

If the parties choose to proceed with the court system, usually the outcome will be that the court:

  • orders one shareholder to buy out the other at a determined price; or
  • decides on the direction of the company. For example, that the company be wound up.  

Above all, both parties should be aware that the court’s order is binding. This means that the parties must comply with whatever the court decides, even if this is not either party’s desired outcome.

Key Takeaways

A dispute between shareholders with a 50/50 split may be challenging to resolve. If there is a shareholders agreement, follow the dispute resolution procedure set out in the agreement to resolve the argument. In the absence of a shareholders agreement, it is wise to try and negotiate or mediate an outcome for the dispute.

There are many ways to resolve a dispute between shareholders with a 50/50 split, including one party selling their shares to the other, or both parties selling the company to a third party. If you have any questions, contact LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

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