Left unresolved, a shareholders dispute can significantly impact on a company’s profitability, if not destroy the company and irreparably damage the relationship between the shareholders. As with all disputes prevention is almost inevitably better than the cure, and in the case of a proprietary limited company, prevention means a properly drafted shareholders agreement (or similar document). A shareholders agreement should, at a minimum, contain clear guidelines for dealing with potential and actual shareholder disputes and may enable parties to engage in cost effective and cost-effective alternative dispute resolution strategies to prevent costly litigation.
It is important that when coming up with a strategy to deal with a shareholders dispute, parties have a clear understanding of the rights and remedies that may be available to them.
How do shareholder disputes arise?
There are any number of ways in which a shareholder dispute arises, in our experience they can most commonly arise from:
- misunderstanding of the parties’ rights and obligation;
- disagreement about the company’s strategy and management;
- a failure to provide information (including financial information) to the shareholders;
- concerns about mismanagement or fraud;
- conflicts of interest arising between other business interests;
- breaching of shareholders agreements or directors’ duties.
What rights does a shareholder have if a dispute arises?
A shareholders’ rights may arise from one or more of the following:
- the company’s constitution (or replaceable rules);
- a shareholders agreement (if there is one);
- the Corporations Act 2001 (Cth) (the Act);
- the common law.
What remedies does a shareholder have to resolve a dispute?
If the dispute cannot be resolved through discussion, there are a number of remedies available to shareholders.
Which remedy is available, and which is the most effective, will depend on the specific issues in dispute.
One of the most effective ways to legally deal with a shareholder dispute for a minority shareholder is an application on the grounds of oppression pursuant to section 232 of the Act.
An oppression application seeks remedies where it is alleged:
- the conduct of the company’s affairs; or
- an actual or proposed act or omission by or on behalf of the company; or a resolution, or a proposed resolution, of members or a class of members,
- contrary to the interests of the members as a whole; or
- oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members.
In a successful oppression application the court can make a number of orders, including:
- orders winding up the company through the appointment of a liquidator;
- orders regulating the conduct or affairs of the company in the future;
- ordering the purchase of the shares of any member by other members;
- appointing a receiver or a receiver and manager of the property of the company;
- ordering a person to refrain from engaging in specified conduct
- ordering a person to do a specified act or thing;
- modifying or repealing the constitution of the company.
What should you do if you are concerned about a shareholder dispute?
Shareholders who anticipate that a dispute is on the horizon should seek appropriate advice to ensure they have an understanding of what rights and remedies may be available to them.
We can assist at all stages of relationship between shareholders – in putting in place effective shareholder agreements, in resolving shareholder disputes by negotiation or alternative dispute resolution, or in making appropriate applications to court for remedies.