One of the most common areas of disputes that we see occur in the business and corporate world are those disputes between the directors and shareholders of a company.
These disputes can be incredibly disruptive to a company affecting their business, clients and staff.
Once a working relationship breaks down it is important to recognise that and seek to resolve the dispute expeditiously to limit damage and contain costs.
What are the options for director and shareholder disputes?
Mediate/Negotiate
This involves the parties coming to the table to try and reach a solution that is palatable and one they can all live with.
Often an independent third party such as a mediator is engaged to try and reach a resolution particularly where there is tension between the parties.
If there is a shareholder agreement in place there are usually mechanisms contained in that agreement on how to resolve the dispute and the process for a party to sell or to buy out the other party(ies).
It is important to remember that mediation/negotiation is very cost effective and will enable the parties to control the process and how to resolve it to each parties satisfaction.
Resign or buy/sell out
A director who is not happy with how the company is operating or disagrees with the other director/s decision can simply resign.
Alternatively, there are usually mechanisms in the company’s constitution and/or the shareholders agreement to remove a director where his actions are not in the best interests of the company, and he could be in breach of his fiduciary duty.
A shareholder can elect to sell their shares or make an offer to buy the other shareholder/s out.
This is one of the main reasons there should always be a shareholder agreement in place for any company as it will govern how the sale or purchase of shares between the parties can be achieved.
Generally, the shares will be valued by an agreed process or by an independent valuer or accountant.
Voluntary Administration/Deed of Company Arrangement (DOCA)
This is usually an option for larger companies and often when they are in financial trouble and are trading insolvent or facing insolvency.
In this case the directors of the company will usually appoint the administrator.
The purpose of appointing an administrator is to resolve the future of the company and the administrator will map out a plan, if possible, to save the company from going into liquidation.
This can be achieved by entering into a DOCA with the company’s creditors to work through the financial difficulties.
The Courts
This is usually the least preferable course of action and will incur expense and can be a prolonged exercise.
Section 232 of the Corporations Act 2001 (Act) empowers the the court may make an order under Section 233 of the Act if conduct of the company’s affairs; or an actual or proposed act or omission by or on behalf of the company; or a resolution, or a proposed resolution, of shareholders or a class of shareholders is either:
- Contrary to the interests of the shareholders as a whole; or
- Oppressive or unfairly prejudicial to, or unfairly discriminatory against, a shareholder/s
The court can:
- Wind up the company
- Make an order to regulate the conduct or affairs of the company going forward
- Order the purchase of any shares by other shareholders
- Order the company to commence or defend legal proceedings
- Appoint a receiver or a receiver and manager to the company’s property
- Order a person/s to desist from certain behaviour or to do a certain thing
- Modify or repeal the constitution of the company
Section 461(1)(k) of the Act also provides a that a court can wind up a company on “just and equitable” grounds.
Some of these grounds are:
- The failure of the objectives of the company
- A deadlock in the management of the company
- A breakdown in the relationship between the shareholders
- Fraud or illegal behaviour
- Oppression or misconduct of minority shareholders
How can FC Lawyers help?
Our business and corporate team together with our litigation team have assisted numerous companies (both large and small), directors, shareholders and members with a large range and variety of disputes.
As indicated above these types of disputes can be debilitating to a company and very stressful to directors and shareholders.
It is important to get advice as to the various options as each case will have a very unique set of facts.
Contact our team today to discuss your legal options.
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