A common way to run your business is through a company. In this business structure, the shareholders of the company are its owners. Shareholders will typically each own a small amount of the company, according to how much capital they have invested. Although the company directors generally control most of the company’s decision-making, there are many times when directors may need the company’s shareholders to:
- approve a decision; or
- consent to a certain course of action.
If you are a majority shareholder and you have one or more minority shareholders, you may need to seek the approval of those minority shareholders to pass decisions. In this case, a minority shareholder who disagrees with you can be a challenge. What can you do if a minority shareholder is not cooperating? This article will discuss several options that might be available to you.
Speak to the Minority Shareholder
This first step may seem obvious, but it is often overlooked. Sometimes, problems arise as a result of miscommunication or a misunderstanding. If possible, try to speak to the minority shareholder and understand their position. Trying to explain your own position, and how it benefits the company, can often help to resolve any lack of cooperation on the other party’s end. Remember that your minority shareholder is an owner. This means that they should ultimately want the company to do well, as this will increase the value of their shares.
Consider Alternative Dispute Resolution
If speaking to the minority shareholder does not work, you should consider using an alternative dispute resolution process. Typically, a company’s shareholders agreement will contain a dispute resolution clause setting out how you should deal with disputes. The first step will likely be to try to negotiate a satisfactory outcome. If that does not work, the next step may be to meet with a third party mediator who will try to help you achieve a satisfactory outcome. If unsuccessful, the dispute resolution procedure will typically then allow the parties to pursue further legal action. You should only take this final step as a last resort, as legal proceedings can be time-consuming and expensive.
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If you cannot resolve the disagreement with your minority shareholder, you may wish to remove them from the company. Unless there are specific rights to do so in your company’s shareholders agreement or constitution, you cannot simply take a shareholder’s shares from them. Instead, you can offer to purchase their shares. If you come to an agreement on the price, you can buy the shareholder out of the company.
Most companies give their shareholders preemptive rights, which means that all shareholders have a right to purchase shares in accordance with the proportion of the company that they own. If this is the case in your company, you and the seller will need to follow the correct process for offering the shares in accordance with those preemptive rights. Once you have followed all relevant steps set out in your shareholders agreement or constitution and the minority shareholder has sold their shares, they will no longer be a shareholder of the company and you will not need to consult with them further.
Leave the Company
If you have attempted all the above options and you still cannot resolve your dispute, you may need to consider leaving the company. Depending on the circumstances, however, this may not be a practical solution for your company. This is because this option is usually only recommended in situations where you and your disagreeing shareholder hold a similar number of shares. If you hold a large portion of the company, and they only hold a small number of shares, it will usually not make sense for you to leave the company. Similarly, if you have other shareholders and investors, it will probably not make sense for your situation.
However, if your minority shareholder holds a larger number of shares (e.g. 40%), this could be a workable solution. In this case, you would offer your shares to the shareholder and undertake all necessary steps to transfer your shares to them. You would need to agree on a price for the transfer of those shares and comply with any requirements in the company’s shareholders agreement and constitution.
Importantly, if you consider leaving the company, you should also consider:
- whether you want to continue running a business; and
- whether your new business will be similar to your current business.
If so, you will need to ensure that you are not in breach of any intellectual property rights and any restraints of trade imposed by your current company.
Wind Up the Company
Generally, winding up a company should only be used as a last resort. You may wish to apply to ASIC for a voluntary winding up of the company if:
- a minority shareholder is seriously affecting the operation of the business;
- the company is solvent; and
- you have no other options.
To wind up a company:
- the directors must make a written declaration that the company is solvent;
- the shareholders need to pass a special resolution agreeing to the wind up; and
- a liquidator must be appointed to liquidate the company.
Throughout the entire winding up process, you will need to lodge various forms with ASIC to ensure that ASIC is kept up to date.
Key Takeaways
If your company has a minority shareholder who is causing you problems and preventing you from operating your business smoothly, there are several steps you can take. Before deciding on a course of action, you should consult an experienced business lawyer. A good lawyer will be able to review your legal documents and guide you through the process of negotiating and dealing with a problematic shareholder in order to achieve the best possible outcome for you. If you need help with a minority shareholder, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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