Unfortunately shareholder and director disputes are a common occurrence in Australia. They can arise for a myriad of reasons including the fact a company is not performing well and directors or shareholders are blaming each other or the relationship between directors/shareholders has broken down and they can no longer work together.
If you find yourself in such a situation it is important that you understand your rights and options and how you can best resolve the dispute. Broadly speaking there are four options available to you to resolve a director or shareholder dispute:
- Resign and sell/Buy out.
- Voluntary Administration.
- Court involvement.
Resign and sell/Buy Out (if you are a shareholder)
Selling out may not even be considered if the company is profitable and is likely to grow into the future. However, if you get to a stage where you don’t think it’s worth continuing with the dispute then engaging a valuer to value the company (and your share in it) with the intention of using that valuation to sell your share in the business is a simple way to get yourself out of a dispute. Sometimes letting go of a potentially valuable company is the best option if the impact to your personal life and health will be significant from an ongoing dispute. Likewise you can also use a valuation to try and buy out other business partners.
Simple right? While it may sound simple, it can actually be an extremely effective way to resolve a dispute. Both sides coming to the table and explaining their positions can result in common ground being found and a mutually beneficial (or at least not a damaging) outcome being reached. A mediator can be appointed by the parties to assist the process if necessary.
A common measure to have in place that may even avoid shareholder disputes in the first place, is a shareholders agreement. Prepared by a qualified lawyer, such an agreement can have provisions requiring compulsory mediation should a dispute ever arise or rules surrounding automatic acquisition of shares in certain circumstances.
This option is a little more high level and more applicable for larger companies. Generally speaking it is open for shareholder’s interests to be adjusted during administration.
A company may issue further shares during an administration (written consent from the Administrator is required), even if it dilutes existing shareholders holdings, so long as it is done for a proper purpose.
So if there is a dispute between directors and shareholders of a company that is insolvent or is facing insolvency it is therefore possible for director(s) to appoint Administrators and to then issue further shares during the administration to dilute existing shareholders holdings so long as it is being done for a proper purpose and the shareholders are not being unfairly prejudiced.
A “proper purpose” has been held to include issuing shares to raise capital. The question of whether shares have been issued for a proper purpose is one to be assessed on a case by case basis. “Unfair prejudice” is usually avoided where it is shown that the shares in the company held by existing shareholders that are being diluted are worthless because of the insolvency of the company.
The typical situation where such a procedure will be utilised is in a “debt for equity” swap (such as seen with the recent Channel 10 administration and restructure) in that an interested party may make an offer through a Deed of Company Arrangement to pay out all of a company’s debts (or a certain amount of the company’s debt) and in exchange will acquire the company’s shares and therefore become the beneficial owner of the company going forward.
For more information on the voluntary administration process see here.
Commonly director and shareholder disputes will end up in Court, usually at great expense and time.
Under Section 232 of the Corporations Act 2001 (Cth) 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 members or a class of members is either:
- Contrary to the interests of the members as a whole; or
- Oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members.
Examples of oppressive conduct include:
- An unfair allocation or restrictions on the payment of dividends to particular shareholders;
- Refusing access to information about the company’s affairs;
- Use of company funds for improper purposes – for example personal expenditure;
- Denying other directors the opportunity to carry out their functions for example failing to call directors’ meetings when required;
- A combination of the inability to sell out of a private company where improper exclusion from management has occurred and there is no reasonable offer to buy the oppressed party’s shares; and
- Paying excessive remuneration to the person having control of the company.
Section 233 of the Corporations Act 2001 (Cth) grants the court a wide scope of powers to make orders it considers appropriate if it finds there has been oppression, including:
- Winding up the company;
- Making orders regulating the conduct or affairs of the company in the future;
- Ordering the purchase of the shares of any member by other members;
- Ordering the company to institute, prosecute, defend or discontinue legal proceedings, or authorising the institution of such proceedings by a member of the company on behalf of the company;
- Appointing a receiver or a receiver and manager of the property of the company;
- Ordering a person to refrain from engaging in specified conduct;
- Ordering a person to do a specified act or thing;
- Modifying or repealing the constitution of the company;
The Court also has further powers under Section 461(1)(k) to wind up a company on “just and equitable” grounds. Such grounds include circumstances where the company was formed on the basis of a personal relationship involving mutual confidence and that relationship and confidence has broken down or where a shareholder has been denied access to information or excluded from major decisions.
However, quite rightly the Court has noted that winding up a company on the basis of oppression is an option of last resort and should not be done if there are other less drastic and suitable alternatives.
As in all circumstances negotiations are by far the most cost effective and efficient option when dealing with a dispute and should be attempted before anything else.
If you are involved in a director or shareholder dispute and are unsure how best to resolve it get in touch on 07 3221 0055 or send us an email at email@example.com.