PRELIMINARY STEPS

I want to exit a business. What do I need to consider?

A business exit is, in most cases, a commercial decision. However, in our experience, far too many Vendors focus solely on the ‘dollars’, whilst neglecting a number of key legal considerations. This can often negate what otherwise looks to be a successful and lucrative exit.

As a threshold issue, it is important to consider the level of exposure you have in relation to business liabilities. If you have provided personal guarantees for any business liabilities, it is critical that a release from these liabilities is included as a key term of your exit.

Furthermore, it is important to consider what impact any ongoing restrictions will have on your ability to start or be closely involved in another business. It is common for outgoing directors / partners of a business to be subject to a restraint of trade or ‘non-compete’ following their exit. The extent of this restriction can often be a key sticking point in negotiating the terms of your exit.

Finally (for the purposes of this FAQ), you should also consider how you will be paid. Many businesses do not have access to the capital required to buy out a significant shareholder at short notice. Where payments will be made over time, it is important that there is some mechanism in place to secure these payments.

Looking to exit a business?

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We want to buy out an existing shareholder / partner. What do we need to consider?

The first step in any discussion regarding the exit of a shareholder / partner is a cool headed, open discussion between the parties involved. In our experience, the fastest, cheapest and most successful business exits are those where the parties have sat down and mutually negotiated and detailed the terms on which the transaction will take. No amount of negotiation or legal wrangling can replace this critical process.

When conducting these discussions, you and any parties involved should consider:

1. What are the exiting party’s shares (or other interests) worth? Where the exiting party is operationally involved, can the company or business operate successfully without the involvement of the exiting party?

2. Is a valuation of the company or business required?

3. How will you or the company will fund the exit? If payments will be made over an extended period of time, will any security be provided? How will these payments affect the financial performance of the company?

4. What kind of restrictions will be imposed on the exiting party? The key here is to reasonably protect the company’s interests (and any confidential information the exiting party may be privy to) without unreasonably limiting the exiting party’s ability to earn a living.

Need assistance to manage the exit of a shareholder or partner?

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LEGAL OPTIONS (COMPANIES & SHAREHOLDERS)

I have been excluded from my company by the other directors / shareholders. What are my options?

There are a number of ways of to approach a situation such as this. However, if you are shareholder that has been unreasonably excluded from a company you are or were involved in, either as shareholder or in any other capacity (such as an employee director), some of most powerful remedies available to you are contained in the ‘shareholder oppression’ provisions of the Corporations Act 2001 (Cth) (Corporations Act).

In short, s232 of the Corporations Act allows a court to order one or more of the powerful remedies contained at s233 of that Act (including the purchase of shares of an oppressed party for their market value), if the conduct of a company’s affairs are either:

1. Contrary to the interests of the shareholders as a whole; or

2. Oppressive to, unfairly prejudicial to or unfairly discriminatory against a shareholder, whether in that capacity or in any other capacity.

It is important to note that conduct cannot be said to be oppressive, unfairly prejudicial or unfairly discriminatory simply because it is harsh or severe. Instead, in order to establish oppressive conduct, a plaintiff must generally show that the conduct in question is unreasonable, unfair or unjust, or contrary to the reasonable expectations of the shareholders.

Typical examples of oppressive conduct include:

1. the unreasonable exclusion of a shareholder and director from the operations of a company

2. the withholding of key financial and operational information; and/or

3. financial transactions that disproportionately and unreasonably benefit one class of shareholders or directors.

If you are able to establish that the conduct in question is oppressive for the purposes of 232 of the Corporations Act, this enlivens the power of a court, under s233 of the Corporations Act, to order the buy out of your shares at market value, in addition to a variety of further or other remedies. 

Have you been unfairly excluded from a company?

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We would like to exclude an existing shareholder and director from our company. What are our options?

Such situations must be approached carefully. However, no matter the legal approach adopted, it is vital that you are familiar with the ‘shareholder oppression’ provisions of the Corporations Act. Too often, we see companies with genuine basis to exclude a shareholder and director act in a manner that leaves them open to litigation.

As a threshold matter, it is important to note that a director can potentially be removed from the Board of a company whilst remaining a shareholder. Furthermore, shareholders have certain rights that cannot be taken away or modified, even if their holding of shares in your company becomes inconvenient.

However, if you have a shareholder in your company who has or continues to cause harm to the company, you may be able to secure the buy-out of that shareholder pursuant to s232 and s233 of the Corporations Act.

Whilst these provisions are enlivened in the event of ‘oppressive conduct’ it is important to note that oppressive conduct is not limited to shareholders that hold the majority of shares in the company – even minority shareholders can be found to have engaged in oppressive conduct, even if the bar to establish such conduct is higher in the event of a minority shareholder.

Is a shareholder of your company causing harm? Have you or your company been accused of engaging in oppressive conduct?

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