When Business Partners Fall Out
SHAREHOLDER DISPUTES, DEADLOCK, AND THE WAY OUT
Friends open a restaurant. Relatives start a company.
At the beginning it is all trust; the rules only come up when things go wrong.
This issue: the paths the law leaves you when a partnership breaks down.
Once the standoff begins, nobody can outvote anybody | Source: Pexels
Of all the commercial disputes we handle, the most painful are never the ones against strangers. They are the ones against former friends, classmates and relatives. While the business struggles or hums along quietly, everything is negotiable. The moment it takes off, or hits real trouble, the cracks appear: one side controls the money and stops showing the accounts, the other is removed from the group chat and the management, and dividends stop without explanation. That is usually when people discover that, beyond a handshake and a promise to "split the profits half-half", nothing was ever written down.
This article covers three things: what weapons the law gives you after a falling-out, what you must not do while the fight is on, and why the next venture should start with a shareholders agreement.
01／First, work out what kind of "partnership" you have
"Partners" is an everyday word, but in law it describes two completely different structures, with completely different exits.
A true partnership. No company was ever registered; two people simply carry on a business in common with a view to profit, governed by the Partnership Act 1892 (NSW). There is no separate legal entity, and each partner is personally liable, without limit, for all the debts of the business. The exit runs through dissolution and winding up of the partnership.
Shareholders in a company (far more common). A Pty Ltd was registered; the two of you hold shares and sit as directors. You may call each other partners, but in law you are shareholders and directors, governed by the Corporations Act 2001 (Cth). The remedies discussed below are built for this situation.
Not sure which one you are? An ASIC search showing whether the business sits under a company or a personal ABN answers it in five minutes.
02／Oppressed minority shareholders: what the law does about it
The script is depressingly familiar. The controlling side holds the bank account and the books, removes the other from day-to-day management, cuts off financial information, pays generous salaries to themselves and their family, declares no dividends, and sometimes quietly moves customers to a new company. The minority shareholder holds shares and, seemingly, nothing else, watching the company being hollowed out.
The law anticipated this script. Section 232 of the Corporations Act is the minority shareholder's most important weapon: if the conduct of a company's affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder, or contrary to the interests of the members as a whole, the court can intervene.
The High Court held in Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 that oppression is judged objectively: the question is whether the decision was commercially unfair, not how aggrieved the excluded party feels. Exclusion from management, refusal of information, salaries in place of dividends, and share dilution are the forms of oppression that appear in the cases again and again.
The remedies sit in s 233, and the court's powers are broad. The most common outcome is a compulsory buy-out order: the controlling side (or the company) is ordered to purchase your shares at a price the court determines to be fair, letting you take the money and leave. The court can also regulate the future conduct of the company's affairs, set aside or vary a resolution, appoint a receiver, or, at the far end, wind the company up. For most oppressed minority shareholders, the realistic goal of litigation is not to win the company back. It is to exit with dignity at a fair price.
Two smaller weapons sit alongside it. A shareholder can apply to the court under s 247A to inspect the company's books, provided the application is made in good faith and for a proper purpose. And where the company's claim is against the very people controlling it (a director misapplying company assets, for example), ss 236 and 237 allow a shareholder to seek leave to bring proceedings in the company's name: the statutory derivative action.
Two doors in the same wall, one large and one small | Source: Pexels
03／The 50/50 deadlock: nobody can outvote anybody
The favourite structure of family-and-friends ventures is 50/50: equal shares, equal say, built on trust. It has one fatal legal flaw: the moment the relationship breaks, nobody's proposal can pass. No new director can be appointed, no accounts approved, no bank mandate changed. The company is stuck. That is deadlock.
Beyond negotiation, there are three main ways out. First, ss 232 and 233 again: exclusion, information blackouts and dividend freezes within a deadlock can amount to oppression, ending in a buy-out order. Second, one side buys the other out: even without litigation, a buy-out negotiated off an independent valuation is where the great majority of deadlocks eventually land. Third, the last resort is an application under s 461(1)(k) to wind the company up on the "just and equitable" ground. The courts recognise that a quasi-partnership company built on mutual trust and confidence may be dissolved where that trust has irretrievably broken down and management is paralysed. But winding up executes a business that may still be profitable, so courts do not grant it lightly, and you should not treat it as a first choice either. Its real function is as the final piece of leverage at the negotiating table.
04／During the fight, being a director cuts both ways
The most common mistake in a shareholder war is forgetting that you are also a director. A shareholder may vote in their own interest; a director may not. Directors' duties (ss 180 to 183 of the Corporations Act) apply throughout the dispute, and in shareholder litigation the court examines what both sides did during the fight under a magnifying glass.
Do not move company money out to "protect yourself". That is not self-help; it is misappropriation, a direct breach of ss 181 and 182, and it turns the party who had the better case into a defendant.
Do not set up next door and take the customers and staff. A sitting director who uses their position or company information to gain an advantage breaches ss 182 and 183, and liability can follow even after resignation.
Do not let the company trade on while it sinks, out of spite. If the company's finances deteriorate during the dispute, the duty to prevent insolvent trading (s 588G) hangs over every director personally. "The other side controls the money" is not a defence.
Do quietly build the record. Archive the emails, messages, bank statements and meeting minutes systematically. Put requests for accounts and information in writing rather than making them by phone, so that every refusal leaves a mark. Oppression cases are won and lost, to a surprising degree, on whose evidence trail is more complete.
05／The shareholders agreement: more reliable than friendship
Every litigation path above is expensive, slow and bruising. Most of them could have been replaced by a shareholders agreement signed back when everyone still liked each other. A proper agreement settles at least five things:
First, which decisions need unanimous consent (borrowing, selling assets, changing the direction of the business, payments to a shareholder's related parties), so no one side can run the company alone.
Second, how deadlock is broken: negotiation, then mediation, and if that fails a buy-out mechanism, commonly a "one side names the price, the other chooses to buy or sell" clause, so that deadlock always has an exit built in.
Third, how exit works: who can sell, when, to whom, whether the others have pre-emptive rights, and how the price is to be valued and by whom.
Fourth, how the money is shared: a dividend policy and shareholder salary benchmarks, closing off in advance the classic "big salary for me, no dividend for you" move.
Fifth, what a departing shareholder cannot do: restraint of trade and non-solicitation of customers and staff, so the person who leaves does not open an identical shop next door with the customer list.
A company without an agreement runs on its constitution and the default rules of the Corporations Act, and the default rules have almost nothing to say about the wounds that hurt most in a friends-and-family venture. The best time to sign a shareholders agreement is when the friendship is at its warmest. The second-best time is now.
Parting ways is not the disaster.
Never having agreed how to part is.
Talking about money doesn't hurt a friendship. Not talking about it does.
Sun Lawyers · Sydney Office
If you are in a shareholder dispute or a company deadlock, or you are about to go into business with someone and want the rules settled before you sign, contact Sun Lawyers. We work in both English and Mandarin and can assess your options and their costs, draft or review a shareholders agreement, and help you resolve the dispute while protecting the value of the business.
Phone: 02 9267 4988 ｜ Email: enquiry@sunlaws.com
Sydney Office: Suite 703 & 704, 265 Castlereagh Street, Sydney NSW 2000
Website: sunlaws.com.au
This article is general legal information only and is not legal advice.
Please contact us for advice specific to your situation.