Shareholder Disputes


AITKEN WHYTE LAWYERS BRISBANE

CIVIL LITIGATION & DISPUTE RESOLUTION LAWYERS FOR BRISBANE, THE GOLD COAST, & THE SUNSHINE COAST, QLD

Disputes amongst shareholders of a company are not an uncommon occurrence. An effective corporate governance structure can significantly alleviate difficulties in navigating such disputes.

Two legal documents provide the foundation for the corporate governance of a company. These are the shareholder agreement and the company constitution.

What Is a Shareholder Agreement?

A shareholder agreement is a legally binding contract amongst shareholders of a company. A shareholder agreement generally outlines:

  • the relationship between shareholders of the company;
  • the management and operation of the business;
  • the rights of shareholders; and
  • how shareholders can exit the company.

If you are starting a company, a shareholder agreement can save you time and money in the event of a future dispute. Even if there are only two shareholders in the company, it is worth drafting an agreement from the outset.

Our commercial lawyers can assist you to draft a shareholders’ agreement. This can cover future eventualities and protect you and the company in the event of a dispute.

What Is a Company Constitution?

A company constitution governs the internal management of a company. It states the rights and duties that govern the relationship between:

  • a company’s directors; and
  • its shareholders.

It will generally include:

  • the means in which directors are to be appointed and removed;
  • how Directors’ Meetings are to be governed; and
  • the process in which the constitution will be amended.

In some cases, a company may not have a constitution to govern its internal management. In these cases, the replaceable rules outlined in the Corporations Act 2001 (Cth) (“the Act”) step in.

Alternatively, internal management can be governed by a combination of both:

  • a company constitution; and
  • the replaceable rules.

Ceasing To Be a Shareholder of a Company or Forcing Another Shareholder to Sell

A shareholder may want to cease their shareholding in a company for a variety of reasons. A well-drafted shareholder agreement will generally outline:

  • the necessary processes to be taken for a shareholder to sell their share in the company;
  • the circumstances in which a shareholder can sell shares; and
  • to which parties the shares can be sold.

Where there is a dispute, a party may be of the view that another party should sell their shares and exit the company.

In this situation, the best outcome is often one the parties are able to negotiate on amicable terms. A mediator may be able to assist parties to negotiate. Aitken Whyte Lawyers are experienced in dispute resolution and can represent you:

  • at mediation; or
  • in negotiations.

What if due to disagreement, however, negotiations fail? In this event, a party cannot force another to sell their shares simply due to conflict without a provision in:

  • the company’s shareholder agreement; or
  • the company constitution.

In the absence of a constitution or shareholders agreement, litigation may be necessary. Where parties cannot negotiate terms, Court intervention might lead to a resolution.

Our civil litigation lawyers have experience acting for shareholders of companies. We can assist you to apply for the necessary orders to get the outcome you desire.

Court Orders Concerning a Company

It is common for shareholder disputes to be taken to Court.

Section 233 of the Act gives a Court a wide range of powers to make orders relating to a company that it considers just. Some orders a Court can make under section 233 of the Act include:

  • orders that the company be wound up;
  • orders regulating the conduct of the company’s affairs in the future; and
  • orders requiring a person to do a specific act.

Section 232 of the Act sets out what must be established for a Court order to be made under section 233. The Court will make an order in circumstances where:

(a) the conduct of a company’s affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

Corporations Act 2001 – Section 232

Oppressive Conduct

In the event of a dispute, a shareholder may apply to the Court to intervene. This is often on the grounds that they have experienced oppressive conduct by:

  • another shareholder;
  • a group of shareholders; or
  • a company director or directors.

The Act does not define oppressive conduct for the purposes of section 232.

French CJ in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 noted, about sections 232 and 233 of the Act:

Their language and history indicate that [they] are to be read broadly”.

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 (29 July 2009)

Certain conduct, however, will generally be held by the Courts to be oppressive, such as a misuse of power. Often it is a minority of shareholders that are oppressed. This may be due to a misuse of power by majority shareholders.

Oppression has been interpreted by the courts to include conduct which:

lacks the degree of probity which the members are entitled to expect in the conduct of the company’s affairs

Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042

For conduct to be deemed oppressive, one must ask:

whether objectively in the eyes of a commercial bystander, there has been unfairness

Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC

For the Court to intervene, there must be proof of oppression or proof of unfairness. Mere prejudice to or discrimination against a member without unfairness will be insufficient (see Mackay Sugar Ltd v Wilmar Sugar [2016] FCAFC 133).

Examples of oppressive and unfairly prejudicial conduct include:

Where a shareholder is also a director, such conduct also may amount to a breach of a director’s duty.

Our civil litigation lawyers have experience:

  • bringing Court applications on behalf of shareholders; and
  • proving that conduct has been oppressive.

In some cases, applying to Court itself can be the step that is needed to reopen negotiations.

Breach Of a Director’s Duty

Directors of a corporation owe various duties to their corporation under Part 2D.1 the Act. These duties are in addition to fiduciary duties that directors owe at general law.

By way of the Act, directors owe duties to:

  • act with due care and diligence in exercising their powers;
  • act in good faith in the best interests of the corporation and for a proper purpose;
  • not improperly use their position to gain an advantage for themselves (or another); and
  • not improperly use their position to cause detriment to the corporation.

Winding Up

Where there is a dispute, the most aggressive step a shareholder can take is to apply to wind up the company on:

  • just and equitable grounds; or
  • grounds of oppression.

If a company is “wound up” it will be concluded and cease to exist after its affairs have been finalised.

A Court can order a corporation to be wound up by way of an order under section 233 of the Act. Some circumstances in which a Court may order a company to be wound up include:

  • where the company does not commence business within one year from its incorporation;
  • where the company suspends its business for a whole year;
  • where the directors have acted in their own interests rather than in the interests of the members as a whole; or
  • on grounds that are just and equitable.

It is well-established, however, that the winding up of a solvent company:

is an extreme step, and one which must require a strong case

Cumberland Holdings Ltd v Washington H Soul Pattinson & Company Ltd (1977) 13 ALR 561

Voluntary Administration

Members of a company may resolve to voluntarily wind up the company by way of a special resolution.

Voluntary administration is a formal restructuring process. This process is outlined in Part 5.3A of the Act.

Directors of a company may place the company into administration in circumstances where:

  • the company is insolvent or
  • the company is likely to become insolvent.

Focused On Results

Proper experience in dealing with company and shareholder disputes is essential.

Aitken Whyte Lawyers Brisbane are focused on results.

We have experience acting for shareholders and company directors to resolve disputes.

Our Brisbane civil litigation lawyers will advise you on the proper course to take if:

  • you are a shareholder of a company; and
  • your rights are being infringed upon.

If you are in a dispute or anticipate that a dispute may arise, contact us for legal advice.

We can assist with all commercial disputes.

Office Location and Contact Details

Brisbane

Aitken Whyte Lawyers Brisbane
2/414 Upper Roma Street
Brisbane QLD 4000

Ph: 07 3229 4459
Fax: +617 3211 9311
E: enquiries@awbrisbanelawyers.com.au





Contact

07 3229 4459 Email

Related Articles

Litigation and Disputes

Legal

Law Articles Law Courts

Scheduled Phone Outage - 3 June 2021

X