Shareholder Agreements – Avoiding Shareholder and Director Disputes
Table of Contents Shareholder and director disputes At the outset of a new business venture the risk of a dispute may seem far fetched. However, the practical reality that we often see is that disputes in one form or another frequently arise over time for example due to differences of opinion. These differences can easily result in complete deadlock in decision making. The prevailing desire for ultimate control over a prospering enterprise frequently results in oppressive conduct against minority shareholders for example by way of dilution of shares, exclusion from management, and so forth. These risks are elevated in the case of smaller “quasi-partnership” businesses with 50/50 shareholders and directors. Directors may find themselves in a position of conflict between their fiduciary duties on the one hand to the company, and duty of care to shareholders, and their personal interests. This may also result in causes of action or claims becoming available for the company against those directors who have breached their duties. Where there is a trust involved, beneficiaries may also claim that directors have been involved in a breach of trust, or the directors may be liable to the corporate trustee arising from their conduct contrary to the corporate trustee’s obligations as trustee for the relevant trust. The risk of expensive and protracted litigation is rife, despite the fact that it can frequently be avoided. Shareholder agreements You will find that the importance of a carefully crafted shareholder’s agreement cannot be emphasised more by any corporate lawyer. It frequently avoids the vast expense, stress and wasted opportunities that arise from and accompany bitterly fought disputes between shareholders / directors / beneficiaries. Shareholder agreements do so by making provision for various scenarios and circumstances which would otherwise be inadequately specified in the company’s constitution or under the Corporations Act 2001 (Cth). Key issues typically covered include: More clarity on decision making of the business, reporting, and tailored voting rights Procedures and requirements for the payment of dividends Clearer obligations and responsibilities of each key personnel The direction and strategy for the business Share options and vesting of shares over time Procedures in the event of breaches or disputes Ultimately, mechanisms designed to prevent disputes but also providing for the sale / purchase of shares in various common scenarios, and dispute resolution procedures which can avoid substantial costs of litigation. In the absence of provision in this regard, the parties will be left to try to negotiate on a solution. Frequently, there are disputes over the terms e.g. the sale price of the shares, who the seller or buyer will be, etc. In the absence of agreement, the parties will need to consider administration or otherwise seek relief from the Court. Winding up on just and equitable grounds; a remedy of last resort Common actions include: Proceedings for oppressive conduct under the Corporations Act 2001 (Cth) where the applicant can show that the conduct of a company’s affairs or an actual or proposed act or omission by or on behalf of a company or a resolution, or a proposed resolution, of members or a class of members of a company is either: contrary to the interests of the members as a whole; or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. Proceedings alleging breaches of director’s statutory and common law duties or obligations under the constitution. Statutory derivative actions on behalf of the company against officers e.g. to recover money misappropriated and/or to liquidate the company if necessary. Proceedings seeking a broad range of other remedies including for the purchase of shares by any person, the appointment of a receiver, an injunction preventing the doing of an act, or an order for the company to be wound up on “just and equitable” grounds. In Re SP Private Holdings Pty Ltd [2021] VSC 142 (23 March 2021) the Victorian Supreme Court were fairly robust in the management of the timetable. Briefly, a 50% shareholder and director in a group of companies sought relief from oppression alleged to have been caused by the other 50% shareholder and director. The application was amended less than one month before judgement to seek the appointment of a provisional liquidator, relying on the just and equitable ground for winding up. In short, there was evidence of an extremely dysfunctional relationship between the parties, a bitter dispute, clear deadlock, and deep acrimony. Whilst the Court will be reluctant to wind up a solvent company (this being a rather drastic and last resort measure), there was no impediment to a just and equitable winding up in the circumstances. There was clear deadlock, deep acrimony, thereby rendering the continuation of the enterprise futile. There was no utility in a provisional liquidator being appointed and a winding up was ordered efficiently and in keeping with the overriding objective of the Court to facilitate the just, quick and cheap resolution of the real issues. contact us Contact our corporate lawyers for assistance in relation to the above. Our commercial lawyers, business lawyers, and disputes lawyers provide expertise in corporate and commercial advisory services as well as litigation and dispute resolution, and specifically shareholder disputes. HEATHFIELD GROSVENOR Level 21, 133 Castlereagh Street Sydney NSW 2000 Australia T: +61 2 8005 7388 E: contact@hglaw.com.au www.hglaw.com.au The information provided in this article is provided by way of general information only. It does not constitute legal advice, and should not be relied upon as such. Specific independent legal advice should be obtained before deciding to act, or not to act, upon the views expressed or information contained in this article. Trustpilot Book Online Related services Related documents Get bespoke legal documents tailored by a lawyer quickly. Complete our intake form to get started so that one of our lawyers can contact you within 24 hours. Free startups and business essentials guides We have collated some free helpful guides containing key important considerationsClick Here to download our guides
Automation, artificial intelligence and legal issues
By Newyorka Musabelliu and Chris Chang – January 2020 It is not surprising that the law cannot keep up with the growth in artificial intelligence. Patent applications have already been filed on behalf of and in the name of a machine called Dabus that used AI to design two products[1]. Nevertheless, progress is being made regarding law reform in this space. In December 2019 the Australian Law Reform Commission released a report for law reform in connection with artificial intelligence over the next five years[2] and the World Intellectual Property Organization (WIPO) announced a public consultation process on artificial intelligence and intellectual property policy[3]. Below are some of the associated legal issues[4]. Table of Contents Key takeaways The implementation of different types of permanent controls, checks and balances on the AI which cannot be overridden is important given the different types of risks. The ALRC report notes recent commentary and states “appropriate design choices are crucial for automated systems to achieve consistency with concepts such as transparency and accountability; predictability and consistency; and equality before the law” and calls for effective regulation of technological developments. There are doubts as to whether mere principle based regulation will suffice and therefore the task of drafting such legislation will be both challenging and interesting. IP Law There are a multitude of issues to consider in view of the current landscape but, in summary, it is important to ensure the retention of personal control over the creative process and provide the input to at least a substantial part of the end result. Otherwise the risk is that you will lose rights in works authored by AI or jointly authored with AI unless reform addresses this. Reform debate primarily focuses on ownership where the work has been created by AI. Who should own the intellectual property rights (1) no-one (2) the AI, or (3) an interested party such as the producer. The latter is in our opinion the preferred option. In any other scenario this would be unsatisfactory to many businesses who have invested in AI and the fruits of the AI’s labour, including adaptations and compilations etc of those works. If left unaddressed, questions as to whether inventions presently created by AI can be registered as patents by persons other than the AI[5], or whether future applications based on such inventions are in fact already part of the prior art base and do not constitute inventive steps may also arise, and so forth. Who should be responsible for infringement by AI? We suggest the principles of agency law should apply. This question also opens the doors to liability for other positive acts of AI and questions concerning torts to the person for example which, given current advances in AI, is a possibility. Admin Law Even when automated systems are deployed carefully and effectively by government agencies, questions remain as to their compatibility with core administrative law principles and the rule of law. In particular, it is not yet clear whether (or how) such systems can be said to act with procedural fairness. The legality of actions and decisions by public bodies is called into question as is transparency and accountability of government decisions (in particular, whether automated decision-making software can provide adequate reasons that would in turn facilitate access to judicial and merits review where appropriate)[6]. The independent scrutiny of automated systems prior to implementation is already envisaged by the ALRC e.g. by way of algorithmic impact assessment[7] and therefore creators of AI are no doubt already focusing upon how to demonstrate compliance such tests if they havnt already done so. Privacy Law Information handled about individuals may not satisfy the definition of personal information under the Privacy Act 1988 (Cth) if the relevant person is for example allocated a code and is therefore not identifiable. Collection by AI may also occur without knowledge or consent (both of the public and the owner of the AI). Permanent checks and balances are likely to already be in place. Directors’ duties and defences It is important for directors to understand the technology upon which they place any reliance, and any limitations if they intend to rely on the safe harbor provisions contained in s.189 of the Corporations Act 2001 (Cth). Discrimination Studies have shown that inadvertent discrimination may occur in the AI’s implementation of its algorithms. Misuse of big data Other issues raised include the propensity for improper use of big data in the financial sector, and consumer law. The WIPO statement of issues goes into greater detail[8]. Discussion BACKGROUND AND STATUS OF AI As the phrase suggests, “artificial intelligence” (AI) is designed with the objective of imitating human intelligence artificially (and as has been proven, exceeding human intelligence in many ways, in the same way traditional computers have served us for so many years). Human intelligence includes accurate perception, analysis, logic / rationale, the ability to make calculated decisions based on objectives and, ultimately, solve problems. It also includes creativity. Machine learning has been available for years (e.g. for the purposes of electronic discovery in litigation). Algorithms are programmed in machines designed to learn both from large amounts of historic data and through their own, “personal”, experience and evolution, to make accurate predictions. Aside from significant advances in the use of artificial intelligence in the legal sector, we note some other examples of developments in recent times: The advanced use of AI as applied to gastrointestinal diagnostics. In particular, AI has been used in the “automated detection of disease and differentiation of pathology subtypes and disease severity[9]”; In October 2011, Takahiro Yamaguchi and So Kanno explored the link between the machine and art. The “Senseless Drawing Bot” is an autonomous device that sits on a skateboard which draws abstract lines using many colors. The robot moves from side to side, riding the wave of today’s modern graffiti. The lines drawn are complex and create abstract modern graffiti and one would have a difficult time arguing that the same work, if originally created by a human,
Minimum Employment Terms and Conditions in Australia
Employers who wish to sponsor skilled employees from overseas are, in summary, required under the subclass 457 scheme to provide terms and conditions which are at least equivalent to those which an Australian citizen or permanent resident would achieve performing the same work at the same location. This is an ongoing requirement not least because it is a 457 sponsorship condition, and severe sanctions can result in non-compliance. Its primary purpose is to prevent the undercutting of the local Australian labour market, protect overseas employees from exploitation, and maintain integrity in the scheme. In Australia, the employment relationship is governed or affected by a number of different parameters, all of which are variable depending upon the circumstances: Applicable Federal, State and/or Territory legislation: These include the Fair Work Act 2009 (Cth). The Fair Work Act establishes the National Employment Standards. Industrial instruments: There are various awards and statutory agreements / enterprise agreements which may impact upon the minimum terms and conditions with which an employee must be provided (for example by amending or adding to the National Employment Standards, and setting minimum wages for particular occupations). Contract of employment: This is agreed between the employer and the employee. Terms are both express and implied into the contract: Express terms: These are usually the written terms and conditions of the employment contract but may include terms and conditions which have been agreed verbally and also provisions of internal employment policies and any other terms (if they have been incorporated into the contract by reference for example). Implied terms: Terms can be implied into the employment relationship through custom, and the common law also implies terms into every employment relationship. Importantly, the contractual terms cannot override or detract from legislation and so the contract needs to provide terms and conditions which are at least equivalent to the terms and conditions required by applicable law (referred to under points 1 and 2 above). It is therefore important to be mindful of the tasks and functions of the occupation in question (and any changes from time to time which may alter the nature of the role), and the minimum requirements which are prescribed by the law for that particular occupation. In addition, the obligation upon 457 visa employer sponsors is broader in the sense that market salary rate conditions (not merely the requirement to pay a minimum wage) are also relevant, and market salary rates may fluctuate from time to time.
Unfair Contract Term Protections for Small Businesses
BACKGROUND Following public consultation processes, new laws[1] came into force on 12 November 2016 which extended existing consumer protection laws against unfair contract terms to “small business contracts” (e.g. business to business contracts). Under these laws, small businesses can also have an “unfair” term in a “standard form contract” declared as void in specified circumstances. In doing so they would not have to comply with the term. Findings identified in the Explanatory Memorandum to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 suggest that, like consumers, small businesses are vulnerable to the inclusion of unfair terms in standard form contracts as they often lack: the resources to identify unfair terms, appreciate their significance and determine whether they can manage the associated risks; the resources to engage in negotiations over the terms of a contract; the bargaining power to successfully negotiate the terms of a contract; and/or the resources and bargaining power to resist the enforcement of unfair contract terms. The stated objective of this reform[2] is to promote fairness in contractual dealings with small businesses with regard to standard form contracts. This will reduce small business detriment and have positive impacts on the broader economy by increasing small business certainty and confidence, and providing for a more efficient allocation of risk. WHEN DOES PROTECTION TO CONSUMERS / SMALL BUSINESSES APPLY The unfair contract terms protection provisions are contained in ss23 – 28 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law). Section 23 provides that a term of a “consumer contract” and “small business contract” is void if the term is “unfair” and the contract is a “standard form contract”. We do not examine consumer contracts which were protected prior to the amendments but examine the concepts of “small business contracts”, “standard form contracts” and when terms will be considered to be “unfair”. Small business contract In summary, in order for the contract to be a small business contract, each of the following must apply: The contract must be for the supply of goods or services or a sale or grant of an interest in land; At least one of the parties to the contract is a business that employs less than 20 people[3]; and The upfront price[4] payable under the contract is $300,000 or less, or the contract is for a duration of more than 12 months and the upfront price is $1,000,000 or less. Standard form contracts Standard form contracts are everywhere for example IT services contracts, advertising services contracts, mobile phone contracts, licences of office space, gym memberships etc. They are an efficient and effective way for businesses to contract. The Court will take into account any facts that it considers to be relevant however at the time of writing it “must” take into account the following in determining whether a contract is a standard form contract: whether one of the parties has all or most of the bargaining power relating to the transaction; whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; whether another party was, in effect, required either to accept or reject the terms of the contract (other than certain excluded terms discussed below)in the form in which they were presented; whether another party was given an effective opportunity to negotiate the terms (other than certain excluded terms discussed below); and whether the terms of the contract (other than certain excluded terms discussed below) take into account the specific characteristics of another party or the particular transaction. Excluded terms: the protection does not extend to terms to the extent that they define the main subject matter of the contract, set the upfront price payable under the contract, or are terms required by law. Excluded contracts: the protection does not extend to contracts which are individually negotiated, or to certain types of contracts such as contracts of marine salvage or towage, a charterparty of a ship, and contracts for the carriage of goods by ship, constitutions of companies or managed investment schemes or other kinds of bodies. After 12 November 2016: The contract needs to have been entered into, renewed or rolled over after 12 November 2016. The law also applies to amendments to contracts after 12 November 2016 but not to the terms which have not been amended. Unfair terms There is a three limb test to unfairness. A term will be “unfair” if: it would cause a significant imbalance to the parties’ rights and obligations arising under the contract; it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by them; and it would cause detriment to a party if it were to be applied or relied on. The Court “must” take into account the extent to which the term was transparent[5] and the contract as a whole. Make sure your print is not too fine! Some prescribed examples of the types of terms which may be unfair are as follows: a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of
Australian business structures – choosing the right structure for your business
In this issue we examine the key types of business structures through which business can legally be conducted in Australia as follows: 1. Sole proprietors: individuals who are liable for the business. 2. Partnerships / limited partnerships: two or more persons or entities who are jointly and individually liable for the business (unless it is a limited partnership in which case the limited partner can enjoy limited liability). 3. Joint ventures: contractual arrangements between two or more persons entities usually for a limited time or specific project whereby the rights and obligations are governed primarily by the contract. 4. Companies: separate legal entities which basically have the same rights as natural persons and which can provide limited liability to their owners (i.e. shareholders). This can also include startups. 5. Trusts: a person or entity that holds assets or income for the benefit of others. Sole proprietors: Sole proprietors or sole traders conduct business as individuals i.e. in their personal capacity. Sole proprietorship is the simplest business structure, but provides no protection to the sole proprietor from debts or other liabilities. A different trading name for the business is often used (formally referred to as a “business name”). If so, the name must be registered in the name of the individual with the Australian Securities and Investments Commission (ASIC). Please refer to the business names section at the end of this paper which applies to all persons and entities wishing to trade under a different name to their own name for additional information. Aside from the usual laws which regulate all businesses in Australia, there are significantly fewer regulatory requirements imposed upon sole proprietors in comparison with other business structures. There is for example no need to publish financial information. Business income is declared separately to the Australian Taxation Office (ATO) but is taxed at the same rate as individual Australian residents for tax purposes. There is a tax free threshold available for individuals of $18,200. The rates of tax for income above $18,200 are as follows: $18,201 – $37,000 = 19% $37,001 – $87,000 = 32.5% $87,001 – $180,000 = 37% $180,001 + = 45% Tax offsets, levies, and deductions may apply depending on individual circumstances. Specific financial / tax advice should be sought from an accountant. Partnerships: A partnership is a relationship between two or more individuals or companies who carry on business in common with a view to profit. The relationship is primarily governed by a written partnership agreement entered into between the partners, as well as the Partnership Acts in each state and territory. Partners (other than limited partners discussed below) are jointly and severally liable for liabilities of the partnership. They also share the profits. As is the case with sole proprietors, there is no need to publish financial information relating to the partnership. The partnership does not pay tax on its income; it is the individual partners who must declare their individual share of the partnership’s net income or loss. The partnership must however lodge a partnership return with the ATO declaring total income less deductible expenses. Individual partners also account for capital gains tax in proportion to their share of each CGT asset, not the partnership itself. Limited partnerships are a species of partnership which need to be registered involving at least one general partner and one limited partner. Limited partners have different rights and obligations and liability is limited to an extent. Limited Partnerships are generally taxed in the same manner as companies. Joint ventures: Joint ventures are essentially contractual arrangements whereby two or more individuals or companies enter into a negotiated agreement to work together to achieve specific goals, usually for a finite amount of time, or the agreement is otherwise terminated. Joint ventures are typically used for specific projects, and are not usually appropriate for ongoing business commitments. Joint ventures are commonly established where each party has different assets / resources which, when combined, can provide advantages / synergies / efficiencies to all parties. The rights of each party primarily depend on the contractual terms of the relevant joint venture agreement that has been negotiated between them. Joint ventures can be incorporated (e.g. where the parties establish a new company as the vehicle for the joint venture), or unincorporated. The tax implications for joint ventures depend upon the parameters of the arrangement. Australian Companies: A company incorporated under the Corporations Act 2001 (Cth) (Corporations Act) is a separate legal entity and has the same rights as a natural person. The company must be registered with ASIC, and ASIC administers the Corporations Act and regulates companies. Australian companies typically provide limited liability for their owners (i.e. shareholders). The directors are responsible for the day to day management of the company. There are numerous obligations and reporting requirements prescribed under the Corporations Act. Companies can either be private (known as proprietary companies) or public (the capital of which is raised from the public e.g. those listed on the Australian Stock Exchange). The different types of company are as follows: company limited by guarantee: liability is limited to a guaranteed amount. This is often used by entities that do not trade. company limited by shares: liability is limited to the relevant amount which is unpaid for the shares held by the particular shareholder unlimited company: liability is unlimited. no liability company: only available to mining companies. The unpaid amount for shares cannot be called upon. The most common type of company is a company limited by shares. There are different requirements depending on the size of the company. Small business entities pay tax at a rate of 28.5% otherwise most companies pay tax at a rate of 30%. Foreign Companies: Companies that are incorporated in countries other than Australia must register with ASIC if they wish to carry on business in Australia. Trusts: Trusts can carry on business in Australia. The trustee owns and manages the business for the beneficiaries of the trust. Generally, the beneficiaries pay tax on their share of the