Disagreement is normal in a family business. Two brothers may hold half the shares each and disagree about selling the warehouse. A widowed mother may side with one child against another. Cousins who inherited shares may feel shut out of decisions made by the branch that runs the business.
What turns disagreement into a crisis is the lack of a process for dealing with it. When there is no agreed path, family members tend to stop talking, then stop signing, and eventually reach for lawyers. In Chinese and other Asian families, where face, seniority and loyalty to parents all play a part, the conflict can be harder to raise openly and can last longer once it starts.
This article explains how families can build a dispute process before the dispute arrives, the tools for breaking a deadlock and their risks, and the court remedies that sit at the end of the road.
Build the dispute process before the dispute
The aim is not to stop the family disagreeing. It is to stop disagreement becoming litigation. The best place to set out that process is a shareholders’ agreement, backed by the company constitution, so the steps are agreed while relationships are still good.
A tiered dispute resolution clause
A typical clause moves through stages, with a time limit for each:
- Family or shareholders’ meeting. The issue is put in writing and discussed at a meeting called for that purpose.
- Facilitator. A trusted, neutral person such as a family business adviser helps the family talk it through.
- Mediation. An accredited mediator helps the parties negotiate a settlement. Mediation is confidential and the parties keep control of the outcome.
- Expert determination. For technical questions, especially valuation, an independent expert decides.
- Arbitration. A private, binding decision on the wider dispute, if the family prefers to keep it out of a public court.
- Court, as the last resort.
The clause should bar court proceedings (except urgent relief) until the earlier steps have been tried.
Deadlock-breaking tools and their risks
A deadlock arises when the board or shareholders are evenly split and cannot pass a resolution on an important matter. There are several ways to break it, each with drawbacks.
Casting vote
Under the replaceable rules in the Corporations Act 2001, the chair has a casting vote at directors’ and members’ meetings, unless the constitution changes this. In a 50/50 family company, whoever chairs the meeting effectively controls it. Many families remove the casting vote for that reason, or limit it to routine matters.
Chair rotation
The chair rotates between family branches each year. This feels fair, but it may simply delay important decisions until a sympathetic chair takes over.
Independent director
An independent director, or an independent chair with a casting vote on deadlocked issues, can break ties based on what is best for the company. The family must trust that person, and should agree in advance how they are appointed and replaced.
Shotgun or Russian roulette clause
One shareholder names a price per share. The other must either sell at that price or buy the first shareholder’s shares at the same price. In theory this forces a fair offer. In practice it favours whoever has more money. A sibling who cannot raise finance may be forced to sell at a low price.
Texas shoot-out
Each shareholder submits a sealed bid, and the highest bidder must buy the other out at their bid price. Variants exist. Like the shotgun clause, it can disadvantage the less wealthy party, and it ends the relationship rather than repairing it.
Because buy-sell clauses are so final, we usually suggest they apply only after mediation has failed, and that the family check whether each shareholder could realistically fund a purchase.
Court remedies as a last resort
The oppression remedy
Section 232 of the Corporations Act allows a court to make orders where the conduct of a company’s affairs, an act or omission by the company, or a resolution of members is contrary to the interests of the members as a whole, or is oppressive to, unfairly prejudicial to or unfairly discriminatory against a member or members. Examples in a family setting might include excluding a shareholder from information, paying excessive salaries to the controlling family branch while refusing dividends, or issuing shares to dilute a sibling.
Section 233 gives the court wide powers. It can order that one shareholder’s shares be bought by others or by the company, regulate the company’s affairs, amend the constitution, appoint a receiver, restrain conduct or, in serious cases, wind the company up. Section 234 sets out who may apply: mainly a member, a former member in some circumstances, a person to whom shares have passed by will or operation of law, and a person ASIC thinks appropriate.
Winding up on the just and equitable ground
Under section 461(1)(k), the court may wind up a company if it is of the opinion that it is just and equitable to do so. Courts have applied this where a small company operating like a partnership has suffered a complete breakdown of trust between its owners, or where management is deadlocked with no way forward. Winding up can destroy a viable family business, so courts treat it as a serious step and consider whether a less drastic remedy, such as a buy-out order, is available.
Court proceedings are public, slow and costly, and rarely repair a family.
Mediation in Chinese families
Mediation tends to suit Chinese and Asian families well. It is private, which protects the family’s reputation. It allows senior family members to be heard with respect. It can address the real issues behind the dispute, such as a feeling of being undervalued or a promise a parent made years ago, which a court cannot deal with.
Practical points matter. The mediation may need to run in Mandarin or Cantonese as well as English. Family members overseas can join online. Elderly parents may need support people. Sometimes it is wiser to hold separate sessions with each branch before bringing everyone together, so that no one loses face in front of the others.
A checklist for families
- Check whether your shareholders’ agreement or constitution has a dispute resolution clause, and whether the chair has a casting vote.
- If there is no process, agree one now, while relationships are workable.
- Stress-test the documents: what happens in a 50/50 split, if a founder will not step back, or if a family member moves overseas?
- Consider whether an independent director would help.
- Think carefully before adopting shotgun or shoot-out clauses.
- When a dispute starts, keep records, keep communicating in writing and seek advice early.
- Propose mediation before positions harden.
Frequently asked questions
What is oppressive conduct under Corporations Act s232?
It is conduct of the company’s affairs that is contrary to the interests of members as a whole, or that is oppressive, unfairly prejudicial or unfairly discriminatory towards one or more members. The test focuses on commercial unfairness, not just on whether a shareholder is unhappy with a decision.
How do you resolve a shareholder dispute in a family business?
Start with the process in the shareholders’ agreement, if there is one. Otherwise, a structured family meeting, a facilitator or mediation usually resolves most disputes more quickly and privately than court.
What happens if a 50/50 family company is deadlocked?
Look first at the constitution and shareholders’ agreement for a casting vote, deadlock clause or buy-sell mechanism. If there is none and negotiation fails, a shareholder may apply to court, including for winding up on the just and equitable ground, but that should be the last option.
Can a court force my sibling to buy my shares?
If oppression is proved, a court can order that shares be purchased by other members or the company. The court decides the appropriate order based on the facts.
How Chua Tan Associates can help
We help families design dispute resolution and deadlock clauses before they are needed, and help resolve disputes once they arise. Justin Chua is a Nationally Accredited Mediator and an Accredited Family Business Advisor, and conducts mediations in English and Mandarin, in person or online for family members overseas. Where a matter cannot settle, we advise on oppression and winding-up remedies. We work alongside the family’s accountant on valuation and tax, act for families across Australia and overseas, and advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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