What Are Shareholder Agreements and Why Are They Important?

This is the same for the shareholders of a company.

If you have the chance to think through how you want to structure the company, what you want for the business, and the future in case unexpected events (like a death or disability) occur, and document those expectations, you create a situation where dispute is unlikely. 

Documenting these expectations in some form (usually a shareholder agreement) is important because even if there is a dispute, you will still be able to use the terms of the shareholder agreement to resolve it with the least amount of time, effort and fuss.

Why Do You Need Shareholders Agreement?

Clients spend considerable time and money with us to resolve disputes about what they are each entitled and not entitled to, how to exit or remove someone from the company, and what will happen to those shares, IF no shareholder agreement was ever entered into. 

When people stop agreeing and there is no effective mechanism to rely on to resolve the disagreement, they can be stuck in a deadlock that can only be resolved by a court.

A shareholder agreement can include a mechanism for dispute resolution that is quicker, easier and cheaper than court. Not to mention private. 

Think about it. 

If there are two shareholders who are also both directors (which is not an uncommon situation), then every decision about the company will have to be unanimous. It is rare for business partners to be on the same page 100% of the time, so situations will arise where the parties are deadlocked on a decision and there is no clear way forward. 

A shareholder agreement can provide the way forward. 

Without a shareholder agreement, court may be the only option. 

Does it make sense to ‘save’ $5,000 now to lose $100,000, or your house, later?

What Is The Difference Between a Shareholder Agreement, Partnership Agreement, and Joint Venture Agreement?

There are many different types of business structures –

1. Partnership

If you are a sole trader and have decided to collaborate with another individual without setting up a company or trust, that formation is a partnership. Different sorts of entities can set up in partnership, but it tends to be most common between individuals, or their family trusts. 

A partnership is not a separate legal entity, which means each partner is exposed to liabilities the partnership incurs. For example, if one partner commits fraud by stealing money from clients, whether the other partners know about it or not, the innocent partners may be required to repay the stolen money. The people who have suffered the loss don’t even have to pursue the defrauding partner first! 

You would need a Partnership Agreement to clearly set out the rights and obligations of each partner, and how to exit or dissolve the partnership.

2. Joint Venture

If you wish to pool resources and share expertise with another person or entity, that formation is a joint venture. A joint venture is very similar to a partnership. It may also not be a separate legal entity by itself, but it does not have the disadvantage of liability for the actions of the other parties.

You would need a Joint Venture Agreement to define each joint venture partner’s roles and responsibilities, and entitlements. 

Sometimes, a successful joint venture can lead to incorporation, or be established as a company from the start.

3. Company

A company is an incorporated entity which is separate to the people behind it (shareholders and directors). The most common structure for a company is a proprietary limited company, which means each shareholder is only liable up to the amount unpaid on their shares.

Here is the typical structure of a company:

In a company, the director is legally responsible for the company and its strategic direction, the people who work in the business are responsible for daily operations, and the shareholders own the company. 

Even with legal responsibility, there are some decisions a director or board of directors cannot make without approval of the shareholders. Some powers are reserved to the shareholders (eg. the power to replace directors) even though they rarely have any involvement in the day-to-day business activities. 

It is important to understand what ‘hat’ you are wearing in a small business and try and focus on the responsibilities of that role only, rather than trying to be everything all of the time. 

As an owner of the business, you should be interested in the finances and the risks the business is taking and feel confident the board has it managed. 

As a director, you should feel confident you understand your legal liability, and that the company is operating within the kind of risk tolerance appropriate to your industry, and you have a plan for where the business is headed.

Workers need to get the jobs done.

As an aside – 

What is the difference between a ‘board’ and a ‘director’ or ‘the directors’? 

Nothing. 

The ‘board’ is just the collective name for the directors working together. In a shareholder agreement, even if there is only one director at the time it is initially signed, the document will usually refer to the board, rather than a director alone to avoid having to make changes once another director is appointed. 

Whether your company has a sole director or a board, they each are responsible for making the same decisions and all members are legally responsible for the company.

What Is In a Shareholder Agreement?

As with all business relationships, it is important for all parties to understand the proposed arrangement, their contributions, entitlements, and rights and responsibilities. 

Essentially, a shareholder agreement is more specific than a constitution and can cover a broader range of topics such as:

• the business activity to be carried out
• what each shareholder owns
• whether, and if so, how new shareholders can become involved
• what rights shareholders have in appointing directors
• whether directors can act in the interests of their appointing shareholder
• dealing with shareholder loans
• outlining specific requirements for business operations, eg. business plans and budgets
• when distributions can be made
• how shares can be transferred
• valuing the company
• what happens if a director or shareholder exits
• what happens if a director or shareholder does something wrong
• rights if a buyer comes along
• what happens to assets and intellectual property if the company is wound up
• dispute resolution

How Do You Write a Shareholders Agreement?

A shareholder agreement needs to set out important matters relating to the shareholders including how they make decisions, their entitlement to dividends, and how they can exit the company or vary their interest in the company. 

Other important factors include bad leaver provisions, restraint provisions and funding provisions.

Consider a scenario where you no longer wish to collaborate with the other shareholder (say, if they have acted recklessly or even fraudulently) and you want to either exit the company or remove the other person from the company, how do you do that? We have seen many situations where the lack of a Shareholders Agreement (or an effective mechanism within the Shareholders Agreement) caused stress and detriment to the shareholders as well as the company which may have to cease operations

Who writes a shareholder agreement?

We strongly recommend you go to a lawyer to help you draft your shareholders agreement.

This is a document that needs to be tailored to your situation and is not a standard form document like the company constitution which can usually be prepared by accountants when setting up the company.

Is a Shareholders Agreement a Contract?

Yes. It is a contract between the company and the shareholders, as well as between each shareholder. 

It is possible, and common, to set different rights and obligations for each shareholder. For example, for a shareholder who has the knowledge and expertise to run the business or steer it in the right direction, it may be good for them to have the power to vote and make decisions for the company. On the other hand, if you have a shareholder who is an investor shareholder and purely contributes funds to the company, you may want to restrict their control over the company by giving them no voting power and only entitlement to dividends.

Does a Shareholder Agreement Need to be Signed?

Signatures are often the easiest way to prove that someone has had the opportunity to read and agree to the terms of a document. 

Shareholder agreements can be signed, or a resolution (also in writing) passed unanimously by all shareholders at the time, can be passed to prove agreement and approval of the terms of the shareholder agreement. This requires a poll of shareholders. 

Every shareholder, and the company, sign the shareholder agreement. If it is a resolution, then it is not passed without the unanimous approval of every shareholder.  

Is a Shareholder Agreement Legally Binding?

Yes, provided that it is either signed by the company and each shareholder, or adopted by unanimous agreement of the shareholders by passing a resolution.

What Happens If You Don’t Have a Shareholder Agreement?

Your business could still operate smoothly in the absence of a shareholder agreement.

Case STUDY

Two builders set up business together on a handshake. They establish a company where they and their respective life partners are directors (4 people all together) and their respective family trusts are the shareholders. Each family trust holds 50% of the shares. The shareholders must vote on the appointment or removal of directors and a decision must be a majority decision. Because each family trust holds 50% of the shares, that means every decision has to be unanimous. 

They each contribute equipment to the company. 

They buy computers and motor vehicles through the company. The vehicles are expensive, under finance and registered in the name of the company, even though each builder takes one for their exclusive use and one builder puts personalised number plates on the vehicle they use.  

A meeting with the company’s accountant highlights that there are unexplained transactions by one of the builders. The parties get into a dispute. As a result of the dispute, each of the life partners resign.

It takes 12 months for the builders to come to an agreement about the vehicles, equipment and jobs in the business. They cannot reach an agreement about the $300,000 + sitting in the business bank account, which was frozen by the bank pending their agreement. 

To resolve the dispute, it is likely the parties will have to go to court, with the likely result that the company is wound up and the money in the bank is used to pay legal fees in getting to that decision. 

If the parties had a written shareholder agreement, that dispute could have been resolved in a few short months, at a significantly lower cost.

However, not having a shareholder agreement would be problematic IF the shareholders cannot agree on a particular matter. It would be more difficult to resolve the dispute without a binding contract to rely on.

We strongly encourage you to put a Shareholders’ Agreement in place if you have not already done so, and have it regularly reviewed by a legal professional to ensure it remains up to date and compliant with regulatory requirements. 

The 7 Key Legal Issues in Buying a Business

1. Not Rushing In

You might be incredibly excited about buying a business, and we have come across people who have decided they want to work from home, have a look on Facebook marketplace and agree to spend money they don’t have, all in one day. No consultation with a lawyer or accountant, no real understanding of what is involved in the business. It did not last and it cost them money. 

We’ve also come across people who buy a business with unrealistic expectations of the work involved and an expectation that if the bank is prepared to lend them the money, they would be able to make a success of it. 

A business purchase is a big commitment. It is not just the cost involved, but running the business afterwards. The next three case studies to show why it is important not to rush into a purchase.

Case Study 1 

A young lady came to us with an offer from her employer to purchase the hairdressing business she was working in ‘cheap’, and to take over the lease for the business. She was keen to sign the agreement, as the seller (her boss) wanted to get out of the business before the end of financial year and it was already June. 

A quick review of the deal suggested that our client would be taking on a business that was only still operating because of her work, a lease that had three years remaining and was not cheap, and the need for some refurbishment of the salon. The landlord was offering a $5,000 incentive for fitout, but the likely cost was probably going to be higher. 

Fortunately, we were able to get our client to slow down and get accounting advice on the business, and to identify to our client that the seller would benefit to the tune of $30,000 per annum by being out of the lease. We encouraged our client to get an estimate of fitout renovations, which came in at a little under $70,000. 

Our client decided there was no benefit in the deal to her and other opportunities were out there. 

Case Study 2

A client came to us after having already taken over a beauty spa business. She thought she had a good deal because the replacement cost of the relatively new equipment in the business was significantly higher than the requested purchase price, and the vendor was providing finance. 

By already being in the business and having paid a deposit of $5,000 to the seller, our client was committed, and there was nothing in writing. The client came to us desperate to get a sale agreement documented because the seller had said they would do it and hadn’t. Our client was already paying the rent, COVID restrictions came into effect and the seller was suddenly very cooperative in getting the paperwork complete. The landlord was fortunately agreeable to transferring the lease, but our client did not want us to advise on the lease, which was very basic. 

Two years down the track it became apparent that the appropriate council certifications had not been obtained for the plumbing work on the premises and the premises were non-compliant. The lease and assignment of lease were silent on responsibilities and our client ended up footing the bill. 

Difficulties with the lease could have been resolved before the purchase was completed if the client had not already been in the premises and operating the business before getting advice. 

Case Study 3

Our client was looking to buy his first business at around $200,000 and had found a business through a broker that he was keen to buy. He arranged the finance, did his own due diligence and asked us to become involved at contract stage. The broker had prepared the contract on behalf of the seller. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. On talking to the broker, they had moved from selling residential property into business broking and were inexperienced in the area. They were also quite frustrated that our client hadn’t simply signed the agreement and sent it back. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive. In addition, the landlord wanted the buyer to enter into a new lease at a rent $10,000 per annum more than the seller had disclosed to our client. 

Fortunately, our client did not rush to sign and when answers to our questions were not forthcoming, and his circumstances changed, he decided not to go ahead. In that instance he had invested in getting legal and accounting advice and told us he had a very valuable learning experience.

2. Knowing What you Are Buying

So, what are you buying? If the contract isn’t clear, then you might be handing over money and not getting what you expected. You need to know what is important to the day-to-day operations of the business and how much of that is being transferred to you. You don’t want to purchase a cafe and upon settlement, find out that the seller cleaned out all the cupboards and fridges the day before and you have to restock before you can trade. 

Case Study 4

Our client was looking to buy his first business at around $200,000 and had found what he thought was a printing business and that everything was done onsite. He had no experience in printing and was planning to hire someone to run the business. He arranged the finance, and asked us to become involved at contract stage. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. There was no mention of printing equipment, paper, card, inks or other stock. We also suggested our client carefully go through the accounts with their accountant to ensure there were sufficient profits in the business to be able to hire someone to run it. The seller was an owner/operator. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive, what equipment was in the business, or even if the seller owned the equipment being used and had the right and ability to sell it. 

Without ensuring the contract was clear, it is possible that our client could have only received business branding, a client list and the liability for a lease – expenses without immediate income.  He would then have also had to immediately spend additional money purchasing the necessary equipment to operate the business. 

Fortunately, our client did not rush to sign and when answers to our questions were not clear, and he was offered a role interstate, he decided not to go ahead. That client is looking to purchase a business for income without him having to be involved in the day to day. He hasn’t done that before and said that it had been a very worthwhile investment in getting legal and accounting advice before signing anything. He now feels better prepared to assess potential deals in the future. 

3. Profit is in the Purchase

When you are buying a business, it is very important to get appropriate accounting and financial advice. It is possible to buy a business that needs to be turned around, but only if you can do so at the right price. 

The profit is in the purchase. 

What opportunities do you have to increase revenue immediately or very soon after you buy the business? It is not uncommon that people who are ready to sell are at that point because they have lost real interest in the business and there is lots of room for improvement. If you can see the opportunities, and know how to leverage them, then you might be looking at a good deal. 

A lawyer who had bought a law practice on the Gold Coast once applied to work with Onyx Legal. They claimed they had been misled about the value of the business, paid too much and there was no opportunity to make money because the Gold Coast was a low socioeconomic area! Naturally, they didn’t get the job. You attitude to the business you are buying can influence your ability to make a success of it. 

When you go into business, success or failure is up to you. Know what the business is worth once the owner walks away (are customers attached to the owner and likely to follow them?) and understand what you are willing to pay to secure that opportunity. 

It is not unusual for cafes and restaurants to be sold for nominal amounts (like $1) because the owner is losing money and is better off getting out. Someone who understand the area, likely clientele, available workforce and marketing can potentially come in and make a success of it. There are stories of a Gold Coast restaurateur selling and buying back a restaurant a couple of times because he knew how to make it a success, but the purchasers didn’t. 

One of the early Australian online tipping platforms was bought from the founders by a larger company, and then bought back by the founders 18 months later at a much lower cost because that company didn’t know how to make a success of it.

4. Assets vs Entities

When you buy a business, you are either buying shares in a company, in which case you are buying the history, or you are buying assets – which is everything necessary to operate a business. Assets can be tangible (like a desk) or intangible (like a website). 

When you buy shares, everything in the company comes with it, so you must understand what loans or other liabilities are sitting in the company, and how they will be dealt with at settlement. Things like tax debts, overdue superannuation, bad credit ratings, court proceedings, embarrassing media stories and so on are all associated with the entity, and that is what you are buying. 

When you are buying assets, you need to understand what is transferrable and what is not. Not all supply contracts are transferable without the prior approval of the customer. So if the profits in the business are in one or two large contracts and it is not clear if they are transferable, you may be losing money as soon as the purchase is completed. 

These sorts of things need to be checked. 

5. Transferring Intellectual Property

Intellectual property – copyright, trade marks, patents etc, need to be transferred in writing, by the owners. It is important to check who owns what when buying a business. In particular, copyright belongs to the creator unless transferred in writing. Software, graphic design, website copy etc all belong to the creator. If the creator is an employee it is ok, the copyright vests in the company, but if they started as a contractor before becoming an employee, there can be uncertainty about what they company owns and is able to sell. 

Case Study 5

Our client was buying a health business and searches showed that the domain name and the website (separate things) used to advertise the business were not actually owned by the seller. A lot of patients found the business through the website. It was essential to have the sale of business contract adjusted to ensure that transfer of the domain name and website occurred as part of the sale. 

Case Study 6

A client was interested in buying a business which used a particular bespoke software for all of its main operations. The due diligence process disclosed that the software developer had been contracting to the business for years and there was nothing in writing about the ownership of that software, or its ongoing use by the company. The seller was unable to produce anything in writing to show that it owned the software, even though it believed it did. 

The buyer of the business walked away. 

6. Competition by the Seller

Online businesses are a big area where competition is a concern after settlement. Most business sale contracts contain some form of restraint on the seller about what they can do in an area that will compete with the business you are buying after the date of the sale. 

A restraint provision in an employment agreement is more likely to be enforceable when it is structured to protect the interests of the buyer, and not likely to be enforceable if it puts the seller in a position where they cannot earn a living. 

Tougher restraint provisions are likely to be enforceable for commercial agreements than they are in employment situations, because the courts will also expect the parties to have made a commercial decision about what is acceptable to them, or not. This is an issue for sellers who do not carefully consider what they plan to do after completion, and how they may be limited by a restraint. 

Different things that restraint provisions can cover are:

• Area: Does the business operate locally, nationally, in a region like Oceania, or worldwide? Does the seller plan to expand the area of service, or combine it into an existing business that covers a larger area? Is it fair? 
• Industry: A bug-bear we have is when a buyer attempts to include ‘a similar business’ without defining what that is, or to include the businesses operated by a group of companies related to the buyer, whether or not those businesses are in the same industry or something completely different. Restraints should focus on the business being sold, not something broader.
• People: It makes sense to restrain a seller from working with existing or potential customers already known in the business being sold, however, we have assisted sellers in being permitted to retain a client list for the purpose of communicating a new business, where that business does not compete with or adversely affect the buyer. 
• Key contacts: It can be also worthwhile include a restraint against poaching staff, suppliers or distributors for a period of time after completion. 
• Time: Periods of restraint can vary significantly, anywhere from months to years. Times and areas of restraint vary depending on the type of business and the reach of that business. It is also common to have cascading provisions, which leave it to a court to decide what is fair if a restraint is breached. We encourage our clients to consider the period of time it would take a knowledgeable competitor to set up a similar business, and to be reasonable in setting the time for restraint. Where a large infrastructure investment is likely to be threated by competition from the seller, then a longer restraint period is likely to be considered fair and reasonable. 

7. The Limits of Each Adviser

It’s tempting to think that your advisers will have all the answers when you are buying a business and be able to tell you what to do if you end up in a situation where you feel a little lost. This can happen for people who have never bought a business before. 

As legal advisers, we can review the contracts and check that the contracts properly describe what you think you are buying and what your obligations, and the obligations of the seller will be, after purchase. We can highlight potential rights and flag decisions you must make – but we cannot make those decisions for you. 

The truth is, it is your responsibility.

Your accountant, lender or financial adviser are all in the same boat. They can highlight information for you, but they cannot make the decision whether or not to buy, and they cannot determine how much importance you place on any piece of information. 

Case Study 7

Many years ago when working in a national firm, a client who had borrowed significantly (millions) to fund a purchase was part way through the due diligence process and wondering whether or not the purchase was going to be worthwhile. It got to a point where the client was saying “we’ve spent too much (around $300k) now not to go ahead.” 

There was an element of wilful blindness on the part of the purchaser in that transaction. They had put their reputation, and their house, on the line to fund a purchase that was looking more and more questionable the more they learnt about the business. Going through with the purchase was more about their ego and being ‘clever’ at getting the deal done. 

About 6 months after settlement, the business failed and was placed into liquidation and the director was forced into bankruptcy.   

It is your money. It could be your reputation, your family and your future that you are staking on this purchase. As much as professional advisers can provide you with advice, advisers cannot tell you what to do and all the important decisions are up to you. This makes it important to be up front with your advisers, whether legal, financial, accounting or otherwise, and ensure they understand your priorities and concerns. 

A binding contract requires offer, acceptance and consideration. Consideration can be the doing of some thing or the payment of money. 

At every point before consideration has passed, you are likely to have the opportunity to exit from a transaction, no matter how much has been spent getting to that point. Sometimes, a small loss can be better than taking a risk that doesn’t feel right.  

When you are buying a business, you will also have a period of time to complete due diligence and should use that time to ensure that your assumptions about the business are correct, and if not, whether you still want to go ahead, negotiate further, or walk away. 

As we said at the start – don’t rush in.

Business Break-ups Can Be Messy!

Unless the founders had something clear in writing beforehand, there is no end to the variety of things that can happen when founders want to go separate ways.

If there is nothing in writing and the split is not amicable, all sorts of time consuming, distracting and stressful things can happen. 

Here are some of the worst-case scenarios we have seen in practice, all where there was nothing in writing to start:

1. A Founder Dies Unexpectedly  

Whilst tragic at a personal level, it can also be very difficult for a business where one of the founders passes unexpectedly. Sometimes the family is aware of their business involvement, and sometimes they are not. In this case the family wanted the company to buy out the deceased founder’s interest in the business immediately and had some unrealistic expectations of what that interest was worth. 

Animosity was growing between the parties due poor communications. We were able to present a strategy which allowed for the progressive buy out of the deceased founder over a two year period, without interference by the family in the business, and at an amount set by a ‘desk top’ valuation completed by the company’s accountant. The family of the deceased founder were offered the opportunity to get an independent valuation, but at their cost, and the $11,000 price tag put them off.

2. One Founder Is Stealing Money From The Business, And Another Finds Out

Unfortunately, this is not an uncommon scenario. 

We’ve seen this occur in a variety of businesses from software to building and construction, and it is rarely pretty, and usually a long and slow process of separation if nothing was agreed in writing when the business was founded. 

Too many people think “we don’t need a shareholder agreement, we will be fine” when they are all excited about getting started, and then when things go wrong, they have no protection.  

In one example with a tech company, there were four sets of lawyers involved and the end result was a comprehensive deed of release covering the transfer of shares, forgiveness of debts, payment of money, and indemnities from the exiting partner. There were no admissions of liability in the deed. The deed took more than 15 months to negotiate and some shareholders meetings to approve decisions. 

As long as the negotiations remain between the parties and their lawyers, law enforcement need not be involved. There is nothing that legally requires you to incriminate yourself or anyone else in the business. When fraud or theft is discovered and reported, it is usually through a third party.

3. A Founder Walks Away Without Notice, Making Demands

Things happen in people’s lives (like death, illness, an amazing job offer etc), and they can suddenly want out. This can be very hard on the people who want to continue with the business and a shock if not contemplated before one partner leaves. Business break ups are often referred to as like going through a divorce by the people affected. 

Sometimes people want out, and they want their money, whether or not there is any owed to them at the time. Many people exiting a business think in terms of the future value of the business, rather than where it is as they exit, and vastly overestimate both what it is worth and the capacity of the other parties, or the business to pay for the exit. 

If shares are to be transferred to existing business partners, then those individuals need to have the money to purchase the shares at the agreed value. In a start up phase, this is likely to be $1 a share and not onerous, but if the business has been running for a while and has some value, the remaining shareholders might not have thousands of dollars required to purchase those shares.

If the shareholder is exiting and the company is making a distribution or buying back the shares (not a simple process) then there needs to be sufficient funds in the company to pay out the exiting party. 

As long as you have clarity around ownership of assets, intellectual property and a realistic value of the business, then its just a process to be undertaken when someone leaves suddenly. If there is nothing in place, then it is a process of negotiation and often heartache before a resolution can be agreed. 

4. A Shareholder Stops Contributing

 In situations where you have people with different skills coming together to build a business, not everyone necessarily has the same energy to keep the business on track. We’ve come across several businesses where a lot of effort was required of one party in the initial set up (for example someone building an App or a Website) and then their contribution become maintenance only. Another person in the business might be responsible for promotion, and there work is constant, requires review and reinvention, and never lets up. 

An example we have is a digital business where the person responsible for service delivery got fed up with the lack of interest of the developer who originally built the website for the business. Their ongoing contribution was minimal and yet their deductions from the business stayed the same and the service deliver person felt like they were working to support two families, without any recognition.  

Differing levels of effort over time could have been written into a shareholder agreement and appropriately dealt with, with the service delivery person gaining a greater interest in the distributions over time. Unfortunately, they had nothing documented. Fortunately, the exiting party, being the person who initially built the site, was prepared to accept an independent valuation of the business and to be paid out over six months rather than an immediate exit. 

In another tech company, the exiting person was someone who thought that they were indispensable to the business, but kept upsetting customers to the extent they left. Again, and independent valuation was agreed and they accepted payment over time, but the process of getting to that point took 4 months and was disruptive to the business.  

5. A Founding Partner No Longer Gets On with Anyone Else In The Business

This was a strange scenario and there was no shareholder agreement. One of the founders had moved into the position of CEO of the business but was no longer on speaking terms with anyone in the business, whether other founders or staff. There were six founders, four of whom no longer had any involvement in the day-to-day operations of the business, but all were looking for a financial exit. 

The company did have prospects, but a sale was not going to be possible whilst the CEO still had voting power to stop it.  There was not enough cash in the business to buy out the CEO without adversely affecting cashflow. 

Through a succession of negotiations including an independent business advisor, we were able to get the CEO’s agreement to retire and stop being involved in the day-to-day operations, as well as converting his shares to a preference share which would be paid first in the event of any declaration of dividends or sale. The preference share had no voting rights. Tax consequences for the business and the individual were also examined before the transaction went through. 

Business operations were a lot smoother without the former CEO’s involvement and a sale was achieved within 12 months, with all founders getting paid. 

It is always easier to think through future scenarios and what is fair when everyone is excited about the business and getting started, and still friends. It is significantly harder, and more costly, to attempt to resolve an acrimonious split a couple of years down the track. 

We provide clients with questionnaires to help identify potential needs in the business, and how people might exit to get you thinking about what might become important when you get started, whether setting up a joint venture or a shareholder or unitholder situation. There a lots of options available.

Disclaimers: What they do and don’t protect you from 

As a business owner, it is likely that you run a website, blog or social media to help people find you, advertise and promote your products or services. It is the most effective way of attracting potential customers or clients in this digital age.

When someone visits your website, you are offering them information of some sort. Are you always 100% certain that all the information on there are accurate and up to date?

Even if your answer is yes, do you know how your customers or competitors are using or interpreting that information? The best you can do is hope they are using it the way you intended, but really it is out of your control.

This is why having a disclaimer is always a good idea. It can better protect you and your business.

What is a disclaimer?

Almost all websites have disclaimers. You must have seen one before. Sometimes disclaimers are hidden in terms of use, and sometimes they have their own individual link in the footer, and sometimes they appear in every footer, whether that is on a website or email.

A disclaimer is a notice that you display to protect you from potential legal issues; it is a statement that you are not responsible for something. To give you an example, here is Wikipedia’s no guarantee disclaimer:

“Wikipedia cannot guarantee the validity of the information found here. The content of any given article may recently have been changed, vandalized or altered by someone whose opinion does not correspond with the state of knowledge in the relevant fields.”

So, why is it important to have a disclaimer?

Well, consider the case where someone claims that they have relied on your information and suffered loss as a result. Let’s look at an example.

A marketer promotes pre-sales of a real estate development through a website. (A common cause of claims in court.)

The website has some images that are ‘artist’s impressions’ of what the development will look like when it’s finished and might contain other information like a copy of a survey diagram. It might also contain a list of finishes to be included in the final development.

Survey diagrams are really things you should check with a surveyor, engineer or other professional, rather than take from a marketing brochure, but that might also depend on who is providing the brochure and what expertise they say they have.

The website should clearly caution the buyer that the artist’s impressions might not be true to the end result and that a buyer should make their own enquiries to verify information before they decide to buy; like checking the inclusions in the contract with the builder. If there are no clear statements, it is possible that a buyer could claim they were misled by the information on the website and would not have bought otherwise. Then if the property turns out being something they don’t want or doesn’t have the value they expected it to have, they sue the marketer to try and recover their losses.

You do not want to put yourself in a situation like this, where your business reputation could be damaged, and you could be found liable to pay legal costs to defend yourself and possibly someone else’s losses.

Some other common examples we see are:

• people who have a lived experience with a physical condition or disease, but no formal medical training
• people who have successfully built a business without any formal qualifications
• people who have successfully overcome an adversity and again, don’t have any formal qualifications

Out of a genuine desire to help others and share the benefit of their experience, a person like this might establish a business around coaching or educating others on how they achieved what they did.

The thing is, not everything works for everybody consistently, and there is a risk if you put yourself in this kind of position that you will encounter a person your services don’t work for, and they say the relied completely on what you said. In that situation, a disclaimer might just help you avoid costly court proceedings.

And for something completely different…

Now consider a completely different situation where your website makes it possible for other people to post comments, reviews or advertisements. Forum sites and advice sites like Quora are like this.  All the information posted by third parties could mislead your customers, clients, or visitors of your website, and you could be the one exposed to liabilities because of their actions.

By having a clear and comprehensive disclaimer for your websites, and building behaviour and processes consistent with the terms of your disclaimer, you put yourself in the best possible position to:

• protect your rights;
• limit your liability; and
• disclaim third party liability.

Do you need a disclaimer?

Yes, and no.

Being in business involves a certain level of risk and some types of business are riskier than others, and some types of business people are happy with more risk than others.

We need to look at your business, your background, your products and your customers to form an opinion on how important it is for you to use disclaimers.

Generally speaking, we will suggest you do use a disclaimer on your website.

This is because any member of the public that has internet access can see the content on your website, and you are responsible for all the content you put on there. Even if you are not making money from these websites (for example, you might be posting a blog simply for informational purposes), you must still take reasonable steps to ensure that visitors of your website will not be misled by any information you share.

However, if your business is fairly straight-forward and well understood, like a barber or hairdresser for example, you probably don’t need a disclaimer. Everyone knows what barbers and hairdressers do. The worst that can happen is probably a bad haircut, or a bad colour, or a clumsy shave. The risk to the business is the cost of the service, and maybe the cost of fixing the problem, or the customer having someone else fix the problem. The problem probably won’t cost the business more than $300. So, will a disclaimer make any difference? Probably not.

On the other hand, coaching can be a really interesting area where you as a coach should be careful about what you say you can do for someone, particularly when results are going to be dependent on how much effort and application your client invests in doing what you have advised them to do.  If you are offering a high-end coaching package with a purchase price over $10,000, we would recommend a disclaimer.

If you run a website or email list that provides information which is likely to be relied on by visitors  to your website, or subscribers on your email list, you are strongly encouraged to have a disclaimer in place. Particularly if you provide specialised information, in areas such as health, managing money or an industry that is regulated.

If your website provides specific steps in a process or a guide for people to follow, you could also increase your legal risk.

An example might be if you are an online fitness trainer and you post videos that step your clients through a workout. If someone who watches and follows your video injures themself, then you run the risk that they sue you for their injury. But if you have a disclaimer in place which covers your legal obligations and placing some responsibility for your clients behaviour back on to them, you give yourself a much higher chance of avoiding liability.

What kind of disclaimer do you need?

You may run different types of websites, and the type of disclaimers you need will vary.

• Websites

What disclaimer you need depends on whether you use your website to sell products or services, or merely to publish information. If you use your website to sell a product, someone could get hurt when using your product. Whereas if you post information on your website, someone could misconstrue that information and suffer loss as a result.

You might need a ‘no responsibility’ disclaimer which states that you are not responsible for any damages people suffer as a result of using your products or services. Or you might need a ‘views expressed’ disclaimer to inform readers that the information is only your view or opinion and is not intended to be relied upon without advice specific to their circumstances. 

• Blog

If you intend on giving information on your blog which you are not qualified to give, you need to have a disclaimer to explain the limits of your qualifications and to recommend that people seek professional advice relevant to their circumstances.

If you are not a health professional but provide information about a health conditions, you need to make it very clear that readers should not rely on your information without seeking their own independent medical advice. The same applies for other types of expert advice including financial or legal advice.

If you are merely passing on information, you should indicate that it is work of another and that you are not endorsing it by making it available on your website. 

• Emails

You may need a disclaimer in your emails, depending on the type of business you run and how you use your email. 

For instance, if you email contains advice that you are not qualified to give, you should include a disclaimer to the effect that you are not an expert in that field, that you are only offering a suggestion and that readers who act on the information do so at their own risk.

A confidentiality disclaimer can also be beneficial if you are sending confidential information. The disclaimer should state that the recipient must not use, reproduce, copy or disclose this information other than for the purposes for which it was supplied. 

• Social media (eg. Facebook, LinkedIn, Instagram)

Again, this will depend on your business and how you use social media.

One of the biggest risks with social media is that third parties can comment, post, or advertise on your page. A disclaimer to limit your liability for any actions or errors of third parties will be of assistance if you are also monitoring your social media pages and removing posts or qualifying posts and comments that could be misleading.

How do you write a disclaimer for your website?

It is not possible to have a disclaimer that could work for all types of businesses or websites. Each disclaimer is different depending on what you do and how you do it. Like we said earlier, we need to look at your business, your background, your products and your customers to form an opinion on how important it is for you to use disclaimers.

To help you decide what you should include in your disclaimer:

Step 1 – Think about what rights you want to protect

Step 2 – Think about what liabilities you might be exposed to

You need to identify the possible risks and scenarios that could expose you to legal liability.

Consider:

• Warning your readers that your content is merely an opinion and not a fact
• Alerting your readers to the potential mistakes and inaccuracies in the information
• Informing your readers that you are not offering professional advice and your content is only informational, and that they should consult a professional before making any decisions
• Disclaiming liability for any errors in the information that third parties post on your websites (together with a process for reviewing the accuracy of information shared, or making it clear that older posts might not be accurate.

When are you not protected by a disclaimer?

If your disclaimer contains terms that attempt to exclude a legal liability that cannot be excluded, your disclaimer will not shield you from liability. If it is contrary to law, it might be void, but if it is legally compliant, it might still limit your potential liability.

Most people get in trouble when they say or do things that are inconsistent with their disclaimer.

Always keep in mind that your disclaimer must be consistent with your behaviour and business processes and any representations that you make, whether on your website or through your conduct. If anything on your website or your conduct creates a different impression for your customer or client, your disclaimer will not protect you.

Your disclaimer also needs to be placed somewhere where it can easily be seen either by customers using your website or receiving your emails or communications in any other way. If your disclaimer is too hard to find or too small that is can be easily missed, it will not protect you.

Conventional website design will usually have a link to your disclaimer in the footer of your website.

do you still need insurance when you have a disclaimer?

Yes.

Even if you have a disclaimer in place, you should still hold adequate liability insurance to protect business activities. Having a disclaimer does not mean you are guaranteed to be protected from all liabilities. If a claim is brought against you, it is up to the courts to determine the effect of your disclaimer and to what extent your liability is limited. The more vague or confusing your disclaimer is, the more unlikely that it will protect you.

Joint Ventures are great for collaboration

Working together with another like minded entrepreneur is a clever way to accelerate business growth, which is why joint ventures remain a popular way for individuals or organisations to collaborate. But before you ‘Give it Away’ (as there’s always room for a Red Hot Chilli Peppers reference in a legal consideration blog), it’s critical to shore up your joint venture’s credentials to ensure a smooth, surprise-free partnership from beginning to end. In this Onyx Legal blog , we highlight 10 ways to avoid joint venture fails. [Ok, so we ended up with 11 – Ed.]

Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time.

1. Who is party to the joint venture?

Establishing a joint venture is no time to be carefree with the details.

Before entering into a joint venture, establish the legal identity of all parties. This means performing ABN and other similar regulatory checks. It might also mean checking driver’s licence details of individuals. 

A client recently came to us with a proposed joint venture, and we could not establish who would pay him the $400k that he expected to receive as his share of profits. The deal fell over when the other party also failed to establish who would pay that sum.

2. How Should You Structure a Joint Venture?

It is important to understand that joint ventures and partnerships are different structures.

A partnership is a long-term working proposition with full legal liability – a commitment to working together into the future.

A joint venture is project or purpose-focused, and facilitates separate parties to continue working on other businesses simultaneously. Joint ventures can be done by contract with each party paying their own tax, but one of the parties must hold the assets relating to that venture (paperwork, accounts, assets) unless it is established in its own identity.

3. What do you want to achieve with your joint venture? 

It’s easy to get caught up in the potential of success and innovation at the beginning of a joint venture, which is why understanding what you want to achieve from the collaboration is so valuable.

We’ve observed web designers, marketers and programmers enter joint ventures expecting to receive a share in profits at the end of the build, only to have ‘goal posts’ moved so regularly they exit the venture – leaving thousands of hours of unpaid labour in their wake.

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment.

Put together a clear written agreement covering all the moving parts of your proposed joint venture, and allowing some flexibility for change as your venture grows. 

have a written Joint Venture agreement

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment

4. How long should your joint venture last?

How long is a piece of string?

There’s no single answer to this question; the duration of your joint venture is based on the purpose of the project.

Will you be building something – a house or a piece of technology?

Are you going to be running a developing a piece of software or an education program together?

If you are building or developing something together the period of the joint venture might be the development period, and once you have a completed MVP (minimum viable product) you might roll it over into a company and start building a team to run it. 

Where you’re entering a revenue share deal, it might be a two year focused time frame for growing the base income of the business. 

Whilst you do not need to define a hard ‘end date’ to your joint venture in documentation, it’s useful for all parties to understand the purpose of the relationship, and a general timeline to completion of the project, and what completion looks like.

We regularly write in rolling successive terms, such as a one year agreement that rolls over for another year unless someone terminates before the end of the year. 

5. How can disagreements be dealt with or avoided? 

A joint venture agreement should be robust, providing options should parties fail to perform their role, or decide to walk away from the project.

In collaboration with your lawyer and with your project’s specific risks and opportunities in mind, carefully identify pressure points that require clarification and consider an approach to realistic exit should your working relationship end unexpectedly before the project is completed.

Good joint venture agreements remove the element of surprise from projects, leading to higher rates of completion and reduced conflict.

For a two party joint venture, it is a great idea to have some way of independently breaking deadlocked decisions. You could use a trusted third party as a referee, such as a mentor or board adviser. You could also allocated areas of decision making to each party that give one person a try breaking vote on those issues.

6. What if someone wants out if the joint venture early?

Build the possibility of a party leaving the joint venture into the structure of the joint venture to avoid future problems.

The best laid plans of mice and men often go awry, and a party may need to exit the joint venture for any number of reasons. Family life may be under pressure, there could be financial considerations, or health issues to address.

Fairness is key when devising a graceful exit from a joint venture. 

7. What if you want someone else to join in the venture part way through? 

Joint ventures can be created to allow for the possibility of other experts parties joining the project. Sales professionals are typically invited to join in after an MVP is achieved. 

It’s important that you’re working with a lawyer to structure your joint venture for all possible contingencies … which could  include growing your collaborative group.

8. Who will do what in your joint venture?

Formalising a joint venture is no time for pussyfooting around responsibilities or making assumptions about role workloads.

Success in your project relies on clear delegation of work, as all parties will have other responsibilities that could take their attention, in addition to the joint venture.

It’s important to know exactly who will be paying the bills and who will be responsible for particular milestones.

Having difficult conversations early on about the work or outcomes due for completion by exact parties of the venture will save plenty of strife when life gets busy or timelines become blown-out. 

9. What happens if someone fails to live up to their responsibilities in the joint venture?

As with any project, it’s possible that the whole thing could become scrambled eggs.

Of course you don’t anticipate that will be the outcome, but it’s prudent to plan for unlikely circumstances. Think about COVID-19, a virus which has changed the trajectory of the global economy in the space of months. It was nigh on impossible to imagine the world shutting down a year before the corona virus; but there it is.

People can fail to live up to the responsibilities in a joint venture for a variety of reasons, including circumstances beyond their control.

Build into your joint venture contingencies around ‘failure to perform’ and decide what the dissolution of the relationship should look like. Who gets what? What will trigger the dissolution? How will any debts be paid?

These are important matters to discuss with your collaborative partners and your lawyer.

10. Who retains any intellectual property created during the venture, once it ends?  

Often a complex matter to consider, the ownership of intellectual property is the cause of many disagreements.

If the joint venture does fail, there is likely to be an argument about intellectual property and who owns what. If you can work out IP ownership at the commencement of your joint venture, you’ll design a logical way of dealing with the matter if you fall out.

Maybe each party only walks away with what they contributed; maybe each party walks away with one complete copy of the created intellectual property.

Certainty around what will happen at the time of the exit gives everyone confidence and reduces the risk of legal action. 

11. How will the project be managed?

A joint venture teaches entrepreneurs a whole lot about project management and communication. There are many moving pieces you and your partners will need to consider:

• planning
• stakeholder relationships
• reporting
• regular meetings and agendas
• cashflow 

While it is appropriate for different roles to be attributed, a single party needs to be appointed to ensure accountability across the whole of the joint venture. You will need someone with the energy and drive to ensure that things happen. 

Flexibility must be built into this role, and an allowance to break ‘deadlocks’ in decision making.

Many’s the time we have observed joint ventures fall apart when the directors of the governing entity failed to design a mechanism for change, independent of the warring parties. 

Joint ventures are a terrific way for business owners to collaborate, to stretch their skills, test ideas, and to innovate. A well-designed joint venture allows for the clear division of work and responsibility, provides safeguards for failure and disappointment, and deals with the sticky stuff of business relationships before they become complex.

At Onyx Legal we support business owners to come together with like-minded partners in joint ventures, creating structures that respond to your unique projects, packed with safeguards to keep you as confident and safe as possible.

Our key takeaway for joint ventures?

Think on it.

Clarity at the beginning of a project leads to better results in a joint venture, and the chance everyone will meet or exceed their expectations. 

Stop and Pause: being too quick to assert your Intellectual Property rights could land you in hot water

Do you think that someone is using your work in an illegal way? Stop and pause before you threaten them with legal action, as accusing someone of infringing your intellectual property rights may leave you in the firing line.

Law exists in Australia to protect people from making dubious claims in relation to patents, designs, copyright and trademarks. This extends to sending cease-and-desist letters, sending circulars and advertisements.

The idea behind this legislation is to stop rights holders from misusing their position.

For example, it may be easy to scare off a competitors by having lawyers draft a cease-and-desist that the competitor cannot afford to investigate, even if your competitor has not technically infringed your intellectual property.

A 2016 case of CQMS Pty Limited v Bradken Resources Pty Limited shows that if you wrongly allege infringement, the person you complained about may bring a claim against you.

In that case, CQMS alleged that Bradken had infringed a number of their patents. Their lawyers sent out a letter of demand, setting out the basis for their claim. The letter of demand was “fairly standard” and of the kind often sent by patent attorneys. When Bradken did not comply with their request, CQMS then pursued the claim in court.

CQMS lost the case and was then counter-sued by Bradken, who asserted that they had been the victim of an “unjustified threat”. The fact that CQMS had lost the case was evidence of the “unjustified threat”. It did not matter that CQMS firmly believed that they had a good case against Bradken and were prepared to follow it through in court.

Likewise, the 2016 case of Stone & Wood Group Pty Ltd v Intellectual Property Development Corporation Pty Ltd should serve as a warning to be careful. What you may think infringes intellectual property rights may not in fact, do so.

In that case, craft beer brewers Stone & Wood had a beer called “Handcrafted Stone & Wood Pacific Ale” and they alleged that competitor craft brewers Elixir had infringed their intellectual property rights by calling their beer “Thunder Road Pacific” and “Pacific Ale”.

Unfortunately, when filing court proceedings Stone & Wood claimed for passing off and contraventions of Australian Consumer Law, but did not include a claim for trade mark infringement in their original claim. Stone & Wood only added a claim for trade mark infringement after Elixir counter-claimed for groundless threats of legal proceedings for trade mark infringement resulting from the letters between lawyers before the claim was filed.  

The court found for Elixir, and said that the reactive amendment to Stone & Wood’s claim adding trade mark infringement only after Elixir made a claim fro groundless threats, served to support Elixir’s case.

These examples should deter you from firing off “cease and desist” letters without a careful strategy.

As it has not always been clear what a groundless claim or unjustified threat could be, in 2017 the UK Parliament passed the Intellectual Property (Unjustified Threats) Act to clarify the meaning. If a reasonable person believes that a communication contains a threat of legal proceedings to protect a registered trade mark as the result of an act done, that will constitute a threat of infringement proceedings. 

That threat will not be actionable if an infringement has occurred. Letters asking a person to cease and desist infringing behaviour will not be actionable if they identify the owner’s rights and do not threaten legal proceedings. 

At this stage, reform is not proposed in Australia.

What if someone is infringing your IP?

In light of the pitfalls noted in this article, what should you do if you think that someone is infringing your intellectual property?

1. Stop and pause

Take a deep breath before firing off any emails or letters to the other party.

Do not presume that just because your competitor is using similar words, colours or phrases that they are automatically infringing your intellectual property.

Do not send any kind of “cease and desist” communication unless you are genuinely intending to proceed with, and substantiate, the claim in court. Be aware that in some cases, if you fail in court, that is enough to establish an “unjustified threat”.

2. Check it out

Check what intellectual property rights you do have. Do you have all your designs, patents and trademarks registered? Are your claims valid in the country that you are asserting them? Just because you have rights in one country, does not mean you have rights in another.

Engage a lawyer who works in the area of intellectual property you seek to protect, if you are unsure about what rights you have.

3. Play if safe

If you believe that someone is close to infringing your intellectual property, there are some things you can do. You are allowed to notify another party that intellectual property in a particular design, patent or trademark exists.

We recommend getting a lawyer to look over any correspondence you intend to send, as there are scales of what is considered a threat.

What if you receive a cease and desist letter?

1. Don’t panic

Being on the other end of a cease and desist letter can be frightening, especially if the other party is speaking about pursing a claim in court.

Remember, these letters are not a summons to court.

Take a deep breath and take time to properly assess what is being asked of you. Don’t rush to pull down all your advertising material or respond with a knee-jerk reaction.

Letters from lawyers in your country should be taken seriously, but there are a variety of options available.

2. Read the letter

Read their communication with care to find out exactly what the other party asking you to do.

Are they talking about trademarks? Copyright? Or other contractual matters? Are they asking you to remove certain material? Or are they just asking for information?

Do they want a response by a certain date? Do they want you to remove the whole part of something, or just make minor changes?

3. Speak to a lawyer about whether a valid claim exists

Intellectual property law can be complicated, with varying degrees of permitted use.

Using similar colours and phrases will not automatically infringe someone’s intellectual property rights.

4. Do nothing

Unfortunately, operating in the public arena opens you up to allowing anyone to contact you. Some people like to act aggressively with the intent to intimidate you or disrupt your business practices. In a case like that you might simply respond that you disagree with their position, or not respond at all. 

Be careful if you choose not to respond to a letter, particularly if it is from a lawyer within your country. If there is a chance you are infringing someone’s intellectual property rights then you could be at risk of further proceedings. 

If there is a chance the claim is valid – address it immediately and do not hide it at the bottom of you to-do-list in the hope that it will go away. In most cases, it usually does not!

5. Comply

After reading the letter and seeking advice, it may be that you decide to comply. This will probably be the easiest and most cost effective solution.

However, you should consider the consequences of doing so. Will you have to change your whole business strategy? Will it cost a lot to make the required changes?