Attention Entrepreneurs: Ignoring Shareholder Disputes Can Kill Your Business

When a couple has just married, it seems ironic to start planning for a divorce. Even for couples that have been happily married for some time, it’s unpleasant and emotionally draining to think about, or even plan for divorce. But when you are in business, you should plan for the possibility of a breakup with your partners. If the survival of your business is a priority, you need to take the bull by its horns. Identify and tackle shareholder disputes even if there are none at the moment. Ignoring the possibility of disputes can kill the business.


We spoke to Shane Rhode about the dangers of ignoring shareholder disputes. Here’s more on what he had to say.


Ignoring Shareholder Disputes is Penny Wise and Pound Foolish

When you are starting a company, the last thing you want to spend money on is planning for the possibility of a divorce. Other matters may seem more important. They require your attention, energy and most importantly, your cash. But Shane points out that the ‘savings’ from ignoring potential shareholder disputes are easily outweighed by the costs.

While reminiscing a recent episode where his friend went through a very drawn out and costly High Court matter, Shane says, “Even if you aren’t a punter, you could see that spending $3000-$5000 on a Shareholders Agreement to avoid spending half a million dollars in Court proceedings to get a result is worth it.” If you think that your partnership bond is so tight, and going to court is a risk worth taking; Shane has an even more scary warning. He says, “There is no guarantee of success and litigation risk (risk of losing and having to pay the other side’s costs – a further, even more, bitter pill to swallow).”


It’s the Common Issues that Trigger Fallouts

Perhaps you think that serious shareholder disputes are hard to come by. You think that you would recognize a serious dispute from afar. But, it’s the common, but often overlooked, issues that could bring your business to its knees. As Shane puts it, “There can be disputes about who has to cough up for sunk costs, particularly where personal guarantees are in play. If the business goes really well, there can be disputes over how the company deals with the profits, i.e. one partner may want the company to declare a dividend because it wants to put a deposit on a property, whereas the other wants to reinvest the profits for further growth. Another common cause for dispute is the treatment of seed capital: is this to be repaid to the individual partners prior to dividends being declared, or have the partners agreed this capital is to be ‘written off’?

Some shareholder disputes may arise due to choices made by individual partners. A shareholder may want to terminate the pact against the wishes of the others. Or perhaps, one shareholder may be in dire need of cash and want to sell their shares to a rival or a competitor.

Such disputes have brought corporate behemoths to the ground before. Your business is certainly not immune and you shouldn’t hide your head in the sand.


What Should You Do?

As we mentioned earlier, you should take the bull by its horns. First, face up to reality. Fallouts often happen, both at home and in business. Therefore, as Shane puts it “Be very careful who you marry.” Be careful about whom you choose to partner in business. But don’t stop there. Resist the urge to be penny wise and pound foolish. Reach out to a qualified legal professional, like a business lawyer, and proactively draft a shareholders’ agreement to safeguard the company against the common, and not-so-common shareholder disputes.

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