Mitigating the risk of shareholder disputes in real estate

Like everyone else, real estate agents are human. And despite the very best of intentions, people who enter into relationships — personal or professional — with other people, don’t always see eye-to-eye.

When entering into a business partnership with someone, you may begin with the same vision. You might have a shared direction and a united goal.

But over time, who you are, what you want and what you plan for the future of your business can change. Unfortunately your partners’ directions, goals and ambitions can also change.

This month, Head of Litigation from JemmesonFisher, Lisa Jemmeson, joins us to look at some of the challenges you can experience as a shareholder in a real estate business, and how some simple work at the start of a new business partnership can save you a lot of cost and frustration later on.

How is shared business ownership formed?

While shared business ownership — that is, two or more people becoming shareholders in a business — should be formalised so all parties are protected for the duration of the relationship, unfortunately this is not always the case.

In the early days of a business’s establishment, especially in the case of small-to-medium real estate agencies, partnerships are often struck informally, agreed to verbally and recorded only in the unreliable minds of the people who were involved in or who witnessed the conversation.

Partnerships that aren’t formalised or documented come with few protections, meaning any future disagreements or divergence when it comes to the plan or direction of the business may lead to very unpleasant circumstances.

“My first tip for people in this situation, would be to always write things down,” says Head of Litigation, Lisa Jemmeson, speaking on business partnerships. “It sounds very trite and almost like a cliché, but what you’ll find is, things can often start really great, with a handshake and verbal discussion. But a few years down the track, if there is a dispute, you can’t recall what was previously agreed — especially if it was an ‘at the pub’ discussion.”

“You don’t need notarised meeting minutes, it can simply just be an email follow up the next day that summarises the conversation.”

What is a shareholder agreement?

Though, at a minimum, an email follow up is a good start, JemmesonFisher strongly recommends formalising arrangements with a proper shareholder agreement. While it may entail a financial outlay at the beginning of the business or the new shareholder relationship, it can save you a great deal of money in months or years to come.

“Shareholder agreements assist in setting out the rights and obligations of the shareholders in the business,” says Lisa. “Considering it’s not uncommon for shareholders to be directors of a business, especially in small businesses, the management of the business tends to filter back to shareholders. Having something in place that says ‘you can do this’ or ‘you can’t do this’ can be quite beneficial so people know where they stand.”

How might it help you mitigate the risk of or manage disputes?

Due to the very nature of a shareholder agreement, and its role in formalising the obligations and rights of all owners of the business, it is an invaluable tool in helping directors agree to how the business will be managed, and also how disputes will be resolved.

When the visions of shareholders conflict

“In a situation where, for example, two real estate agents own a business with a 50% shareholding each, and they have a falling out because one partner may want to leave the business while the other has a new view of its direction, both parties may have different expectations as to the value of the business,” says Lisa.

“This may be problematic, as reaching a resolution can be difficult, drawn out and frustrating. There is no automatic right for one partner to simply buy the other partner’s shares, both must agree to the value and terms.”

“There are various approaches that can be taken to determine fair market value and what happens next, depending on your agreement or lack thereof. For example, a brutal but effective method is the inclusion of a Savoy or Russian Roulette clause, whereby one party issues notice of the value they believe the shares to be worth. The second party has a set period to either agree to the value and allow purchase of their shares at the agreed amount, or if they refuse, they must buy the first party out at that same value.”

“Though there is usually a valuation methodology behind what the offer is, and this method is effective, it is a very brutal way to cut through the back and forward. It doesn’t delay the process and draw it out for a long time, and it avoids involving the court systems unless there are urgent matters like needing to preserve business assets, or a partner has run off and is using confidential information.”

A shareholder agreement ensures measures and processes are in place and agreed, right from the start of a partnership, so disputes can be resolved more easily.

When shareholders don’t have a voice

An agreement can cover two or more shareholders and offers protections for all, regardless of the size and value of their shareholding.

Many businesses with concession plans now enable staff to buy small numbers of shares, like 5% or 10%. In some cases, despite their ownership status, minority shareholders will be overlooked and they will have no say in how the business is managed. This can cause disputes.

“Again, this is where a shareholder agreement can be valuable. Usually an agreement will have a good dispute resolution process, which tends to be the first place a minor (or any) shareholder can go to resolve this issue and avoid the courts,” Lisa explains.

“Court proceedings can still be an option. They tend to come under the Oppression regime and The Corporations Act. Effectively it says a court can find there has been oppression, where the conduct of the company and their affairs, or the decision of some shareholders, are either oppressive to the shareholders as-a-whole, or unfairly prejudicial or discriminatory against individual members.”

Lisa goes on to detail the options available to the court, should it find there has been oppressive behaviour. “Most commonly, and what people want, is to be bought out, so the court has the power to order this at a set amount, generally based on an independent valuation. It also has the power to wind up a company, though it doesn’t like doing this if the company is still viable and trading and it is not insolvent. In those cases, it can rewrite or amend the company’s constitution or appoint a receiver.”

There are many other situations when a shareholder agreement will be invaluable as guidance for dispute resolution and simply to ensure all parties involved in running a business are on the same page and understand their individual responsibilities.

“The big take away is, a very well-drafted shareholder agreement, that sets out a nice dispute resolution mechanism, combined with some commercial sense and reality can pave the way for smoother business management as the business grows and changes and as various shareholders leave and join the business.”

“If nothing else, send some emails confirming your discussions at the pub on a Friday night if it relates to business,” Lisa adds.

JemmesonFisher is the legal partner to the EAC, providing introductory legal advice to EAC members. If you would like specific advice relating to your shareholder agreement or situation, or any other issues, don’t hesitate to get in touch with JemmesonFisher.

Note: this article is general in nature and does not constitute legal advice. Please seek independent legal advice for you specific situation.

Leave a Reply