Case study – Business Breakups

A written shareholders’ agreements could save you and your business from a bad business breakup!

Preparing a shareholders’ agreement at the start of an exciting new joint venture is probably the last thing you’re thinking about.

The scenario – going into business with a friend

Katie decided to start a business with a good friend of hers some time ago. They had been friends for a long time so she thought it would all be fine and they would see how things went before formalising the business relationship.

As time went on and the business took pace, Katie didn’t think it was necessary to have a shareholders’ agreement as business was going well and there were no problems.

Katie owned 51% of the shares so she thought she would have the majority say, in any event. After a while cracks started to show and her friend started to drift away, becoming less involved in the business and disputes started to arise, as it usually would in business breakups.

Katie found herself responsible for more and more of the work and more and more of the obligations in the business. Before long the discussions between them started getting heated and it became clear that they could no longer get along and do business.

Debts started to mount in the business and, as they were both directors and shareholders, they had incurred joint and several liabilities.

Winding up the business requires mutual agreement

Katie wants to wind up the business now but she can’t do so unless both parties agree.

It’s now been a year and they still can’t reach agreement, accounting fees and legal fees are now mounting up and uncertainty while Katie wants to get on with her new business but still feels like this is holding her back.

Her options are either to resign as a director (which has implications for her starting the new business) or go to the Supreme Court and seek an order to wind up the company which will be expensive and time consuming.

Business Breakups – Key Learnings

She thought that just because she owned 51% of the shares, she would have the ultimate say, but because she didn’t have a shareholders’ agreement in place which specifically said that, she couldn’t force the other director out.

Business breakups are well and truly a stalemate, just like an ugly divorce.

If only she got a shareholders’ agreement done right from the start to spell things out.

Good fences make good neighbours and in this case, a well drawn up contract would have spelt out what was to happen if there was a disagreement without having to face all that uncertainty and extra costs.

Contact us today if you require any assistance with preparing or reviewing your Shareholders’ Agreement.

(c) Progressive Legal Pty Ltd – All legal rights reserved (2019)

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