Shareholder Disputes can cripple a company. Disputes between directors and shareholders can have serious consequences.
Before we discuss what a shareholders’ dispute is, let’s briefly discuss what a shareholders agreement is and what it should outline.
What is a Shareholders Agreement
A shareholders agreement is a binding contract between the shareholders of a company, which governs the relationship between the shareholders and specifies who controls the company, how the company will be owned and managed, how shareholders’ rights may be protected and how shareholders can exit the company.
A shareholders agreement should outline:
- the structure, management and direction of the business;
- how responsibilities will be divided between directors and shareholders;
- how shareholders may acquire or dispose of shares;
- how the company will be funded; and
- what will happen if the relationship between shareholders comes to an end.
What is a Shareholders’ Dispute?
A Shareholder Dispute can be a dispute between:
- directors and shareholders of a proprietary limited company;
- directors and shareholders of a unlisted public company;
- directors of a corporate trustee;
- partners in a partnership;
- partners in a partnership of trusts; or
- any other disagreement about the management of an entity between the controlling entities.
Resolving Shareholder Disputes
Shareholders Agreement & Constitution – the governing documents of a company, and in particular the shareholders agreement, often set out what is to occur in the event of a deadlock. Some of the different types of provisions include buy-out orders, meditation, market sales or wind-up. Figuring out what is provided for in your governing documents should always be your first port of call.
Corporations Act – If the answer to your woes does not lie in the governing documents (or you don’t have any) you should look at the avenues for relief per the Corporations Act (the Act). Often, claims of a deadlock coincide with claims of oppression and/ or breaches of directors’ duties.
Under the Act, the power that the Court has includes to make orders:
- that the company purchase a shareholder’s shares;
- that a receiver and manager be appointed and the company wound up (section 461 Corporations Act);
- that one shareholder purchase another’s at a price determined by the Court; or
- that an injunction be granted against the company or a director/ majority shareholder to restrain a specific Act.
The Court Process
A shareholder involved in a shareholder dispute could also apply to the Courts under section 461(1)(k) of the Act to wind up (liquidate) a company where it would be just and equitable to do so. A breakdown of the relationship of 50/50 shareholders in an operative company has been deemed, on some occasions, a just and equitable basis.
Courts are, however, extremely reluctant to grant such applications to wind up a company especially if the company in question is solvent. See for example the decision in International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2) (1994) 18 ACSR 603. Note however, that even in cases where the Courts have held that the appropriate remedy is to wind up the company, they do also, in most cases, adjourn or suspend its order to allow the parities to reach a compromise before the formal order is made.
Common legal remedies to Shareholders Disputes
In considering the tactics which can be used to resolve a Shareholders Dispute, it is common that an aggrieved party consider the remedies provided in section 461(k) and section 232 of the Act:
Winding up on just and equitable grounds – section 461(k) of the Act
In cases where the relationship between the parties has completely broken down is to make an application to the Supreme Court pursuant to section 461(k) of Act to wind the company up on just and equitable grounds. Section 461(1)(k) of the Act provides that:
‘The Court may order the winding up of a company if:
The Court is of the opinion that it is just and equitable that the company be wound up.’
The Court will need to be satisfied that the relationship between the parties has broken down.
Shareholder Oppression – section 232 of the Act
Section 232 of the Act sets out the grounds on which a Court may make an order under section 233 if the conduct of the Company’s affairs, an actual or proposed act or omission by or on behalf of a Company or a resolution or proposed resolution is either:
- contrary to the interests of the members as a whole; or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.
Example of a company losing control because of a shareholders dispute
The recent case of Van Wijk (Trustee), in the matter of Power Infrastructure Services Pty Ltd v Power Infrastructure Services Pty Ltd  FCA 1430, demonstrates that one such consequence is directors having control of the company taken away from them.
These proceedings were brought about by Mr Van Wijk who sought the winding up of Power Infrastructure Services Pty Ltd (Power) and was applying for the Court to appoint a provisional liquidator to Power.
The consequences of a shareholders dispute
This case demonstrates that, where directors and shareholders fail to reach an agreement they may have control of the company taken away and a provisional liquidator appointed. Whilst a provisional liquidator has the power to operate the business of the company or to close the business and sell off assets, it is perceived as a negative event in the general market place and can trigger, in some cases, contractual breaches in commercial contracts.
Another possible consequence of shareholder disputes is a Court ordered winding up. In the case discussed, though the outcome of the application was not decided at this instance, Mr Van Wijk had applied for the winding up of Power under the Corporations Act 2001 (Cth) on the following grounds:
- The directors had acted in affairs of their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appeared to be unfair or unjust to other members (s 461(1)(e));
- Affairs of the company are being conducted in a manner that was oppressive or unfairly prejudicial to or discriminatory against member(s) or in a manner contrary to the interests of the members as a whole (s 461(1)(f)); or
- The Court would be of the opinion that it is just and equitable that the company be wound up (s 461(1)(k)).
A breakdown of relations between company’s members may support a winding up on the just and equitable ground where it frustrates the commercially sensible operations of the company.
It is a real possibility that a shareholder dispute could result in the company’s winding-up.
To avoid situations like the this one, we recommend companies seek to resolve issues internally, with mediation, before escalation sees the matter taken out of their hands.
If you find yourself in a company or director deadlock which has caused a shareholders dispute, it’s important that you take action immediately. Talk to our shareholder dispute lawyers and they can advise you about your rights and obligations in dealing with shareholder disputes, either through commercial negotiation or Court proceedings.
About Mark Harley | Principal
Mark has practiced in commercial law, commercial litigation and insolvency law for almost 10 years. He established the firm in 2014. With degrees in law and information technology, as well as being a director of several companies, Mark speaks the language of business owners and has a first hand understanding of the issues facing his clients.