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Throughout the lifespan of a business, the relationship between partners can function effectively and is often a crucial factor in the success of the business.
However, as time goes on the relationship between partners can change. Partners may no longer prioritise the business in the same way they once did or take a view that their contributions to the business are greater than others and they should be entitled to more. There may even be a rogue partner, who starts making decisions without consulting the others, or in the worse situations a partner starts to deflect business opportunities away from the business to themselves.
In our experience, business partnerships often break down subtly over time with fallout slowly building up until it escalates to a critical breaking point. At this stage, with so many issues unresolved the dysfunction can cause the business to collapse.
Potential signs to look for which may indicate that a business partnership is in decline include: a lack of communication; consistently being late for critical meetings; double-checking or reviewing insignificant decisions (indicating a lack of trust); lack of interest in the management of the business; making decisions without consulting partners; and unexplained transactions or expenses.
If partners see any of the conduct listed above, it is important to address it appropriately and in proportion to the conduct that is in issue. For example, if there is a lack of communication it may be more suitable to flag it with the partner, organise a coffee or lunch and just be honest and say ‘hey, I feel like you’ve stopped responding to me, are we good?’. This simple attempt at communication can save you thousands in legal fees. Rather than doubling down with emails, texts or calls demanding in person meetings which may make matters worse.
If communication attempts have been made and the issue is still unresolved, we consider the potential options available in this situation.
We will assume the directors are also shareholders of the company, common in most small to medium businesses. If the business is a partnership or trust, there are different ways to manage a business breakdown and will require reviewing the trust documents or partnership agreements.
When a breakdown in a business relationship occurs it’s important to review and follow the relevant clauses within the shareholder agreement or company constitution. Any clauses which address how disputes are resolved, and if necessary, how the sale of shares is to be conducted.
A typical dispute resolution clause will require the parties to notify the other party in writing of the nature of the dispute and provide them with a few days to respond. If there is no response, the aggrieved party is generally able to proceed to litigation provided the clause does not limit their rights any further. If the party responds and there is still no resolution, the clause will likely stipulate that the parties are to engage in a predetermined form of alternative dispute resolution within a specified time frame such as conciliation, mediation, expert determination or arbitration.
Choosing to not follow a dispute resolution clause and proceeding with litigation may result in the proceedings being stayed or adjourned pending compliance with the dispute resolution clause. This can be challenging because if the matter is resolved through dispute resolution and proceedings were started, the other party may look to recover their legal costs for responding to the proceedings.
This issue will just add further complexity and costs to the dispute, when it could be avoided if the agreement was consulted and the dispute resolution clause was followed, even if there is resistance from the other party, the attempt is the important aspect.
Selling shares in a business after a dispute can be a pragmatic solution to resolve conflicts and move forward. When partners are unable to reconcile their differences despite tries at communication and alternative dispute resolution, selling shares allows one or more partners to exit the business amicably. This can prevent prolonged legal disputes and financial strain. It is crucial to ensure that the sale of shares is conducted in accordance with any existing agreements, such as the company constitution or shareholder agreement, to avoid potential legal issues.
A frequent issue in share sales arises when a fractured business relationship complicates the shareholder agreement’s independent valuation clause. Disputes may occur over the expert’s methods or data. Even if the share value is agreed upon, finding a willing buyer can be difficult. Other shareholders might decide whether to buy the shares themselves or approve another purchaser. The shareholder agreement will guide these decisions, often allowing a vote by most shareholders.
Although in some circumstances there may not be a requirement to engage in mediation, we recommend that all our clients consider it early in the dispute. Mediation involves an independent third party being retained to aid the parties in reaching a mutually agreeable resolution.
The costs of the mediator are usually shared 50/50 between the parties and the total costs of the mediator largely depend on the mediator’s experience and reputation. There is a mediator available for every budget. A mediator can be retained for any length of time.
The mediator prior to the mediation date (which is agreed by both parties) will request position papers from the parties, these are not intended to be a complete detailed recount of the whole dispute (in most cases the mediator sets a limit on how much can be written) but rather it should identify the parties, their relationship, the nature of the dispute, your position, and the damages or relief sought. The mediator will review all the parties position papers prior to the mediation to aid with carrying out the mediation.
Mediation offers several advantages in resolving business disputes, with the primary benefit being a reduction in costs. Unlike litigation, mediation is a relatively straightforward process that enables parties to reach a mutually agreeable solution without the lengthy and often expensive requirements of court. By engaging in mediation, parties can significantly save on legal fees, court costs, and potential expenses related to prolonged disputes. Mediation is subject to confidentiality agreements, and the parties can agree to exclude any admissions or representations from being relied on in court, so that the parties can negotiate freely without fear of consequence.
Going to court can be unpredictable as the decision-making authority is transferred to the court; while in mediation, the parties retain control over the process and jointly reach a settlement if one is achieved. Consequently, compliance with a mediated settlement is found to be higher compared to a court judgment, which might require further costs for enforcement due to appeals or non-compliance.
Even when mandated the court will expect that the parties engage in mediation in good faith, we often see that in partnership disputes clients will say that it’s a waste of time given the conflict. In these circumstances, we still recommend attempting mediation because it may be advantageous when it comes to a cost dispute to be able to show to the court that you did attempt mediation, but it was refused, or the other party had engaged but with a lack of bad faith.
If communication has failed, mediation has failed so now it is time to approach the court for relief. The two main causes of action available are oppression and derivative action as a shareholder.
Oppression
If the relationship has gone sour, and you need to approach the court for relief, the key provisions relied on by minority shareholders is section 232 of the Corporations Act 2001 (Cth). This section permits the court to make an order under section 233 of the Act if conduct of the company’s affairs, or an actual or proposed omission by or on behalf of a company, or a resolution or proposed resolution by its members is contrary to the interests of members as a whole or oppressive to, unfairly prejudicial to unfairly discriminatory against, a member or members. The cause of action is commonly referred to as a claim for oppression.
To decide what conduct is unfair the court employs an objective test as to whether objectively in the eyes of the commercial bystander has there been unfairness, regardless of the motive. The types of conduct which could constitute oppressive or unfair conduct include diverting company funds into personal accounts, preventing minority shareholders exiting the for a fair value or exiting at all, making decisions which are not in the company’s best interest and denying shareholders access to information. The conduct which may give rise to a claim of oppression is broad and will vary depending on the circumstances given that every company is different.
If there is finding that conduct is oppressive, prejudicial or discriminatory, then the court has broad powers to do what is necessary to right the wrong pursuant to section 233 of the Act. This can include an order for the sale or buyout of shares by a third party or other shareholders, the court is allowed to determine the value of those shares,
Derivative action
A derivative action is a claim brought by a shareholder or a group of shareholders on behalf of a company against third parties, such as the directors or officers, for breaches of their duties to the company. The aim of a derivative action is to remedy harm caused to the company, rather than to individual shareholders. A member’s derivative action allows shareholders to sue on behalf company against directors or officers for breaches of duties. It aims to remedy harm caused to the company, not individual shareholders. Under Section 236 of the Corporations Act, shareholders or directors can initiate such actions if they prove the company is unlikely to act, they are acting in good faith, it benefits the company, and the company was given 14 days’ notice of the intention to file the claim.
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Andrew is a Sydney-based solicitor with a strong background in commercial litigation and transactional legal work. He has acted for a broad range of clients across insolvency, estate disputes, and property-related matters. His experience also extends to drafting and negotiating commercial agreements, advising on business and property transactions, and preparing tailored estate planning documents.
Known for delivering clear, commercially minded advice, Andrew established Gouveia Legal to provide clients with legal services that are practical, accessible, and results driven. Whether navigating a dispute or managing a transaction, he brings a strategic approach grounded in understanding each client’s goals and delivering value at every stage.
Clients come to Andrew for straightforward guidance and a solicitor who takes the time to understand their situation and can get results.
In his spare time, Andrew likes to train Jiu-Jitsu, take his dog Henry for long walks and enjoys watching anything by Guy Ritchie or Martin Scorsese.
Melissa is an experienced lawyer with extensive expertise in personal injury law and a keen interest in immigration.
Holding a Bachelor of Medical Science and a Graduate Law Degree, she combines a strong analytical foundation with a compassionate approach to legal advocacy.
With significant experience working as both a plaintiff lawyer at Australia’s top firms and a legal representative for Australia’s insurers, Melissa brings a well-rounded perspective to every case she handles.
Known for her exceptional negotiation skills, Melissa is dedicated to securing the best outcomes for her clients. Her empathetic nature allows her to connect with individuals, understanding their unique challenges and providing clear, supportive guidance through complex legal processes. Committed to achieving justice, Melissa ensures her clients receive fair and timely resolutions to their claims, whether through skilled negotiation or robust representation.
In her spare time, Melissa enjoys fashion, going out with friends and family.
