Shareholder disputes – a fight for control

Disputes between directors and shareholders of Australian proprietary limited companies (Shareholder Disputes) are common.  The rights and obligations of directors and shareholders of companies are regulated by the Corporations Act 2001 (Cth) (Act) and the standard form “vanilla” constitution (Constitution) based on the Act.  The unfortunate reality is that the Act and the vanilla Constitution are usually insufficiently prescriptive to protect the parties from the conduct of a Director or Director(s) behaving badly.

What is a Shareholders Dispute?

Broadly speaking, 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 of a Unit Trust and Unit Holders of a Unit Trust;
• Partners in a partnership;
• Partners in a partnership of Trusts; and
• potentially any other disagreement about the management of an entity between its controllers.

Most common however is the dispute between directors and shareholders of a proprietary limited company (Enterprise).  In this context what is commonly referred to as a partnership dispute, may actually be a Shareholders Dispute.

The fight for control

At the core of a Shareholders Dispute (regardless of its precise type) is a fight for control and the benefits that this control may provide. Therefore another way of looking at the ensuing legal problem is to look at how to limit control of the Enterprise. Often times the fight for control is characterised by one party attempting to limit access to information about the performance of the Enterprise, because they perceive that the value that they bring is greater than what was initially agreed.

The background law

In the case of a proprietary limited company there are a variety of contractual and statutory obligations governing the rights and obligations of the parties to the dispute.  These include but are by no means limited to:

• contract(s) of employment;
• contracts for services;
• directors duties (both statutory as provided in the Act and at common law);
• the Constitution or the replaceable rules of the company; and
• Shareholders Agreement (if any).

The above documents are generally the weapons which each party has at their disposal to ascertain the rights and obligations which can be used to ascertain their rights and obligations and to subsequently resolve the dispute.

What are the options for resolving a Shareholders Dispute?

Like any litigious matter, the tactics available to the parties depends on the facts of the matter and the application of the law to the facts. Once the legal position is established a prudent legal practitioner advises on a strategy to resolve the dispute in conjunction with their client, considering the value of the Enterprise. Generally some of the options available to assist to resolve a Shareholders Dispute may involve:

• offering to buy out a party;
• offering to buy a controlling stake;
• attending a mediation of the parties to attempt to resolve the dispute;
• appointing an auditor;
• obtaining the accounts of the Company;
• winding up on just and equitable grounds section 461(k) Corporations Act 2001 (Cth);
• making an application for oppression pursuant to section 232 of the Corporations Act 2001 (Cth); and
• appointing an administrator or liquidator.

The above is not an exhaustive list as the possible tactics used to resolve the dispute will depend on the specific circumstances. Recently, in an attempt to streamline the process of dispute resolution in the case of matters involving shareholder oppression pursuant to section 232 of the Act, the Victorian Supreme Court has introduced streamlined dispute resolution procedures for oppression claims. See our commentary on the streamlined procedures introduced in September 2014 here.

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)

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 the Corporations Act 2001 (Cth) to wind the company up on just and equitable grounds. Section 461(1)(k) of the Corporations Act 2001 (Cth) 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 as appointing a liquidator is seen as a drastic step. Because of this often times where negotiations have taken place for the buyout of a party, the section 461(k) remedy forces the parties to a settlement, often “on the steps of the Court” as it is often said.

Shareholder Oppression – section 232

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.

See further commentary on shareholder oppression here.

Of course, the steps taken in each Shareholder Dispute will depend on the specific circumstances and the contractual obligations of the parties. Often time when taking a client’s statement we discover that one of the parties to the dispute has engaged in conduct which may be prejudicial or is a clear breach of their duties as a Director.  Disputants need to take care to ensure that the steps taken to resolve the dispute do not actually act against them in breach of their obligations.

Links and further references

Legislation

Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)

Further information

If you are involved in a Shareholders Dispute, please contact us for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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