Many of our clients operate businesses in Australia, and in Australia most businesses are not established by a single person. When starting a new venture, people often collaborate with others — there may be several co-founders, directors, or shareholders.

When someone disagrees with another party’s views, getting along and growing the business can become difficult. It is therefore essential to understand how to resolve these issues, the legal implications of such disputes, and where things can go wrong.

Today let’s talk about some useful strategies for resolving disputes between co-founders.

What is the relationship between co-founders?

When you establish a business, there are several different partnership structures you can choose from.

Some common structures include:

Company

If you have incorporated a company, you need to consider whether you and your co-founder are directors or shareholders. Directors typically have more control than shareholders and bear specific duties to the company. If you are only a shareholder of the company, you will have some decision-making rights. However, they will be more limited than those of a director.

The essential documents for this business structure are the shareholders agreement and the company constitution.

Partnership

A partnership is a legal entity consisting of two or more people. They usually each have their own ABN. Partners are jointly and severally liable for the debts and obligations of the partnership.

The key document for this business structure is the partnership agreement.

Your business structure will affect the strategy you use to resolve disputes.

What are the available solutions?

There are several ways to resolve disputes, and you can also choose whether or not to continue operating the business. The solution that best suits you will depend on whether you or the other party has breached the law, and on what matters you can reach agreement. You should maintain a good relationship with your partner wherever possible, even if that means having a difficult conversation.

Some possible outcomes include:

selling the business or its business assets;

dissolution of the partnership or winding up of the company.

Work hard at negotiation

The first step in resolving any dispute should always be to try to work things out with your co-founder. You may not be able to agree on every matter, and if negotiation is ineffective, a lawyer can step in.

A lawyer will encourage you and work with you to find a middle ground between the two parties, grounded in your legal rights. So if you can do this sooner rather than later, you will save a great deal of hassle!

Sell the business or business assets

Where there is conflict between co-founders, proposing to buy out your co-founder’s shares or selling your assets in the company is a good way to part on amicable terms. For example, you could sell the entire business, or sell specific assets such as shares or other intellectual property.

To agree on the value of the transaction, you should refer to the shareholders agreement or the partnership agreement to determine whether there are specific valuation requirements. Alternatively, both parties can appoint an independent valuer to review the business and provide a valuation based on their professional opinion.

If your co-founder has done something wrong — whether by breaching their director’s duties or your partnership agreement — you can use this to negotiate a better deal price.

It is important to remember to formalise any agreement reached in a written commercial agreement or asset sale agreement.

Dissolution of the partnership

If you are using a partnership structure, your focus should be on selling or buying the business assets. Given that a partnership is a legal entity, you need to formally dissolve and deregister it to ensure that the parties are not jointly liable for ongoing debts and obligations. In addition, you will need to transfer or pay out ownership of the assets and liabilities.

If you do not have a formal partnership agreement, you can rely on the relevant state partnership legislation to dissolve the partnership.

Winding up the company

If neither co-founder wishes to continue operating the company, or if the company’s principal assets have already been sold, you may also dissolve the company. You will need to pay off any remaining debts and then apply for voluntary deregistration with ASIC.

What if we cannot reach an agreement?

If you and your partner cannot agree on a resolution, you may need to go to court. The outcome you can obtain through litigation will depend on your specific circumstances and the remedies available. Contacting a lawyer early on can help you pursue a better solution.

Final thoughts

Resolving disputes between co-founders can sometimes be difficult, and you need to consider your business structure when choosing the appropriate approach. The most cost-effective way to resolve these issues is to negotiate with your business partner and reach an agreement.

Engaging a lawyer to assist with negotiations can help you achieve a more favourable agreement, but in some cases you may still need to resort to the courts.

If you need help resolving a co-founder dispute, our experienced dispute resolution lawyers can assist you — answering your questions and drafting and reviewing your documents.