Beware of Starting a Company with Others

It is not uncommon for two people, whether friends or business associates, to have a great business idea and then conduct the venture through the vehicle of a company with each person becoming a director and equal shareholder. Little thought is given to what happens if things turn sour and the company becomes deadlocked because neither person has a deciding vote. The deadlock can continue indefinitely meaning the company cannot make important decisions and the business either cannot function properly or is headed for failure. So, what can be done to avoid this situation? Here are some solutions:
(a) When setting up the company the shareholders should enter into a Shareholders Agreement which governs the relationship between shareholders and would include a term to resolve disputes;
(b) Avoid setting up a company with only one other person so that there will always be a majority on the board of directors or between shareholders;
(c) A non-executive director can be appointed to resolve the deadlock;
(d) One of the director/shareholders can sell their shares to the other or a third party at an agreed price;
(e) Mediation to try and resolve the issues between the parties;
(f) Court proceedings seeking to break the deadlock by one party claiming oppressive conduct under the Corporations Act or breach of director’s duties; or
(g) As a lat resort, an application to a Court to wind up the company.

June 2019