How to resolve a dispute between business partners

Start with your shareholders' or partnership agreement and follow its dispute clause. If there is no agreement, or the clause does not help, the path runs from direct negotiation, to mediation with a neutral third party, to the remedies the Companies Act 71 of 2008 gives shareholders, which include relief from oppressive or unfairly prejudicial conduct and, as a last resort, the winding up of a solvent company on just and equitable grounds. The usual practical outcome is that one partner buys the other out. The sooner you get to a price, the less you spend on lawyers.

This guide uses "partner" loosely. If your business is a company, you are shareholders and the Companies Act applies. A true partnership with no company is governed by the common law, and the position differs, as noted below.

Step 1: Read the agreement, then read the Memorandum of Incorporation

Most shareholders' agreements have a dispute clause that sets a sequence: notice of the dispute, a period for the parties to negotiate, then mediation, then arbitration or court. Many also have deadlock provisions, a valuation formula and exit mechanics. Follow the sequence exactly. A partner who skips mediation and goes straight to court usually gets sent back, with costs.

Then check the Memorandum of Incorporation. Where the two documents conflict, the Memorandum of Incorporation prevails. If the Memorandum says something different about share transfers or voting, that is the rule. Read do I need a shareholders' agreement for how the two documents fit together.

Step 2: Separate the problem from the person

Most partner disputes are about money, effort, direction, control or trust. Write down which it is. Then write down what you actually want: to keep the business and change the arrangement, to buy the other out, to be bought out, or to close down. Being clear about the outcome changes every conversation that follows.

Step 3: Negotiate directly, in writing

Put a proposal in writing. Say what the problem is, what you propose, and by when you want a response. Keep it factual and avoid accusations, because the letter may one day be read by a mediator or a judge. Meet, with an agenda, and minute what is agreed.

Step 4: Mediate

Mediation is a structured negotiation with a trained neutral who helps both sides reach their own agreement. It is confidential, usually takes a day, and the mediator's fee is split. If it works, you sign a settlement agreement on the day, which is a binding contract.

For company disputes, the Companies Tribunal offers alternative dispute resolution, including mediation, at little or no cost where both parties agree to take part.

Mediation is where most partner disputes settle, usually with a buy-out on agreed terms.

Step 5: Use the Companies Act remedies

If negotiation and mediation fail, the Companies Act 71 of 2008 gives a shareholder several routes to court.

Relief from oppressive or unfairly prejudicial conduct. A shareholder, or a director, who is being treated in a way that is oppressive, unfairly prejudicial or unfairly disregards their interests can apply to court for relief. The court has wide power to make any order it considers fit, and in practice the common order is that one party buys the other's shares at a fair value fixed by the court. This is the main tool for a minority shareholder who is being frozen out.

Derivative action. Where the wrong is done to the company rather than to the shareholder, for example a director diverting business to a private entity, a shareholder can demand that the company take action and, if it does not, apply for leave to sue in the company's name.

Winding up on just and equitable grounds. As a last resort, a shareholder can apply to court to wind up a solvent company where it is just and equitable to do so, for example where the relationship was based on mutual trust that has irretrievably broken down, or where deadlock makes the company unmanageable. A court will not grant this lightly if a buy-out would solve the problem, because winding up destroys value for everyone.

These applications run in the High Court, are expensive, and take months to years. Many are settled on the courthouse steps for a buy-out.

If you are in a true partnership, with no company, the position is different. Any partner can generally end the partnership on notice, the partnership is then dissolved, and its assets are realised and divided after debts are paid. There is no oppression remedy, and each partner is personally liable for partnership debts. An attorney should look at the partnership agreement, if there is one, before anyone gives notice.

Step 6: Agree the buy-out

Almost every partner dispute that does not end in closure ends in one partner buying the other out. The hard questions are price, payment terms and what happens afterwards.

Price. If the agreement has a valuation formula, use it. If not, agree a method: a multiple of sustainable profit, net asset value, or an independent valuation with the cost shared. Avoid arguing about the number before you have agreed the method.

Payment. A lump sum is cleanest. Instalments are common because the business usually cannot afford a lump sum, in which case the seller should hold security, such as a pledge of the shares until paid.

Afterwards. The leaving partner resigns as a director, is released from any personal suretyships for the company's debts, and agrees reasonable restraint and confidentiality terms. The staying partner takes over any loan accounts and updates the CIPC records. Do not skip the release from suretyships. A partner who has left but is still surety for the overdraft has not really left.

A worked example: Two Rivers Guest House (Pty) Ltd

This example is illustrative only.

Nomvula and Dirk own a guest house company fifty-fifty. Nomvula runs it day to day. Dirk, who lives in another city, put in most of the capital. Dirk believes the bookings are being under-reported. Nomvula believes Dirk is doing nothing and drawing R15 000 a month for it. Neither has spoken to the other for two months. The shareholders' agreement is a template downloaded years ago with a mediation clause and a valuation based on net asset value.

Nomvula sends a written proposal: an independent bookkeeper reviews the accounts for both to see, the monthly drawings are reviewed, and they mediate within thirty days. Dirk agrees. The bookkeeper finds no under-reporting but does find that neither partner has been paid a market salary, so the "drawings" argument is really about that. At mediation, they agree that Nomvula will buy Dirk out at net asset value, roughly R900 000, paid as R300 000 on signature and the balance over 24 months secured by a pledge of the shares, with Dirk released from the bank surety on the final payment. Total cost to each: a share of the bookkeeper, a share of the mediator, and about R25 000 each in attorneys' fees to document the exit.

Had it gone to the High Court on an oppression application, each would have spent several times that over a year or more, and the guest house would probably have been sold.

What to do this week

1. Find and read the shareholders' agreement and the Memorandum of Incorporation.
2. Secure the company's records. Not by freezing the other partner out, which would itself be prejudicial conduct, but by making sure copies exist and cannot be lost.
3. Send a written proposal to your partner that includes an offer to mediate.
4. Get a one hour consultation with an attorney about your position. See what a small business attorney costs.

Documents and records to set up

• The shareholders' agreement, the Memorandum of Incorporation, and the securities register.
• Management accounts and bank statements for the last two years.
• Loan accounts showing what each partner has put in and taken out.
• Directors' and shareholders' resolutions and minutes.
• A chronology of the dispute with dates and copies of correspondence.
• Suretyships each partner has signed for the company.

Realistic timeline

• Direct negotiation: two to six weeks.
• Mediation, including preparation: four to eight weeks from agreeing to mediate.
• Documenting a buy-out: two to four weeks after agreement in principle.
• A High Court oppression application: six months to two years, longer if opposed with competing valuations.

Common mistakes and what they cost

• Locking the other partner out of the bank account or premises. This is the conduct the oppression remedy exists to stop, and it hands the other side an application.
• Skipping the dispute clause. A court application may be dismissed or stayed pending mediation, with costs.
• Leaving the suretyships in place. A partner who has been bought out can still be pursued by the bank.
• Removing a partner as director without a proper process. The Companies Act sets a procedure for removing a director, and a director removed unlawfully can claim.
• Diverting customers to a new entity while the dispute runs. Breach of fiduciary duty, a derivative action, and personal liability.

If you cannot afford an attorney

The Companies Tribunal offers alternative dispute resolution for certain company disputes at little or no cost, and can be a first step before any court. The Companies and Intellectual Property Commission deals with director changes and beneficial ownership filings. The Small Enterprise Development Agency offers free business advice and mentoring, which can be a neutral voice in a dispute. University law clinics assist individuals who meet their means tests. Legal Aid South Africa on 0800 110 110 does not usually take company disputes, but may assist an individual with a related civil matter.

If the dispute reduces to a fixed sum owed to you personally, for example a loan you made to the business in your own name, and you are a natural person claiming within the limit, the Small Claims Court can hear it. The company itself cannot sue there. Check the Small Claims Court calculator and, because loan accounts can be old, the prescription checker.

Frequently asked questions

Can I just sell my shares and leave? Only if the Memorandum of Incorporation and the shareholders' agreement allow it. Most private company documents restrict transfers and give existing shareholders a first right to buy.

Can my partner fire me from my job at the company? Only through a fair process under the Labour Relations Act 66 of 1995, if you are an employee. Being a shareholder does not protect your employment, and being dismissed does not remove your shares.

Is winding up the company the same as bankruptcy? No. A solvent company can be wound up by a court on just and equitable grounds. Its assets are sold, creditors are paid, and the balance goes to the shareholders. It is a last resort because it destroys the business.