The case of Bainbridge Grill’d Pty Ltd & Ors v Simon Crowe & Ors before the Federal Court illustrates the potential pitfalls of not having a shareholder agreement.

Grill’d opened its first restaurant in 2004, the brainchild of friends Simon Crowe, Simon McNamara and Geoff Bainbridge and currently has over 100 stores.

In 2011, McNamara exited the business leaving Bainbridge holding 25% of the shares in the company and Crowe the remaining 75%.

For various reasons, the relationship between Bainbridge and Crowe became strained and deteriorated to the point that in June 2016 Bainbridge commenced proceedings under the Corporations Act 2001.

Bainbridge claimed that he had been denied access to the company’s books and records and that Crowe had breached his director duties by using company staff and resources to fund KoKo Black, a chocolate company.  Bainbridge sought an oppression order and the removal of the company’s Chief Financial Officer and Director.

In his counter-claim, Crowe sought an order for the forced sale by Bainbridge of his shareholding on the basis that the relationship had soured to the extent that the continued involvement by both owners in the business would be futile.

The battle has been personal and fuelled with emotion between the owners. It has been before the Court several times for various interlocutory and directions hearings, no doubt resulting in considerable expense for both parties.

This dispute may have been avoided if the parties had entered into an appropriately drafted shareholders’ agreement.

The following are common inclusions in shareholders’ agreements:

·   Pre-emptive rights. These provisions impose restrictions on the transfer of shares. A provision can require exiting shareholders to offer their shareholding to existing shareholders first, before the shares are offered to outside parties.

·   Drag-along, tag-along rights. These provisions are aimed at balancing the rights of a majority shareholder and a minority shareholder. Under a drag along option, majority shareholders can require a minority shareholder to join in the sale of shares in the company. Under the tag along option, where a majority shareholder is selling shares in the company, the minority shareholder has the right to join the transaction and sell their minority stake.

·   Mandatory sale events. These provisions set out triggers for the mandatory sale of shares in certain circumstances (for example, a director passes away, resigns or files for personal bankruptcy).

·   Share valuation methods. Methods by which shares are to be valued in relation to pre-emptive rights and mandatory sale events, for example, shareholder agreements often provide for the appointment of an external valuer with set criteria for valuation.

·   Deadlock breaker. These provisions deal with circumstances where shareholders cannot agree on the management of the company and include:

o   a shotgun clause, allowing a shareholder to break the deadlock by purchasing the shares of the other shareholder at a nominated price;

o   a chairman clause, allowing one shareholder to become the chairman with a casting vote; or

o   a liquidation clause, providing for the company to be voluntarily wound up if the deadlock continues for a set period of time.

·   Conflict and non-compete clause. These provisions prevent the shareholders from investing in or engaging with competing businesses.

·   Alternative dispute resolution. An agreement should include processes to resolve disputes requiring a genuine attempt by the parties to resolve matters or to engage in alternative dispute resolution before commencing formal litigation.