Many businesses are started by friends or acquaintances who had a great business idea - but didn’t give much thought to how their business partnership would work or whether indeed they would be well suited to run a business together. Other times, the relationship can fracture over time. It’s not uncommon to hear from business owners, “I used to like this man, but now he’s my worst enemy.”
When the relationship breaks down or there is a disconnect between what each party wants from the business, disputes over the future of the business and its management can occur. These are known as shareholder disputes.

What is a shareholder dispute?

Shareholder disputes may stem from one or more parties having  issues with jealously, money, power or it can be as simple as misunderstandings arising. Often the business partners simply aren’t on the same page anymore. Frustrations may arise from disagreements surrounding what certain business partners should or should not be doing.

Often one business partner may want to leave the company. Within these disputes, shareholders can struggle to agree upon how the exit should occur with respect to shares, money, legalities and restraints about what the exiting partner can or can not do after their departure.

There are many options available to shareholders to navigate these disputes when exiting a business, including some which can be put in place in advance to ensure there’s a clear pathway if things turn sour.

Have business/shareholder agreements in writing, with clear terms and conditions

Many business owners implicitly trust their business partners and could never imagine they would ever do anything to hurt them. While this is positive, as trust is essential in running a business, this confidence can be misguided. You can’t know what the future holds, so it's best to prepare for the worst case scenario.

A written business/shareholder agreement underscores the trust and competence in the partnership, with clarity and communication, ensuring a clear understanding amongst all shareholders who operate the legal entity.

Within business/shareholder agreements, the legal obligations of directors are made clear, along with set timelines, KPIs, remedies for non-performance and share information.

How shares will be treated is an important component. What happens with shares when a shareholder exits? If there’s a transfer of shares, how many and to whom? How much will they be worth? What is the time period for transfer and payment? The agreement should clearly outline these answers.

The final document should be signed, dated and kept safe. Unfortunately, losing these documents is common and often shareholders can only find documents which are missing signatures or dates and therefore may not be watertight.

If business/shareholder agreements are in place, a shareholder exit has a higher likelihood of being amicable. This is because an agreement which clearly outlines detailed information regarding the plans for the business and shareholders in the event of an exit prevents any surprises by providing an exiting process to be followed.

How to resolve disputes when there isn’t a business/shareholder agreement

If there is no business/shareholder agreement in place, the disputes may be more intense, and further disagreements may arise. Disagreements may occur if, for example, one shareholder wishes to leave and start a new business in competition, or if the shareholders disagree about money related issues. If this is the case, there are two main methods to assist in resolving the dispute:

1) Negotiation

Negotiation is preferable when wanting to avoid court. However, this may be difficult if the relationship between shareholders is damaged. Often lawyers are brought in to ensure the business remains the focus within negotiations, rather than emotions.

2) Court

An application to attend court is usually made when the relationship between the shareholders is severely damaged, and thus they are unable to resolve disputes themselves.

Put and call options (buy and sell options)

Put and call options, or buy and sell options, are a great idea for tax reasons and involve an agreement which outlines how a business partner can buy the other business partner out at a later date.
There are usually over 10 events which can trigger a purchase or a sale. For example, death, disability, breach of director duties, breach of shareholder duties, breach of employment duties and conviction of a criminal offence. Having insurance can be essential for the transfer of shares where the trigger event is insurable.

Understanding key terms and what you’re signing

Understanding the key terms and what you’re signing is essential. For example, understanding the difference between a warranty and a condition. If there was a mistake with the signing, the court usually won’t take a second glance at the contract and will only revisit the dispute if, for example, negligence or misleading/deceptive behaviour occurred. Thus, be careful what you sign and ensure you have a thorough understanding in order to prevent self-sabotage.

Audits

Many people don’t realise that shareholders who amount to 5% or more of the total shareholding of the company can get financial reports of the company audited by any auditor. This may assist in settling exiting disputes.

Disputes between shareholders when exiting a business are common, and can be stressful and damaging. By putting written agreements in place early in the process, you can avoid things going awry.