If a business partner did not put money into the founding of the company are they still entitled to their shares?

Question

Consider the scenario in Western Australia:

1. Me and 2 others want to go into business together based on what we believe will make us profit (etc.).

2. The decision is to form a company, however, due to financial difficulties of the other 2 individuals, it is decided that I pay for the registration of the new company and they pay me back when they can at a later date.

3. The company is registered and called "Newco" where I have paid for the whole proceedings. The allocated shares are split equally; i.e. 5 shares for each person to make up a company made up of 15 shares. Documents are signed showing witness of this.

4. Each individual is a 33% shareholder and also a director in "NewCo".

5. As time goes on it becomes apparent to me that the other 2 individuals continuously seem to use the company's resources to do things outside of the company's interests (i.e. conflict of interest).

6. Arguments occur but the steering of the company is officially decided by the majority of the director's decisions; which is always determined by the same voting of the other 2 partners who have a long history working together.

7. It becomes apparent to me that I am at significant detriment and have been for quite some time from their behaviour and dealings and want to stop doing business with them. I want them out of the company and make myself the sole director and shareholder but they are not willing to give or sell me their shares amicably.

Question: Seeing as they never actually paid me back from the beginning for the company set up do the other 2 actually have a right to their shares? Or are they actually mine because I paid for everything? What can be done to get them out of the company?

Answer 1

The directors are in control of the company, and the directors are appointed by a majority of shareholders. As a minority shareholder, the general rule is that you have to accept the decisions of the directors while they have the support of the majority shareholders. It does not matter what the majority shareholders paid for their shares or if they received them in exchange for other contributions to the business.

However, the law does recognise that the general rule creates the potential for oppression of minority shareholders. In Australia, the courts can order that a company be wound up, or that some members "buy out" other members' shares, if "the conduct of the company's affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member": s 232 of the Corporations Act 2001 (Cth).

Applying for such a court order is expensive and complex. The court fee alone starts at $1,530, and litigation of this kind would normally be conducted by professionals at a cost of tens, if not hundreds, of thousands of dollars. The unsuccessful party would generally be required to pay the successful party's legal costs. Almost invariably, it would be in the mutual interest of all parties to negotiate a settlement.

For more information about shareholders' oppression in Australia, see Victorian Law Reform Commission, The oppression remedy in the Corporations Act (2021):

Irreconcilable differences may establish a basis for winding up, they do not of themselves constitute oppression or unfair prejudice … oppression connotes a lack of probity and fair dealing (although this is not a necessary condition), is something which is burdensome, harsh or wrongful, or is inequitable or unjust, or exhibits commercial unfairness … Examples of oppressive behaviour given by Brockett include where a majority shareholder:

• runs the company in their own interests and ignores the interests of minority shareholders
• improperly issues shares to themselves to outvote other shareholders
• excludes a minority shareholder from being involved in the management decisions of the company
• redirects business opportunities from the company to themselves
• pays themselves excessive salaries at the expense of paying dividends to shareholders.

Answer 2

There are many ways people get shares in a company - all of which require explicit documentation, contracts and so on, supported by the Memorandum and Articles of the company (to permit these contracts).

1. Typically shares are issued based on the capital invested (this is the most common)
2. Sweat equity is increasingly common - where shares are granted based on work done
3. Equity for branding - where someone is granted shares to be associated with a company ...

So, yes, shares can ard do get issued even if one does not bring in money.

Answer 3

In the UK, you paying for initial expenses would be giving a loan to the company, and the company would have to repay the loan to you.

If company resources are used, the company should send a bill, which needs to be paid. The same as if I used company resources. Being a shareholder doesn’t make a difference. So send bills out.

I don’t think you have a right to remove them. But if the company goes bankrupt owing people money, someone may take over the company who forces your friends to pay money owed to pay the company’s debts.