Business divorce: How to make a clean exit

Like most relationships, people don’t go into business together with an expectation that it will end in a messy divorce. But just like romantic relationships, business relationships can sour. If they do, the process for ending the relationship can be tricky, and costly, depending on what – if any – preventative measures have been implemented.

We come across many examples where, for one reason or another, an owner (or group of owners) wishes to expel someone from the business. Often the business is profitable and it’s simply a case of the owners ‘falling out of love’ with each other. It may be that one person is not pulling their weight, or the owners’ ambitions for growth and direction are no longer aligned.

So, how do you get rid of someone who doesn’t want to leave? The answer depends on your structure – partnership, company or trust-and the rules governing your business.

Assuming that you’re a company and you don’t have a customised constitution or shareholders agreement,the obvious solution is a negotiated buy-out. However, this is impractical if the recipient demands an unreasonable premium on their sale price.

Without a pre-determined buy-sell option, with a fixed valuation/payment mechanism, there is no obligation on any member to sell out for fair value-or indeed any value.

An aggrieved member may seek an order to have the shares compulsorily acquired or the company wound-up under the oppressive conduct provisions of the Corporations Act. The challenge is to prove to the court that there has actually been oppression. A simple relationship breakdown is not sufficient.

Alternatively, section 461 of the Act may be used if it can be proven that the deadlock is so serious that it is not capable of being resolved in any way other than by having the company wound-up. Even if successful, the winding-up process is expensive and fatal to the corporation’s existence; a drastic outcome if you simply wanted to exit a member.
As always, prevention is better than cure. Before you find yourself in this situation, talk to your adviser about implementing contractual arrangements to deal with unplanned exits.

Usually this involves a discussion with all stakeholders about the circumstances that will trigger the exit option – for example, failure to remain actively involved in the business – and the methodology for determining a fair price for the departing member’s interest.