Video Series: ‘How to Divorce Your Business Partner Amicably’

  • Posted By: Aptum Admin
  • October 14, 2021
  • 4 Minute(s) to read
Graphic with text 'How to Divorce Your Business Partner Amicably' with Aptum Logo and Legally Yours Logo

All too often, shareholder disputes dissolve into fights that are just as hostile as some family law disputes. And, like a divorce, parties can become far too focused on the ‘blame game’ as opposed to navigating an exit strategy.

Whilst a dispute always starts with a grievance, it’s important to see past the problems in your business relationship and focus on the solution(s) which will set you up for the best possible outcome when you do realise it’s time to part ways.

Aptum Senior Lawyer, Trisha Lingard, recently presented a #HubTalk hosted by LegallyYours titled ‘How to Amicably Divorce Your Business Partner’.

The following are five key snippets from the presentation.

Part 1: Have a framework before you start

Every business relationship will inevitably come to an end. Someone may move on voluntarily – by retiring or changing jobs – or involuntarily, someone may die or become incapacitated. So, way before these things happen, you need to have an exit strategy.

When starting a business relationship, try to move past the uncomfortable notion of talking about what might go wrong and address things ‘head on’. A partnership agreement is essentially a binding prenup. You’re establishing a legal relationship and it needs to be documented.

Whilst online templates have their place, shareholders agreements are not ‘one size fits all’. You should seek legal advice to find out what to include based upon your particular circumstances, and how to draft an agreement that will protect and work for you.

Doing this at the beginning is far more cost-effective than trying to sort things out at the other end or when a dispute arises.

Part 2: What should your shareholders agreement include?

A shareholders agreement is one important way to protect your investment in the business and to establish how shareholders and directors will work together to grow the business.

Each agreement will depend on the circumstances of the company, but here are some key provisions that you should consider including:

1. Guidance regarding the relationship between directors and shareholders as to how decisions are made

For example, provisions relating to who can make decisions and what decisions require shareholder approval and the relevant percentage of votes required.

2. Critical business decisions

The agreement may include a list of important decisions that may require higher percentage approval from either directors or shareholders, such as amending the Company Constitutions, winding up the business or any major directional change of the business.

3. Rights to appoint and remove directors

The agreement might specify which shareholders have rights to appoint and/ or remove a director, and how this can happen e.g. through voluntary resignation, a board decision, or the shareholders being able to forcibly remove a director.

4. Shareholder special voting rights

These provisions will depend on the type of shares you hold, but the agreement should set out the rights attached to each class of shares (for example, whether you can vote at a shareholders meeting).

5. Process for issuing new shares

Any new shares will dilute existing shareholders ownership, so there should be terms for how new investors may be brought on, how new funds are raised, and how the company attains approval to issue new shares.

Part 3 – How to exit and dispose and determine the price of shares

In addition to the standard provisions in a shareholders agreement we discussed during Part 2, the agreement should contain a provision relating to how a shareholder can exit an agreement and dispose of their shares and the price of those shares.

For example, how do you get out of a business relationship, or what happens if you need to get out to the value of your shares? Can you just terminate at will? Is there a process you need to follow? How are the assets of the company treated, including your shares?

These questions should be answered in your shareholders agreement. Some of the most effective agreements will allow you to determine the sale and price of your shares.

Some key provisions to consider:

1. Dispute resolution

What is the dispute resolution clause, in terms of any disputes between multiple shareholders or between shareholders and the company? This clause often sets out how disputes are handled, whether mediation is required within a certain period of time, what constitutes a dispute, and when the avenue is open for parties to proceed to litigation.

2. Right of refusal/ Offer Clause

Often if you’re exiting or someone else is exiting, you’ll find that your agreement requires shareholders to offer their shares to existing shareholders first – before any third-party purchasers.

3. Drag along right/ Tag along right

This applies where a third party wishes to purchase some (or all) of the company. A drag along right is where majority shareholders can require minority shareholders to sell so that a bidder can buy the whole company. Alternatively, a tag along right can provide that the minority shareholders can tag along with a majority shareholders if they’re wanting to sell.

Part 4 – What is shareholder oppression?

At minimum, oppression refers to unfairness where the unfairness is the result of some form of abuse of majority power or control.

Contrary to some belief, oppression does not have to be illegal or even improper behaviour, but it does need to be an abuse of power of some kind. For example, it can be failing to pay dividends, not providing access to company materials, excluding somebody from meetings or using funds for personal purposes. It is typically by a majority shareholder against a minority shareholder, but not always.

An example for the legal test for oppression is, was the decision made by the director/majority shareholder a decision that “no board of directors acting reasonably would have made”.

The Court has a broad range of remedies for shareholder oppression. Generally, those remedies include winding up the company or requiring the purchase of shares such that one shareholder buys and one sells, with an appropriate reduction in the company’s share capital.

Part 5 – Where to focus your energy in a shareholder oppression dispute

If you end up going to court for a shareholder oppression disputes, it is important to focus first on value. This focus reflects the courts’ approach. It’s no secret that judges loathe oppression trials, so they will do what they can to direct the parties to focus on value.

The questions to address are:

1. What is the value of the shares (and how is the value determined)?

Share price is only affected by oppression where the oppression itself has some material impact on the value of the company or its assets.

There is no prescribed methodology for how the value of the shares is determined. It will depend on the company, the industry, and often the opinion of an expert valuer.

2. How do you achieve the best exit?

In practice, one or the other party will seek an order that they compulsorily buy out the shares of the other. If the company is solvent, this is generally preferable (to both the parties and the Court) to winding up the company.

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