Shareholders are the owners of a company. They are entitled to receive distributions of the profits of the company in accordance with their shareholding, which is usually governed by the 'replaceable rules' set out in the Corporations Act 2001 (Cth), a company constitution, or a shareholders agreement.
Friends or family members often come together and incorporate a company to pursue a business venture. The start-up phase is filled with excitement, nobody thinks about what could happen if things go wrong, and no money is spent on lawyers to prepare a shareholders agreement.
Where there is no shareholders agreement that defines the rights and obligations of shareholders it can lead to disputes about what directors or shareholders may or may not do or about the entitlement of shareholders.
Shareholders are often directors or appoint the directors of a company, and if there are disagreements between the directors, it affects the shareholders or vice versa.
How do disputes between shareholders arise?
Disputes can arise in many ways, but circumstances that often lead to conflicts are:
- Where excessive remuneration is paid to certain directors or employees.
- Where controlling shareholders unfairly restrict the payment of dividends.
- Where a shareholder or shareholders are excluded from taking part in the company’s management contrary to the company’s constitution or where a shareholder’s legitimate expectation of participating in management is not fulfilled.
- Where the company or a director denies a shareholder access to the company’s books, records and other information to which it is entitled.
- Where there is improper conduct at company meetings, such as excluding certain shareholders from attending a meeting.
- Where a company’s assets are sold for a price substantially below their value or on uncommercial terms.
What are the available options to resolve disputes between shareholders?
When disputes arise, the important documents to consider are the company’s constitution and the shareholders agreement, if there is such an agreement These documents set out the rights and obligations of the shareholders and directors and may provide answers on how to deal with the dispute. A shareholder can bring an action against the company or another shareholder in certain circumstances to enforce its rights in the constitution.
The Corporations Act provides a remedy to a shareholder or shareholders who believe the company’s affairs:
- are being conducted in an oppressive, unfairly prejudicial, or discriminatory manner against that shareholder or shareholders.
- are being conducted contrary to the interests of shareholders as a whole.
In these circumstances, the court can make the following orders:
- Ordering the company or the other shareholders to purchase a shareholder’s shares.
- Prohibiting a person from doing something or ordering a person to do a specified act.
- An order modifying the constitution or regulating the future affairs of the company.
- An order winding the company up.
The Corporations Act also allows a shareholder to apply to a Court to wind up the company on just and equitable grounds. One instance where it could be just and equitable to wind up a company where there is a deadlock between the company’s shareholders and important resolutions cannot be passed at a general meeting.
A further remedy provided to a shareholder by the Corporations Act is to apply for an injunction to prevent a person from doing something or to order a person to do an act or thing. The court can order a company to provide certain documents to a shareholder or restrain it from convening a meeting.
A shareholder may also apply under the Corporations Act for a remedy on the company’s behalf. This will be the case where the company fails to take action against a director that breached its duties because the director has a controlling influence over the majority of the board or shareholders. A shareholder can apply in the company’s name for an order against the director to cease its misconduct or to compensate the company for damages caused by its actions.
Shareholder disputes are often complex, and a shareholder may have to choose between different remedies. It is preferable to seek legal advice before commencing with a claim against the company, a director, or another shareholder.
If you have any queries or need some advice, please don't hesitate to contact us.