A great many ventures these days are being operated through company structures. They are a neat and clean way for people to work together towards a common goal, with clear rules and regulations established through company constitutions, as well as the governing Corporations Laws and Regulations. The tax benefits of a company structure also don’t hurt.
Too often though, particularly in times of financial stress, we see disputes arise between the individuals involved in companies and things get messy when either there is a deadlock of equal shareholders or an individual with a minority shareholding feeling oppressed or unfairly treated by the majority.
Companies are relatively easy to get registered, with organisations helping people get companies set up, sometimes even on the same day as an application goes in. The problem though is that these quick setups may come with a ‘ready to go’ constitution that sets the basic rights and roles of parties, but rarely do they set up a full regime for each person’s individual roles in the company or what happens in the event of shareholder disputes.
The Corporations Act outlines the legal rights of shareholders, where there is either a deadlock of members that prevents the company functioning properly or where a minority shareholder feels oppressed or unfairly treated, but not good commercial rights and options. Under the Corporations Act a shareholder may to apply to have the company wound up where the company becomes unreasonably hampered or deadlocked by shareholder conduct and disputes.
If a shareholder brings an application like this, where a court is not presented a reasonable alternative, the question is asked of the other shareholders “Why shouldn’t this company be wound up?”. That question puts the pressure on the other shareholders to establish a reasonable basis for keeping the company alive and it is often times a hurdle too high to overcome. Why leave individuals locked into a company that can’t function and will just see more and more risk to everyone’s investment and to third party creditors if forced to limp along?
But tables can be turned where a shareholder, making that type of application, is presented a reasonable offer to buyout their shares by the others. The question then flips and the court will ask the applicant “In the face of this offer, why should I wind the company up?”
This is an important change in onus. Courts fully appreciate just how serious the winding up of a company is. People’s investments are put at risk, creditor’s rights are compromised, there are often issues with leases, license agreements, equipment contracts, personal guarantees and the list goes on and on. So where possible courts will only wind up a company as a last resort.
So, if an offer is made to purchase a disgruntled shareholder’s interest, where you can show:
- A reasonable mechanism for valuing the shareholder’s interest in the company;
- A capacity to be able to follow through on the offer and pay that value to the shareholder; and
- A reasonable time frame to achieve that process in;
Courts will be far more reluctant to wind the company up, start taking a closer look at the disgruntled shareholder and asking what the real motivation for a winding up application is and whether its genuine or not.
So, if you are faced with an application to wind your company up by one of your shareholders, let’s have a look at ways of potentially buying them out of the fight and keeping the company alive and trading without them.
Of course, our preference is to “prepare for the divorce before the wedding”, get proper advice from a lawyer and put in place detailed shareholder agreements that run alongside the company’s constitution and sets out everyone’s roles and proper exit strategies, so you don’t need to rely on these extreme and disruptive measures, if things go bad!
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific circumstances. It is intended for information purposes only and should not be regarded as legal advice. Further professional advice should be obtained before taking action on any issue dealt with in this publication.