Attwood Marshall Lawyers Partner and NSW Law Society Accredited Specialist in Dispute Resolution, Charles Lethbridge, discusses what can happen if business partners are embroiled in a dispute and are unable to move forward.
Many businesses are built on the passion, ideas, and sacrifice of friends who share the same vision. When entering a new business venture, often business partners are devoted to the project and are willing to commit a significant amount of “sweat equity” to the business, in addition to whatever they can invest financially.
An integral step that is often overlooked during the excitement of setting up a new business is establishing a formal agreement between all business partners and shareholders that sets out the management structure, roles, hours, and salaries of business partners, buy and sell provisions, financing and contributions to be made, succession issues, and deadlock provisions which deal with circumstances where shareholders or partners cannot agree on a given course of action.
If all shareholders/partners are unable to establish an understanding on these issues early on when the business is starting up, they leave themselves open to the risk of disputes arising and escalating and resulting in extremely costly litigation. When the proper mechanisms are not in place to resolve business disputes between directors and shareholders and partners, it can personally and financially impact those involved, and be detrimental to the business and its operations.
In most cases, it is only when a dispute has already escalated and one party is trying to force the other party to sell or exit the business, that the advice of a lawyer is sought.
In the absence of a shareholder’s agreement (or partnership agreement), a shareholder cannot be compelled to sell their share of the business to another simply because there is a dispute over the business. A Court will not order a sale unless ‘shareholder oppression’ is found to exist and the Court is convinced that the sale of the business, or the sale of one party’s share in the business, is the best course of action to resolve the matter.
As with family matters, business partners are not immune to conflict arising and although all partners may have the best of intentions when starting a new venture, they should never discredit the need to establish a formal agreement.
In the current economic climate, where many businesses have had to shift their focus to stay afloat, change their operations, or in some cases revise their entire business model, disputes can often arise when shareholders no longer have the same vision or are no longer willing to continue to invest in the business.
Early intervention is important to successfully resolve business disputes
If business partners find themselves embroiled in a dispute and they have failed to resolve the matter by discussing the issues amongst themselves, it is then time to seek help from an independent legal practitioner who can support them with resolving the matter.
Depending on the outcome trying to be achieved, there are a few options available.
Alternative Dispute Resolution and Mediation
If business partners value their friendship and/or business relationship and want to preserve this as best as possible, then considering alternative dispute resolution might be the best option. Alternative dispute resolution processes, such as mediation, aim to assist business partners/shareholders to develop options for resolving a dispute without having to go to court. A mediator, who acts as third party neutral, assists parties in dispute by encouraging them to communicate openly and to generate options via which to resolve disputes.
Resolving a dispute in this fashion will save the parties involved the enormous amount of time and money associated with litigation and will do away with the stress associated with that process.
Going to Court or Tribunal
Going to court should always be a last resort. Most courts and tribunals will encourage both parties involved in a dispute try to reach an agreement between themselves, including by way of alternative dispute resolution, before embarking on the court process. In some cases, it may be mandatory that these other avenues be exhausted prior.
Before going to court, it is important to document all efforts made to resolve the dispute. This can include making notes of conversations that have been had, collecting any emails, text messages, or transcribing voicemails that support the case.
However, if a business dispute cannot be resolved by way of negotiation or via a form of alternative dispute resolution, the parties may have no option but to apply to a court seeking adjudication of the issues in dispute.
When to wind up a business if a dispute gets out of control
A court will always do everything possible to avoid winding up a company, particularly when there are other stakeholders to be considered, such as employees, who will be impacted by the decision. In situations where a dispute between shareholders or directors has been unable to be resolved and or there exists a deadlock, the only option as far as the Court is concerned may be to wind up the company or partnership.
Attwood Marshall Lawyers have a dedicated team of dispute resolution specialists
Attwood Marshall Lawyers has proudly been supporting businesses from start-up to wind up for over 75 years, helping directors and shareholders resolve disputes and other issues that arise in the course of business, in the most cost-effective way.
Our dedicated team believe that when a dispute arises, it is important to bring all parties together to communicate effectively so that disputes can be resolved without having to resort to costly litigation.
We present our clients with viable options to save them time, money, and stress, giving them greater control of the outcome.
If anyone needs advice about business partner and shareholder disputes, we are here to help. Contact our Dispute Resolution and Litigation Department Manager, Amanda Heather, on direct line 07 5506 8245, email firstname.lastname@example.org or free call 1800 621 071.
We also have a dedicated property and commercial team who have extensive experience drafting Shareholder’s Agreements, helping businesspeople protect their interests and set expectations early on to avoid disputes arising in the long run. For any enquiries related to business and commercial matters, our Property and Commercial Department Manager, Jess Kimpton, can be contacted on 07 5506 8214, or email email@example.com