Legal development

Shareholder on Shareholder Violence

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    The United States restructuring market has coined the phrase "creditor-on-creditor violence" recently. It describes the taking advantage of loopholes in financing documents by certain existing or new lenders to the disadvantage of certain existing lenders. But in financially distressed scenarios, there is not only creditor violence but shareholder violence. We are seeing an increasing amount in Australia. So what is it and how should it be handled?

    Shareholder on shareholder violence is hardly new. It has been around as long as there have been shareholders. But like any trend, it morphs. What we are seeing in the current market is an increase in disputes in relation to early stage and high growth companies where what could be described as "easier" access to funding has become more difficult and the equity capital markets have re-calibrated value. This creates an inherent tension between a company's need to preserve runway and continue to attract capital (sometimes at a price per share less than that which existing shareholders have bought in at, otherwise known as a "down-round") which can lead to fights between shareholders and inevitably, violence.

    Shareholders are looking closely at the performance, cash-flow and future outlook of these businesses to see whether they should continue to invest or whether they cut their losses and seek to exit their investment via a secondary sale, often with a view to deploying funds elsewhere. But exiting an investment is not as easy as it sounds. So how do you manage the exit, and navigate the underlying issues?

    Here are 7 tips:

    1. Understand the cash-flow and the timeline. Cash is king. Robust forecasts are invaluable. Without an understanding of cash or runway, it is impossible to make informed decisions.
    2. Be calm. Marriages can falter when cash is tight. So too can businesses. Emotions can run too high. Being cool, calm and collected is critical.
    3. Understand the constituent documents. The first things any lawyer will ask for are the constitution or the shareholders' agreement. Have them to hand. Read them. Understand your voting power and know your rights which are invariably bespoke. And it goes without saying – the value of a good lawyer is being able to understand how legal rights interact with commercial outcomes.
    4. Be aware of your stake in the game. What do your fellow shareholders need from you and what do you need from them? Strategise how to resolve and how to succeed. Treat it like a game of chess – how is your opponent going to react to your next move and how can you pre-emptively protect your interests? Defend. Attack. Neturalise.
    5. Stay awake to your obligations. Avoid opening yourself up to an action for shareholder oppression. Utilitarianism often trumps self-interest in leading to a commercial outcome.
    6. Make sure your appointed directors understand insolvent trading liability and safe harbour. See our RSSG Guide chapter on Informal Workouts here for further information.
    7. As one would expect, any lawyer will say get advice. You should. The pandemic is over. DIY restructuring is not as easy as it was during COVID. If you had a stroke, would you go to a doctor? Well if your shareholding is imperilled, see the equivalent of a corporate doctor.

    Crisis is opportunity. An increase in shareholder on shareholder violence presents both a threat to guard against and an opening to take advantage of.

    Authors: Michael Sloan, Partner; Alinta Kemeny, Partner; Camilla Clemente, Partner; Jason Maletic, Partner; Stuart Dullard, Partner; and Jacqueline Chan, Senior Associate.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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