What you must do before going into business

7 July 2016

Caught up in the thrill of the new, parties often neglect to consider what will happen if things go sour in business. Disputes can erupt over something as simple as one party wanting to exit, a change in personal circumstances (for example, a marital breakdown, injury or illness), or a difference of opinion in how best to leverage a successful start-up.

A shareholders agreement can provide for such exigencies – and prevent an out-and-out war between partners. Let’s examine how the following real-life examples played out:

Case study

Mazzoni Plant Hire Pty Ltd (MPH) vs. HBU Holdings Pty Ltd & Ors [2014] QSC 228

Our client was HBU, and HBU and MPH were equal shareholders in Aurora Leisure No 1 Pty Ltd (Aurora). Aurora acquired land for development. The shareholders agreement provided that MPH would advance funds to meet certain development costs pending finance approval, and dealt with other matters relating to the acquisition, approval, finance and conduct of the development.

It also outlined what would happen in the event of a “continuing unresolved dispute” of “such magnitude” that a shareholder considered the “orderly management” of Aurora impossible:

  • That shareholder (offeror) could offer to sell its shares to the other shareholder (recipient) on prescribed terms.
  • Within 30 days of proposing such an offer, the offeror could acquire the recipient’s shares on the same specific terms.
  • If the recipient does not make a counter-offer within 30 days, it is deemed to have accepted the original offer.
  • If the recipient does make a counter-offer, the offeror is deemed to have accepted it.

The intent behind the clause is clear. In a deadlock, one shareholder must go. The offeror cannot make an outrageous offer because the recipient would simply make a counter-offer. Having an agreement in place means the recipient cannot ignore an offer.

In this case, a dispute arose and the representatives of HBU and MPH were unable be in the same room as one another.

On 1 February 2013, HBU made an offer to MPH to purchase its shares for $388,000 in accordance with the prescribed terms. MPH issued its own offer on 1 March 2013 (not a counter-offer) and included additional terms to those prescribed in the shareholders agreement.

The outcome

The court ruled that because a deadlock existed on 1 February 2013, HBU’s offer (the first offer) was valid. This meant that MPH could only make a counter-offer – which it didn’t do within 30 days. Accordingly it was deemed to have accepted the initial offer. Ultimately, MPH was forced to purchase HBU’s shares for $388,000.  

That’s all well and good BUT

The buy-out clause in this case was triggered by a deadlock – not by a breach of the shareholders agreement. This is important. Here’s why: In another case – the case of Pioneer Energy Holdings Pty Ltd (in liquidation) [2013] NSWSC 1134 – a shareholders agreement allowed a shareholder to purchase another shareholder’s shares for $1 if a shareholder breached the agreement. After deliberation, the court ruled that this particular clause was unenforceable because it was a penalty for breaching the shareholders agreement, and $1 was disproportionate to the damage caused by the breach. So there you go – properly drawn-up agreements are essential in business arrangements to protect all parties, but every case has its own variables. Nothing is ever cut and dried.