Overview
In NSW, shareholder disputes can be seen as a common occurrence that arise for several reasons, some examples include disagreements over company direction, profit distribution, management decisions, and oppression.
These disputes can be complex and significantly affect a business if not resolved quickly and effectively. It is important for shareholders to understand their rights and responsibilities to navigate disputes, seeking preventative measures and resolutions. Moreover, business should familiarise themselves with the causes of shareholder disputes in order to identify problems before they arise to limit the impact of possible disputes on their performance.
Common Causes of Shareholder Disputes
- Company Direction
- Management Decisions
- Financial Management
- Oppression by majority or minority shareholders
- Breaches of Fiduciary Duties by the shareholders or directors
Dispute Resolution
- Negotiation / Mediation
Negotiation is typically the first step in shareholder dispute resolution. This is an internal process where the parties may reach a resolution between themselves or through lawyers without the need for litigation. Mediation uses the assistance of an independent mediator who facilitates the mediation process, and parties can reach their own solution through the help of the mediator.
- Arbitration
If parties cannot come to an agreement through either negotiation or mediation, Arbitration is another form of alternative dispute resolution that is more formal than other alternative dispute resolution strategies, but quicker and less formal than litigation. Arbitration involves the use of an arbitrator who makes a determination for the parties involved to resolve their dispute.
It is recommended these dispute resolution mechanisms are agreed between the shareholders in the shareholder agreement. This would assist the shareholders resolving a dispute without a need for litigation.
What Actions Can the Court Take?
When shareholder disputes cannot be resolved by alternative dispute resolution mechanisms between parties, the court can have the power to make a range of orders to resolve the dispute and enforce members’ rights and remedies.
Before looking at what actions the court can take, it is important to take section 232 of the Corporations Act into consideration to understand on what grounds the court can make an order under section 233. Section 232 provides that a court may make an order if a company acts in a way that is contrary to the interests of the members, or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, members of the company.
If the court has established the relevant grounds to act under section 233, it may make range of orders including but not limited to:
- That the company be wound up;
- That the company’s existing constitution be repealed;
- Acquisition of shares by any member or person;
- Appointment of a receiver;
- Restraining a person from engaging in specified conduct;
- Requiring a person to do a specified act.
Section 461 of the Act provides the general grounds on which the court can make this order, such as when directors have acted in affairs of the company in their own interests, or in any other manner whatsoever that appears to be unfair or unjust to other members (461(e)).
Similarly, the court can order the winding up of a company if affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against members, or in a manner that is contrary to the interests of members (461(f)).
The court may also order the winding up of a company if an act or omission or proposed act or omission by or on behalf of the company is oppressive or unfairly prejudicial to, or unfairly discriminatory against a member, or is contrary to the interests of members (461(g)).
Finally, the court can make an order for a company to be wound up simply if it is of the opinion that it is just and equitable to do so (461(k)).
Key Takeaway
It is important for shareholders to understand the forms of dispute resolution available to them to ensure that disputes are prevented and can be resolved quickly and effectively without causing significant damage to the business.