Shareholder disputes can place significant pressure on a business, particularly where the disagreement concerns the management or control of the company, access to financial information, the use of company assets or the future ownership of the business.
In privately owned companies, the position can be particularly complex. Shareholders may also be directors, employees, family members or long-standing business partners. A breakdown in one relationship can therefore affect the management and operation of the company more broadly.
The appropriate response to a shareholder dispute will depend on the circumstances. In some cases, the dispute can be resolved through negotiation or mediation. In others, particularly where the company’s assets or a shareholder’s interests are at risk, court intervention may need to be considered.
Understanding your legal and commercial position at an early stage can help determine which course of action is appropriate.
What can lead to a shareholder dispute?
Shareholder disputes often arise from a breakdown in the relationship between the people who own or manage a business.
The immediate disagreement may concern the direction of the company, but the underlying issues can be more substantial. A shareholder may believe they have been excluded from management or important decisions, denied access to financial information, treated unfairly in relation to dividends or remuneration, or disadvantaged by decisions made by other shareholders or directors.
Disputes can also arise where shareholders disagree about the use of company funds, the value of the business, the introduction of new shareholders, the sale of shares or the future direction of the company.
In companies with two equal shareholders, a breakdown in the relationship can result in deadlock, leaving the parties unable to make decisions necessary for the ongoing operation of the business.
ASIC recognises that disputes in small proprietary companies commonly concern the ownership, management or control of the company and generally involve the private rights and interests of the people involved. (ASIC Download)
Identifying the real issue behind the dispute is important because it will influence both the legal position and the options available for resolving it.
Start with the company’s governing documents
An important early step is to establish the rights and obligations of the parties.
This will usually involve reviewing the company’s constitution, any shareholders agreement and other relevant agreements or company records.
The constitution governs important aspects of the relationship between the company, its directors and shareholders. The Corporations Act 2001 also contains replaceable rules dealing with aspects of company governance, although their application will depend on the company’s circumstances and constitution. (ASIC)
A shareholders agreement may deal with matters such as decision-making, voting rights, transfers of shares, valuation mechanisms, the exit of a shareholder and procedures for resolving a deadlock.
These documents can therefore be central to understanding the parties’ respective positions. However, the absence of a shareholders agreement does not mean that a shareholder is without rights or options. Rights and remedies may also arise under the Corporations Act, the company’s constitution and other areas of law.
Can a shareholder dispute be resolved without litigation?
Not every shareholder dispute needs to result in court proceedings.
Where there remains an opportunity for the parties to negotiate, a commercial resolution may preserve value and avoid the cost and disruption associated with prolonged litigation.
The appropriate outcome will depend on the nature of the dispute. It may involve changes to the way the company is managed, an agreement about future decision-making, the purchase of one shareholder’s interest by another, the sale of the business or another negotiated exit.
Mediation can also provide a structured process through which the parties can attempt to resolve their differences. ASIC recommends seeking legal advice and identifies communication and mediation as potential means of resolving disputes between members and officeholders of small proprietary companies. (ASIC Download)
Any proposed resolution should be considered in both legal and commercial terms. Resolving the immediate disagreement is only part of the issue. The arrangement also needs to provide a workable position for the business and the parties going forward.
What happens when a shareholder wants to exit the business?
An exit by one shareholder can sometimes provide a practical resolution, but the terms of that exit may themselves become a significant source of dispute.
The parties may disagree about whether the shares should be sold, who should acquire them and the price that should be paid. The treatment of shareholder loans, guarantees, employment arrangements and other financial interests may also need to be addressed.
Valuation is often central to these negotiations. The value attributed to an interest in a private company can depend on the nature of the business, the shareholder’s interest, the company’s financial position and the valuation methodology adopted.
The company’s constitution or shareholders agreement may provide a mechanism for transferring or valuing shares. Where no effective mechanism exists, the parties may need to negotiate an appropriate process, which can include obtaining independent valuation advice.
What happens when shareholders are deadlocked?
A deadlock arises where the shareholders cannot obtain the necessary agreement to make decisions about the company.
This is particularly significant in a company owned equally by two shareholders. If their relationship breaks down, neither may have sufficient voting power to resolve important matters without the agreement of the other.
A deadlock can affect decisions concerning expenditure, staffing, distributions, investment, borrowing, business strategy and the future ownership or operation of the company.
The options available will depend on the company’s governing documents and the circumstances of the dispute. A shareholders agreement may contain a specific deadlock procedure. Otherwise, the parties may need to consider negotiation, mediation, a negotiated buy-out or, where the dispute cannot be resolved commercially, court proceedings.
The existence of a deadlock does not necessarily determine the legal remedy. The conduct of the parties and the effect of that conduct on the company and its shareholders will also be relevant.
When can shareholder conduct amount to oppression?
Some shareholder disputes involve more than a disagreement about the management or direction of a business.
Under section 232 of the Corporations Act 2001, the Court may make orders where the conduct of a company’s affairs, an act or omission by or on behalf of the company, or a resolution of members is contrary to the interests of members as a whole, or is oppressive, unfairly prejudicial or unfairly discriminatory against a member or members. (Federal Register of Legislation)
A disagreement about a commercial decision will not, of itself, necessarily amount to shareholder oppression. Whether particular conduct satisfies the statutory test will depend on the circumstances.
Where the requirements are met, the Court has broad powers under section 233. These include orders regulating the future conduct of the company’s affairs, requiring the purchase of shares and, in appropriate circumstances, winding up the company. (Federal Register of Legislation)
Issues involving exclusion from management, the use of company assets, access to information or conduct benefiting one group of shareholders at the expense of another may warrant closer consideration.
What rights do shareholders have to company information?
Access to company information can become an important issue once a shareholder dispute develops.
The precise rights available depend on the information sought and the circumstances. However, shareholders have a number of statutory rights relating to company records and governance.
For example, shareholders are entitled to inspect the company’s share register and request a copy of the company’s constitution. Members can inspect minutes of members’ meetings and resolutions, and members holding at least 5% of the votes in a small proprietary company may, subject to the statutory requirements, direct the company to prepare and distribute financial and directors’ reports. Shareholders holding at least 5% of the votes that may be cast at a general meeting also have rights relating to calling or requiring the directors to call a meeting. (ASIC)
The existence of a dispute does not itself create an unrestricted entitlement to every company document. If information is being withheld, the appropriate course will depend on the nature of the information, the shareholder’s position and the purpose for which it is required.
When might court action be necessary?
Litigation is not necessarily the first step in resolving a shareholder dispute. There are, however, circumstances where court proceedings may be required to protect a shareholder’s interests or address conduct affecting the company.
This may occur where negotiations have failed, oppressive conduct is alleged, company assets are at risk, urgent orders are required or the parties have reached a position where a commercial resolution is no longer achievable.
The appropriate remedy will depend on the legal basis of the claim and the circumstances of the company. In oppression proceedings, for example, the Court has broad powers and can make orders concerning the purchase of shares, future management of the company and, in appropriate cases, winding up. (Federal Register of Legislation)
ASIC generally does not determine private disputes between shareholders and officeholders. Those disputes will ordinarily need to be resolved by the parties themselves, through an alternative dispute resolution process or, where necessary, through court proceedings. (ASIC Download)
Why obtaining advice early can matter
Seeking legal advice at an early stage does not necessarily mean commencing court proceedings.
It can provide clarity about the parties’ respective rights and obligations, the effect of the company’s constitution or shareholders agreement, the information and evidence that should be preserved, and whether negotiation or mediation remains a realistic option.
Early advice can also be important where there is a risk that company assets may be transferred, records may become difficult to obtain or decisions may be made that materially affect the business or a shareholder’s position.
For business owners, the legal dispute is only one consideration. The effect on the company’s operations, employees, customers, commercial relationships and value may also need to be taken into account when determining the most appropriate strategy.
Advice on shareholder disputes
Shareholder disputes often involve overlapping legal, financial and commercial considerations. The appropriate strategy should reflect not only the legal rights of the parties, but also the commercial outcome they are seeking to achieve.
Mazzeo Lawyers advises clients in shareholder and partnership disputes as part of our broader property and business disputes practice.
We take a practical approach to dispute resolution, including exploring opportunities to resolve disputes through negotiation or mediation where appropriate, while being prepared to pursue or defend court proceedings where this is necessary to protect our client’s position.
If a shareholder dispute has arisen, or circumstances suggest that one may be developing, obtaining advice early can help clarify your position and the options available.
