Small business- shareholder removal?

I am the sole director of a company. It is a small proprietary company with 2 x $1 shareholders, both myself and shareholder X. At the time of starting the company, I was in a relationship with shareholder X. We broke up a year ago. I have been solely running the company since this time and he has been almost entirely a passive shareholder both during and after the relationship. Despite my requests, he is refusing to sign over this $1 to me.

I understand that I cannot remove him as a shareholder without his consent. The company has made losses over its initial years but finally made a profit last year. It has assets, a medium term lease, but all of its debts are to myself as I have personally injected funds to get the business up and running and seek expansion options.

I would like to end any association with shareholder X. If Shareholder X does not sign over the share, what are my options for the company ? Am I forced to end the company and if I decide to, how do I move, sell or transfer the assets that I am using in the current company across to a new company ?

I have limited cash flow to pay extensive legal advice so clarifying my options and situation would sincerely appreciated

You need to consider carefully the terms of any shareholder agreement and/or the company's constitution, if any.

As to Lionheart's advice, be very careful! Starting a new company and then referring clients from the existing company will almost certainly be a breach of your duty as a director.

Whilst you cannot force the other shareholder to sell his shares, you could possibly (as the sole director), start a new company and then sell the underlying business to the new company. This would have to be done for a fair price, (establishing the fair market price would likely require an external valuation of the business and could be expensive), but you must be careful not to breach your duties as a director under the Corporations Act as to do so may result in both civil and CRIMINAL issues. You absolutely should only explore this option with the assistance of a lawyer.

The better option, in my view, is to negotiate to buy your former partners shares. They are obviously worth something to you, and even if the business has little or no value without your constant input, you should be willing to pay something.

On the other hand, the other shareholder would be silly not to agree to accept a reasonable offer, as you, as the sole director, can make life uncomfortable for them. For example, you could, as the sole director of the existing company, determine to pay yourself a generous, but commercially justifiable wage for your work running the business, direct profits into the repayment of your loans to the company, so ensuring that no actual dividends will be payable to the shareholders for a considerable time. You could also decide to issue new shares which would require you both to buy more shares or reduce your relative shareholding (which will raise capital and forces shareholders to either buy more shares or reduce their relative shareholding in the company, which may affect control).

Most of the above actions, however, should only be considered with the assistance of formal legal advice as if done improperly, you could easily commit a crime or at least expose yourself to civil litigation.

Proceed carefully, and remember that in business, a negotiated outcome is usually the cheapest and most satisfactory.

Edited by Excaliburman - 16/March/2010 at 12:41

Lionheart,

My concern with that approach is simply that s.183(1) of the Corporations Act includes:

"A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

    (a) gain an advantage for themselves or someone else..."

"Information" likely includes client lists and client contact details.

Hi Lionheart & Excalibur,

Thank you so much for your responses, I'm starting to see that there are other courses that I had been unaware of.

Some further info if it may help:

1. The company name is not the same as the trading name, so clients would in fact not even know of the changeover if I were to transfer companies, as the brand would remain the same.

2. He is unwilling at this stage to transfer the share over, and I have had no choice but to assume it is not negotiable as he has not named a price.

3. Just to clarify, are you saying that I can sell the assets of the company at fair market value to a newly created company, or is it that I would need to sell the business to the new company at fair market value?

As to the fair value of the business, presently the assets of the company are less than the debt owed to me personally as the sole creditor of the company. It has been operating at losses and this year is just starting to generate profit. I suspect that the fair market value of the company is not overly high but take the point that it would still require an external valuation.

I'm wondering if the above factors alter your opinions on the way ahead - any more insight would be useful before I seek formal legal advice!

Thank you!

In relation to the further information you have provided:

1.     Even were the business name the same as the existing company name, it would still be possible to register the business name, then change the existing corporate name before transferring the business, so as to effect the transfer of the business name.

2.     The mere fact that he has refused to transfer his shares over does not justify the conclusion that he won't transfer them over if a suitable offer is made. He probably has less idea what they are worth than you and as such is reluctant to make an offer himself. As a precursor to making an offer, I think you should explain your position, and the position of the company, including:
a) that the company is in marginal financial shape and in view of its debts, is of negligible value.
b) that you are not prepared to continue running the business if he is to remain a shareholder, and therefore propose that either he sells you his shares or buys yours. Ask him to make an offer to buy yours, if his offer is high you might accept it. If it is low, perhaps tell him you'll buy his at that price (since that is what he considers a fair price).
c) if a sale cannot be agreed, then you will have to take steps to sell the business in order to pay back the company loans.

If he is not willing to sell or buy you out on acceptable terms, a further possible alternative (depending on the nature and length of your relationship with this other shareholder) might be to consider an application under the applicable law relating to property settlements for defacto relationships (which varies from state to state) or for marriages. Generally, the courts attempt to distribute assets of a relationship in a way which separates the parties financially. Limitation periods may vary so you should consider this option ASAP if you think it may be necessary.

3.     The business and all property associated with it, are assets of the company, and conceptually, can be traded/sold, just like a person can sell a car.


Edited by Excaliburman - 17/March/2010 at 13:23

I agree with excalibur excpet that a director that sells the majority of assets out of a company to a related company controlled by the director even at arms length would definitely be seen as a breach of duty.

The shift in asset sale would be considered as an attempt to transfer the underlying business to a separate entity controlled by the director and therefore a breach of his duties and an attempt to defraud the other shareholder

Hi all,

Thanks again for all the responses. More info below:

(i) I own a business that sells services. The only assets of the company are some equipment that is used in provision of the service. (ie similar to a personal trainer running a business and owning some gym equipment and then needing to sell the gym equipment to start a new company). The service provided is the main "asset" in the company. Would selling this equipment even at an arm lengths price to a new company, still be considered a breach of shareholder duties ?

(ii) As for how the other shareholder would react if i told him that I was going to stop operating the business, he wouldn't care. The company operates on a spexed service I provide, and if I resign, it wouldn't be able to continue running. My brand is extremely crucial to the business due to the level of my spexation and I thus do not want to lose the business either.

(iii) Also, one of the reasons that I set up the company with 2 $1 shareholders was that I had understood that I required two shareholders to start up a proprietary company. IF he is willing to transfer his share to me, am I able to be a sole director and sole shareholder as well ?

From all the above, I'm hearing that:
- the best and only option is to negotiate to buy his share if we can come to an equitable agreement (highly unlikely)

Failing this,
- It seems my hands are tied
- my chances of being able to retain my trading name appear to be pretty slim, since the actions I have been advised above all seem to be a breach in some way or other of my directors duties
- also, even if I do set up a new company, it looks like I would not be able to sell my assets to that new company as he is a 50% shareholder and it needs his approval plus it is also a breach of duty
- if I resign as the director and the company ceases trading, I don't have a business to operate since the business relies on services that i provide. Sure i could open a new business, but i would no longer have the brand I have established, plus the lease is in the company's name as well.

Thus I am struggling to see a way forward if i cannot negotiate an outcome.

Is that accurate?

Thanks once again.

Lucy you may certainly operate a Pty Ltd Company as the sole shareholder I do it now for my own Pty Ltd Company although I have 10 shares (makes no diff).Are you able to elaborate on the Brand, I suppose from what you say it is owned by the company and the other party is just uncooperative for the sake of it?

Hello everyone,

thank you for all the advice. I will be trying a few ways to negotiate an outcome with the shareholder as well as seeking formal legal advice next week. Your input has been fantastic and has made me so much clearer on a multitude of matters. I appreciate it.