Shareholder Disputes
To obtain tax benefits or to protect personal assets, persons who conduct business may choose to conduct the business through a company. This applies both to an individual or two or more people.
When two or more persons wish to conduct a business together, they may choose to enter into a partnership. An alternative is a company structure, in which the persons who wished to conduct the business through the company have shares reflecting their interest in the business.
Depending on the taxation and other considerations, persons engaging together in business may use a structure in which the company acts as trustee of a trust in which the persons involved in the business are beneficiaries or unitholders.
Using a company to conduct a business in which two or more persons have an interest is no less prone to the risk of disputes than a partnership. A company that conducts a business in which several persons have an interest, as with a partnership, is built on the business and personal relationships of those who stand behind the company. Over time, these relationships can break down or become strained into the point where the parties need a separation.
In the context of a company operated business in which several persons are involved, this may lead to a shareholders’ dispute.
Oppression
One form of shareholder dispute in which some shareholders, often minority shareholders, are treated unequally or exclude altogether from the company’s affairs and business. This is called shareholder oppression and the Corporations Act allows an oppressed shareholder to apply to the court to seek remedies to deal with the oppression.
Company deadlock
Another frequent shareholder dispute arises from company deadlock.
This is a serious problem that arises when there are two shareholders who are both directors of a company that operates a business and the relationship has broken down to the extent that the directors do not agree and cannot reach agreements on major decisions that need to be made for the efficient operation of the company’s business.
Usually, either the company’s constitution or a shareholders’ agreement requires a majority or unanimous decisions by directors in making decisions relevant to the conduct of the company’s business. When the 50% shareholders and directors are in dispute, the parties are left with a deadlock that cannot always be resolved under the terms of the company’s constitution or a shareholders’ agreement.
In some circumstances, a deadlock can be overcome by negotiation and an agreement in which one 50% shareholder sells his or her shares to the other party, or the company’s business and assets are sold to a third party by a transfer of shares in the company to the third party and the parties divide the sale proceeds as agreed.
In other cases, if the relationship between the 50% shareholders has deteriorated to the point where there is ill will and no communication between them it may be impossible to reach agreement by negotiation.
In extreme situations, one party may be effectively locked out of the business and the company’s affairs which is also shareholder oppression.
Resolving disputes
In most cases, the company’s constitution or a shareholders agreement will provide a mechanism to resolve disputes. For example, the terms of a shareholders agreement may require parties to participate in a form of alternative dispute resolution such as mediation before any party commences Court proceedings to resolve the dispute.
The remedy for shareholder oppression or company deadlock may be a shareholder oppression proceeding or an application under the Corporation’s Act to break the company deadlock. The Court has a wide range of remedies available to it to end the company deadlock including orders that require one party to buy another party’s shares, appointment of a receiver to sell the company’s assets and business or the winding up of the company.
At some point, such legal proceedings may involve the need to value the company’s shares or its underlying business and assets, which may add significant costs to the resolution of the dispute.
Legal proceedings to resolve shareholder disputes are often very expensive and the business of the company can significantly deteriorate before the legal proceedings are concluded and the court makes orders. For this reason, it is critically important to obtain legal assistance as early as possible once company deadlock occurs or shareholders are excluded or oppressed in some way by other shareholders, and to work with your legal advisers to find a way and to resolve this dispute before commencing court proceedings.
