What to Do During a Dispute With a Shareholder

In Short

• Review company documents: Check the shareholders’ agreement and constitution for existing dispute resolution procedures.

• Consider alternative dispute resolution: Mediation or negotiation can often resolve conflicts more efficiently than litigation.

• Legal action as a last resort: If informal methods fail, legal options like derivative actions or oppression claims may be necessary.

Tips for Businesses

Preventing shareholder disputes starts with a clear shareholders’ agreement that includes dispute resolution procedures. Open communication among shareholders is crucial to addressing issues early. Regularly update company documents to reflect the business’s evolving needs, and consult legal advice when conflicts arise to ensure a fair resolution.

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Table of Contents

• What Are the Differences Between Shareholder and Director Breaches?
• Power of Shareholders to Remove Directors in Private Companies
• Can a Majority Shareholder Act in Their Own Interest?
• What is a Minority Oppression Claim by Shareholders?
• Steps to Make a Shareholder Oppression Claim 
• Derivative Action By a Current or Former Shareholder 
• Key Takeaways 
• Frequently Asked Questions

Disputes between company shareholders are common and can arise in various situations. Shareholders need to understand their rights and obligations in these circumstances and the steps they can take to resolve these disputes. This article will explore disputes with a shareholder and the powers you can use to deal with them or prevent them from occurring. 

What Are the Differences Between Shareholder and Director Breaches?

In addition to disputes between company directors, disputes can also arise between a company’s shareholders. In smaller proprietary companies, directors (or their related companies) are often also shareholders.

The role of directors and shareholders differ as directors are appointed to manage the company on behalf of its shareholders. Whereas shareholders are in effect the owners and controllers of the company, which they purchase through shares. 

The shareholder’s agreement governs the rights and obligations of shareholders. The internal management of the company and the rights and obligations of directors (and sometimes shareholders) is usually within the company’s constitution. 

Power of Shareholders to Remove Directors in Private Companies

In some cases, the directors of a company might also be shareholders in the same company. In such situations, there can be situations where shareholders want to remove a director from their position for various reasons. 

These reasons may include: 

• where shareholders know or suspect that a director has breached their director’s duties;
• they have been performing their duties poorly; or 
• there is a disagreement about the management of the company, or personal conflicts have arisen between the director and shareholders.  

Company Documents and Replaceable Rules 

At the outset, you should check the company’s shareholders’ agreement or constitution. These documents may include clauses governing the shareholders’ rights and the mechanisms in place to remove directors from the company. These documents may also permit a process whereby the director’s related shares in the company must also be sold on their resignation or when they cease to be a director.  

However, if the company does not have these documents or does not deal with the issue, then the ‘replaceable rules in the Corporations Act will apply. 

According to the ‘replaceable rules’, shareholders can remove a director by passing an ordinary resolution (more than 50% majority vote) at a general meeting. Under these rules, each shareholder has one vote for each share held. However, it is important to note that companies must always have at least one director. So, if the shareholders seek to remove a sole director, they must also simultaneously appoint a replacement. 

Informal Negotiations

Usually, when shareholders are concerned with a director’s conduct, they raise their concerns with the director personally. If the parties cannot resolve their issues, the next step may be to try to negotiate a settlement whereby the director resigns from their position and returns or sells their shares. This option is a cost and time-effective way to negotiate a commercial outcome of a dispute. 

If these initial negotiations are successful, then the director can give written notice of their resignation to the company, after which these details must be communicated and lodged with ASIC. The related share transfer or sale documents can also be drawn up and signed by the parties. 

However, suppose the parties cannot come to an agreement. In that case, the shareholders may wish to engage in a mediation where an independent third party can try to assist the parties in resolving the dispute (for example, a mediator or via the Small Business Commission of the relevant state). This process may or may not involve each party’s solicitors. 

You should also review the company constitution or shareholders’ agreement if it is available. This is because they may document specific dispute resolution procedures to follow when dealing with such disputes.

Litigation 

If informal negotiations with the director are unsuccessful, shareholders may decide to commence court proceedings against the director through a ‘derivative action’. This means that, as shareholders, you can commence proceedings on behalf of the company. To bring a derivative action, the party must be a current or former shareholder. Further, they must be granted leave by the court to do so. Courts will grant leave for such an action if: 

• it is likely that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; 
• the applicant is acting in good faith; 
• it is in the best interests of the company; or
• there is a serious question to be tried. 

In addition, you must give the company written notice of your intention and reasons for applying for leave at least 14 days before making the application. If you have not done so, the court must be satisfied that granting leave in the circumstances is appropriate. 

Such proceedings are typically instigated where the director’s conduct has caused the company to suffer some loss or damage. This may include where the director has breached their director’s duties owed to the company – such as mismanaging the company, misappropriating company funds, or competing with the company in another business – or where the conduct has the effect of being oppressive or unfairly prejudicial or discriminatory against you as a shareholder of the company. These types of claims are explained in more detail below. 

Can a Majority Shareholder Act in Their Own Interest?

Majority shareholders are those that hold 50% or more of the total shares in a company. They, therefore, often have a lot of power and influence in a company’s operation by their voting rights. Generally speaking, shareholders are entitled to one vote for each share they hold. However, these rights may be altered by a company’s constitution or shareholders agreement – for example, if they provide for different classes of shares with different voting rights.

With this said, shareholders do not generally owe any duties to the company (such as those duties owed by directors). Therefore, they usually act in a manner that promotes the company’s best interest. Shareholders’ liabilities are usually limited to any unpaid amounts on shares they hold. However, if a shareholder is also a director of a company, then they will still owe specific duties to the company.

If you wish for shareholders of your company to be subject to certain obligations, then these should be set out in the company’s shareholders’ agreement or constitution. 

What is a Minority Oppression Claim by Shareholders?

Majority shareholders can sometimes use their influence for their benefit instead of the company’s benefit. Such conduct could cause loss or damage to the company.

In such circumstances, it may be open for company shareholders to bring oppression proceedings against shareholders or directors. This involves a claim whereby a party alleges that the conduct is contrary to the interests of the shareholders as a whole, oppressive, unfairly prejudicial or unfairly discriminatory against the shareholder.

Steps to Make a Shareholder Oppression Claim 

Both existing and former shareholders and their related directors can claim oppression.

To make a claim for oppression under the Corporations Act, the conduct of a company’s affairs or an actual or proposed act or omission on behalf of the company, or a resolution or proposed resolution of company members is either: 

• contrary to the interests of the shareholders as a whole; or 
• oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder or shareholders.

Oppressive Conduct

Oppressive conduct can include actions taken against shareholders outside of their capacity as shareholders – for example, In their capacity as a manager or directors. 

Courts assess oppressive conduct by applying an objective test on whether a ‘reasonable person’ would view the conduct as unfair. However, disobeying the wishes of minority shareholders by the exercise of the majority’s voting power or a shareholder losing confidence in its director’s decision-making capacity is not itself oppressive. Oppression usually involves an action against a person’s will and not with their consent or mere acquiescence. Examples of what courts have previously found to be oppressive conduct include where: 

• shareholders make decisions that are in their own best interests while suppressing other shareholder votes;
• you have been excluded from management decisions, financial decisions and profit participation;
• you have been prevented from accessing company information or books and records;
• other directors/shareholders resolve to dilute your shares in the company; 
• declaring dividends in the company has been unfairly denies; 
• other shareholders have engaged in fraudulent activities; or
• other shareholders have misused company funds.

With this said, courts have also, in rare circumstances, found there to be oppressive conduct committed by a minority shareholder with operational control of the company. This is when the minority shareholder excludes the majority shareholder from the operational decision-making capacity. 

Derivative Action By a Current or Former Shareholder 

Oppression proceedings are a form of “derivative” action that shareholders can bring on behalf of a company. In addition to this, it may be open to shareholders to bring derivative claims to wind up a company or against breaches of a director’s statutory or fiduciary obligations it owes to the company if that conduct is causing or has caused loss or damage to the company. Such duties include the duty:

• to exercise care and diligence in the exercise of their powers; 
• to exercise their powers and discharge their duties in good faith, in the best interest of the company and for a proper purpose; 
• not to improperly use their position or information obtained through their directorship of the company to gain an advantage for themselves or someone else or cause detriment to the corporation; and
• not to misuse information.

Such proceedings may be brought together or separately from an oppression claim. 

The court can grant a range of remedies under the Corporations Act for derivative claims. These include, but are not limited to, orders for:

• one or more of the majority shareholders to purchase the minority shareholder’s shares at a price determined by the Court;
• the company to purchase the minority shareholder’s shares;
• a receiver and manager to be appointed, and the company wound up (potential for a director resignation); 
• an injunction to be granted against the company; or 
• a director or majority shareholder to refrain from a specific act.

In addition, and usually, as a last resort, the court has the power to order that the company be wound up. However, courts will generally not do so if this will prejudice the minority shareholder or when there is another remedy available. 

Guide to Resolving Business Disputes

This guide provides key information on how to manage a business dispute as quickly and cost-effectively as possible.

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Key Takeaways 

There are various reasons why disputes between company shareholders may arise. In many circumstances, these are also directly related to disputes with certain directors. Shareholders have rights and obligations in these circumstances, which are governed by legislation and company documents, as well as some options in attempting to manage and resolve such disputes. The best option for you will depend on the specific circumstances of your case. 

If you need help dealing with a shareholder dispute, our experienced dispute lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions