QLD Business Partner Leaving - My Rights as Director?

[YLW]

Hi, I am currently in a sticky situation where my business partners have advised they are wanting to exit the company and cash in, so they can get some cash straightaway.

Company setup: I have 50% shares & they have 50% shares ( they are a couple)
Directors loan: The company owes each director say approx. $5000 each

Over the last two years, with the operation of the business, I have been the one who has been earning most of the sales within the business, so my contribution towards the company is well above theirs. Upon their advise of exiting, what are the company directors rights?

1. Can they just say that they want to take all the cash and leave me with the stock? (good try!)

2. Legally, what can I use under commercial law to stop them from taking advantage and run with the cash?

I just feel that with all the effort I have put into the company, they cannot just all of sudden say they are going, and want to take what they want. There has got to be justice for me right?

Any advice will be appreciated.

P.S. Company setup as Pty Ltd
P.P.S. Net asset only $500.00

 

[Sarah J]

Hi YLW,

Are you planning to wind up the company? If not, you should not be giving out company assets to remunerate the leaving director. What does your company constitution (or articles of association) say about director remuneration? What does it say about exit packages when a director leaves? Essentially, where a director leaves, they are entitled to the any outstanding remuneration (i.e. wages) paid up to their day of departure and any exit packages that is due under the constitution or as approved by the directors (or the shareholders) upon passing of a resolution. In this case, you will need to look to your constitution to see what the procedure is for passing such. If the director wishes to step down as a director, does he also wish to sell his shares? Further, have a look at the Corporations Act and see if there is a requirement that there must be at least two directors acting on the board.

 

[YLW]

Hi Sarah, thank you for your reply. At this stage I am not planning to wind up the company, the other directors simply at this moment in time wish to exit the company.

Unfortunately there weren’t anything setup in relation to director remuneration or exit packages. If these weren’t setup, do I still have a fair stand in arguing my proportion of contribution is greater; therefore claim more base on contribution/informal arrangement?

The directors wish to step down as director, as well as selling their shares in return for cash. Is it correct that they can only obtain cash via selling off shares, they should not be entitle to ‘Directors loan’?

 

[Sarah J]

Hi YLW,

As far as my understanding goes, if there is no stipulated exit package, then it is within the discretion of the company, through its shareholders/board of directors (depending on your company constitution), whether to provide the exiting director with any "golden handshake". If it is not provided for in their director contracts, then it is not mandatory. The director would be entitled to their wages as accumulated and falling due on their exit day (i.e. wages / 365 days x days worked). The director would also be entitled to any reimbursement for costs and expenses and any other benefits they are entitled to under the director's contract and the company constitution.

As a director, you must act in the best interests of the company. This means, acting in the interests of the shareholders as a whole. Where the shareholders agree to offer a loan rather than cash buy-back in exchange for the shares, then the directors would be able to offer that to the exiting director. At the end of the day, it is whatever the existing director and the company decides. Any offers extended by the company should be accompanied by a board and/or member's resolution (again, depending on your company constitution).

I am assuming this is a private company incorporated in Australia.

 

[DennisD]

Is there a shareholders agreement which you all signed at the outset? If so, review it along with the company constitution for details as to the relevant rights and procedures

 

[Rod]

1. Can they just say that they want to take all the cash and leave me with the stock? (good try!)

2. Legally, what can I use to stop them from taking advantage & run with the cash?

Ans: 1. No
2. Possibly sue them. Without board approval it may be theft.

Difficult situation for you. The law doesn't care if you do 90% of the work or 10%. It will look at wages, shareholding, shareholder agreements and the company constitution.

Shareholder agreement is the important document for you, followed by the company constitution, though I suspect you don't have a shareholder agreement. Was anything discussed/put in writing at the time the company was set up about what happens when a party wants to sell shares?

It may be that them taking cash in return for giving you 50% of the company is fair value. Their shares are only worth what someone else is willing to pay.