Shareholders Disputes

Written by Cristian Fuenzalida

When individuals come together to set up a company as shareholders, there is an expectation that pre-established relations between shareholders will continue to thrive throughout the life of the business.

There are often highs and lows in the relationships between shareholders, and often, these lows can lead to shareholder disputes. Unfortunately, disputes between shareholders and between directors are common in Australia.

When shareholder relationships start to break down, individuals are often left in the dark about what rights they have, and how to protect their interests as a shareholder. It is important that you understand your rights and responsibilities so that you are well equipped to handle the dispute. It is even more important that you have qualified professionals that can help you navigate a shareholder dispute, and most importantly, well-drafted legal contracts that can minimise and hopefully avoid these disputes.

Common Shareholder Disputes

In Australia, common disputes that arise between shareholders are caused by:

1. A breakdown in trust between shareholders;
2. Disagreements about company decisions;
3. Lack of access to company information;
4. Improper use of shares;
5. Disagreements about the disbursements of company resources; and
6. Breaches of directors’ duties by a director of the company.

Generally, in smaller companies, shareholders are also appointed directors of the company or have the right to nominate a director. This creates added obligations on the shareholder while exercising their functions as a director and creates further risks of deadlocks in the company’s decision-making if the shareholders/directors are involved in a dispute.

What rights do shareholders have?

In Australia, shareholder rights as set out in the Corporations Act 2001 (Cth) (the Corporations Act), the company Constitution and any Shareholder Agreement.

The Constitution sets out the obligations and rights of the company, its officeholders (directors, secretaries etc) and the shareholders. A shareholder agreement is similar to a contract between the shareholders which governs the rights and responsibilities of shareholders.

It is therefore important to review these documents when you are involved in a shareholder dispute, as they will usually provide a starting point to determine your rights as a shareholder.

How can I resolve a shareholder dispute?

It is no secret that the easiest and cheapest way to resolve a dispute amongst shareholders is by talking and engaging in informal dispute resolution practices, like negotiation or mediation. If any resolution is reached, it is important to document the resolution which can aid in preventing future disputes about the same issue.

In some instances, due to the significant breakdown in the relationships and the inability for shareholders/directors to work together, it may be necessary for one party to sell their shares to the other party and formalise the ‘divorce’ between shareholders. Another option would be for all shareholders to sell the whole company to a third party. This usually requires the appointment of a valuer to valuer the shares to determine the sale price.

If the parties can agree to sell the company or some of the shares to one another, this can avoid costly and lengthy litigation, as well as the added stress of legal proceedings.

What legal actions can I take as a shareholder?

Often, parties are often entrenched in their positions and sometimes it is impossible to find a path forward without going to Court. If negotiations fail or are not available, the Corporations Act outlines several ways in which a shareholder’s rights can be protected and enforced.

Some of these remedies include:

1. Bringing a claim for oppressive and unfair conduct pursuant to section 232 of the Corporations Act 2001 (Cth). This can happen when the company’s conduct is:
   1. Contrary to the interest of the shareholders as a whole; or
   1. Is oppressive to, unfairly prejudicial to or unfairly discriminatory against a particular shareholder.
2. Bringing a personal action as a shareholder to enforce a personal right owed to a shareholder. For example, a claim for a breach of fiduciary duty by a director.
3. Commence a derivative action pursuant to section 236 of the Corporations Act 2001 (Cth) – this allows shareholders to bring a claim on behalf of the company in which they hold shares. This can be a claim against directors or other third parties where the company, where the officeholders may have a perceived conflict of interest or are refusing to act.
4. Making an application to inspect the books of the company, in accordance with section 247A of the Corporations Act 2001 (Cth). This can help if you want to assess how company funds are being used and to ensure they are being used in a proper way.
5. Seeking a statutory injunction against the Company to restrain them from engaging in certain conduct that is a contravention of the Corporations Act.

As a last resort, an application can be made to Court in accordance with section 461 of the Corporations Act seeking to wind up the company. However, a company will only be wound up if there is just and equitable grounds to do so and there are no other options to deal with the affairs of the company.

How can we help in a Shareholder Dispute?

If you are a shareholder and need legal advice on your dispute or want to avoid future shareholder disputes by drafting a suitable shareholder agreement for your company, do not hesitate to contact our expert commercial lawyers at Madison Marcus to see how we can help you.