Attwood Marshall Lawyers Commercial Litigation Senior Associate and NSW Law Society Accredited Specialist in Dispute Resolution, Charles Lethbridge, discusses his top tips to resolving business disputes.
Business owners know how detrimental it can be when disputes arise between partners, owners and shareholders. It is hard enough running a profitable business without internal disputes sapping time, energy and money from the bottom line of your enterprise.
With so many businesses suffering significantly as a result of the pandemic over the past 12 months, this difficult economic landscape has put additional pressure on business owners who have had to make some of the toughest decisions in order to stay afloat during the pandemic.
Attwood Marshall Lawyers has seen a significant rise in the number of enquiries we are receiving from business owners, shareholders and directors who are feeling the weight of the world making tough decisions to navigate an economic downturn. The impact of Covid-19 and the uncertainty of the business world has highlighted these stressors.
Earlier this year the Australian Bureau of Statistics released their ‘Business Conditions and Sentiments’ insights which told us that:
- Two in five businesses (41%), were significantly impacted by the COVID-19 pandemic and the restrictions it put on businesses.
- 41% of businesses reported that they only had enough available cash on hand to cover their business operations for up to three months.
- 14% of businesses reported that they needed to seek additional funds at the start of 2021 to stay afloat.
That’s a huge number of businesses having to make extremely difficult decisions about their staff, cash flow, product supply and services. As you can imagine, not everyone always sees eye-to-eye when it comes to making those tough decisions, and business partners can end up at a standstill if they are unable to work through their disputes effectively.
What types of disputes are common between business partners?
Even without the added pressure brought on by COVID-19, disputes between directors or shareholders arise for various reasons and are relatively common. Situations that can escalate and lead to disputes include:
- If there is a lack of clarity around the roles of each owner or director;
- Arguments over contributions or effort; underperformance can be an extremely sensitive point of contention between business partners where one party may feel they have contributed more than the other/s;
- Incompatible management styles; and
- Unequal investment and profit sharing, just to name a few.
When it comes to disputes among business partners, often common sense is left for dead. In the heat of a dispute, shareholders can find it difficult to focus on a commercially sensible outcome and they tend to engage in a blame game which does not serve anyone well. Emotions run high when there is uncertainty about the future and concern about income and livelihoods.
Without a clear path forward, it can be difficult for business partners to agree on whether they want to continue to invest in their business or cut their losses and close the business altogether. Decisions are often made based on emotion rather than cold hard facts and figures.
Here are our top 8 tips to resolving business disputes, and the process you will need to take if you are struggling to mutually agree on the best way forward for your business.
Tip 1: Be proactive sign a Partnership or Shareholders Agreement BEFORE you start!
It is always recommended that when starting a company, shareholders should enter into a Partnership or Shareholders Agreement. By doing so, they can outline a dispute resolution process to be undertaken with a view to resolving disputes at the earliest possible stage. Usually, the agreement will have an agreed value or mechanism for valuing the business so that it can be sold, or one partner can buy out the other.
Unfortunately, many business owners don’t draft and sign a Shareholders Agreement.
If the relationship between business partners breaks down and conflict arises, you don’t have the tools in place to manage and resolve the conflict with the result that they can end up in litigation – i.e. going to Court.
If you decide to get into business with friends or family, it is just as important to formalise your agreement (if not more important, as it can be difficult to separate your emotions and not make business matters personal when family are involved).
Tip 2: Cover all bases in your Agreement
In addition to putting a dispute resolution clause in place in a legally binding Partnership or Shareholders Agreement, there are various other clauses you can include to ensure everyone involved is on the same page and understands their obligations and responsibilities to the business.
Some other common clauses you can include are:
- Director/Partner and Management structure
- Agreed roles and hours, salaries, payment of dividends or profits etc
- Buy and Sell provisions
- Financing and contributions towards the business, and implications for any shareholder who does not contribute as expected.
- Deadlock provisions which can deal with circumstances where shareholders cannot agree on a given course of action.
- And succession issues – if for some reason something unexpected happened and one business partner was to become incapacitated or die, what would happen then?
Tip 3: Refer to the agreement
If a dispute arises and you have a Partnership or Shareholders Agreement in place, it is important to immediately refer to the agreement and discuss this with your partner or fellow shareholders. Check the dispute resolution procedures and clauses as they may help you reach a resolution quickly.
Tip 4: Take time and take a step back
It is important to take the time to step back and identify the real issues. Try to separate the emotion. If you are able to remain sensible and discuss the issues in dispute it may help in resolving the matter without it escalating further.
Tip 5: Be realistic
You need to have a realistic outcome in mind. Consider your priorities and the goals for the business. If your priorities and goals are very different to that of your business partners, it is unlikely you will be able to resolve the matter. Sometimes, it is clear you are not on the same page and continuing will only bring more disputation.
Tip 6: Communication is key
If you have been able to identify the key issues in the dispute, sit down with your business partner to discuss the problems. Try to stay calm and be prepared to listen and negotiate otherwise, nothing will be achieved. Sometimes it helps to bring in an independent person to help to solve the problems you are having. This could be an accountant, business coach, or a qualified mediator.
Tip 7: If you have been unable to resolve the dispute; put it in writing
If you were unable to resolve your dispute when meeting with your business partner, write a formal letter outlining the issues and your suggestions. In the letter, set a deadline for a response and the next steps that will be taken. Make sure you confirm oral discussions by text or email so that decisions or agreements are documented. This may help differing recollections of discussions.
Tip 8: Get trusted advice from an experienced dispute resolution lawyer
If you have had no success in resolving the dispute, it is important to get the right legal advice. Speak with a dispute resolution specialist who can guide you through this difficult time. Sometimes it takes a neutral third party to get involved in order to get everyone to focus on the issue at hand and start openly communicating, with a view to avoid having the issue fought out in court.
If disputes are unable to be resolved at an early stage, there are various avenues available to parties through which to seek redress including under the Corporations Act 2001 (Cth). These avenues include seeking a court order that a company be wound up on the “just and equitable grounds”. This is an application usually brought when relationships have irretrievably broken down, when a director is acting in his or her own interests to the detriment of the company, or where there is a deadlock.
Attwood Marshall Lawyers are here to help you when disputes arise
Our dispute resolution team have found that by getting business partners to communicate openly and honestly about their roles and contributions, and by exploring their interests, disputes can be resolved at an early stage without having to resort to litigation.
We believe in presenting viable options to business partners that will ultimately save them time and money and give both sides greater control over the outcome.
Our experienced team aim to resolve disputes efficiently to ensure there is minimal interference to business operations, or ultimately to allow all parties to move on with their life if the decision is made to buyout another party or separate from the business.
If you are involved in a business dispute, please contact our Department Manager, Amanda Heather, on (07) 5506 8245, email firstname.lastname@example.org or free call 1800 621 071 to find out where you stand.