Shareholder disputes – what form do they take and what are your options?

Many businesses are under pressure at the moment, and we are seeing an increase in disputes between shareholders.

The best outcome for the parties and the business is for the shareholders to work out their differences without the need for Court proceedings, often as follows:

1. the parties agree on a strategy to move forward and work together; or

2. one shareholder buys the other shareholder out (often an expert valuation of the business is required).

Seeking legal advice early to assist in facilitating any discussions and documenting any outcomes is an ideal approach.  It can also potentially reduce the risk of much larger legal fees if the matter proceeds to Court or there is a dispute as to what agreement was reached.

What if the shareholders cannot agree?

Sometimes when shareholders cannot agree on a way to move forward, one or both shareholders seek legal redress through the Courts. This will usually take the form of:

1. an application to wind up the company on just and equitable grounds; or

2. an oppression proceeding.

Winding up the company on just and equitable grounds

Sometimes a Court will wind up a solvent company on just and equitable grounds because the company cannot continue despite not necessarily being in financial trouble.

When such an application is brought the Court will consider the following circumstances which may result in winding up the company and appointing a liquidator:

(a) a failure of the main object of the company’s formation;

(b) a deadlock in the management of the company;

(c) a breakdown in the relationship between the shareholders;

(d) a lack of confidence in the conduct and management of the affairs of the company;

(e) where there has been fraud, misconduct or oppression in relation to the affairs of the company;

(f) serious concerns about the company’s compliance with its statutory obligations, including the filing of tax returns;

(g) where there have been breaches of the Corporations Act 2001, including breaches of directors’ duties or an inadequacy of accounts or recordkeeping;

(h) questions of commercial morality in the conduct of the company’s affairs; and

(i) a risk to the public interest that warrants protection.

Oppression

If the directors and majority shareholders are conducting themselves in a manner that oppresses the minority shareholder(s), then these minority shareholder(s) may have a claim in oppression.

In order for a claim for oppression to be successful, the conduct of the company must be more than simply an action which the shareholder disagrees with. Whilst there needs to be a lack of fair dealing, the conduct does not have to be illegal.

Some examples of oppression include:

• excluding the minority shareholder from the affairs of the company;
• a denial of information; or
• ensuring a legitimate corporate opportunity is given to themselves or an associate.

 The Court may order the following:

• that the company be wound up;
• that the constitution of the company be modified; or
• the purchase of the oppressed minority shareholding by the other shareholder(s) – often this will involve a valuation of the shares at a price in the event that the oppressive conduct had not occurred.

Lessons

If you find yourself in a shareholder dispute there are legal options available to you and obtaining experienced legal advice early is essential.

Partner Catherine Ballantyne is well placed to advise you across complex shareholder disputes, obtaining a business or business unit valuation and appearing before a Court to wind up a company or oppression hearing.

Do not hesitate to contact Catherine or one of the Madgwicks team via the contact details below to discuss your own situation.