How to avoid shareholder disputes

22-August-2016 Commercial Disputes By Mel Collins

Shareholder disputes can arise as a result of a deadlock between shareholders, an impasse in the decision-making process or even disagreements in relation to the management, disclosure or use of company funds. Failing to address these disputes or investigate those concerns at an early stage can lead to allegations of a breach of a director’s duties.

One of Streeterlaw’s senior solicitors, Mr Evatt Styles, said the majority of shareholder disputes arise as a result of poor preparation and planning, which is usually indicated by the absence of any form of Shareholders’ Agreement.

“If directors carry out their duties correctly, most shareholder disputes can be avoided,” Mr Styles said. “Clients often have a gut instinct about something not being right and that instinct is often correct, they just do not know how to address or investigate the issue.”

The most common breaches of directors’ duties and their manifestations is listed below, along with how to resolve them.

DIRECTOR’S DUTIES

The Corporations Act has imposed a number of director’s duties including:

Duty: Care and diligence

Why is this important? Directors or Company Officers are expected to fulfil their duties with the care and diligence of a reasonable person, particularly in relation to making business judgments in good faith, without material personal interests.

Duty: Act in good faith and in the best interests of the corporation and for a proper purpose.

Why is this important? When there are allegations of breaches of director’s duties between directors of a board, it is important to look at the nature of the decision they have made in relation to whether or not it was for the proper purpose and in good faith and in the best interests of the corporation. Often, transactions made when there is a personal interest are contrary to this good faith element.

Duty: Proper use of position

Why is this important? Directors or company officers should not improperly use their position to gain an advantage for himself or someone else or to damage the corporation. An example of this would be using the position as director and obtaining customer lists and then setting up an organisation that is a competitor of the corporation.

Duty: Proper use of information

Why is this important? See Proper use of position (above). It is important to note that this duty continues after the officer or person stops being an officer or employee of the corporation.

Duty: Trade only while solvent

Why is this important? If trade continues while insolvent, the corporation may not be able to pay back creditors. Directors of the corporation could also be investigated for this breach of duty.

In circumstances where the appropriate quorum of the company are of the view that action is required against one of the directors, it will be necessary to explore whether or not a derivative action is required (this is an action brought on behalf of the company against one of the directors or officers). It is important when considering such action, that it includes the recovery of the amount that was obtained in breach of the director’s duties, any interest owed and the inclusion of any civil penalty provisions.

SHAREHOLDER DISPUTES

A corporation’s rules and regulations are prescribed by the constitution of the company.  These are sometimes changed by the replaceable rules under the Corporations Act.

The company’s constitution is effectively a contract between the company and each member, the company and each director and the company secretary, as well as the members themselves; (Section 140 of the Corporations Act).

A company’s constitution is key to resolving a shareholder dispute. The most common form of dispute relates to the transfer of shares and the use of the majority of those shares against other shareholders. The remedy available to deal with “the actions of directors (or majority shareholders) allegedly acting badly” is via an application to the Supreme Court for the oppression of the minority. Other variations of this application are known as an application for a “fraud on the minority”.

If you are part of a shareholder dispute or believe there’s been a breach of a director’s duties, ensure you take the following steps before initiating litigation:

  1. What documents do you have that support your claim? If you do not have these documents, where are they or who has access to them?
  2. Reduce your overall legal costs by “front loading” your preparation and preparing your case before commencing proceedings;
  3. Avoid unnecessary surprises by gaining an early appreciation and understanding of the strength of your evidence in support of your claim; and
  4. Compile the relevant company documentation in advance, for example the Company Memorandum of Articles (Constitution) and/or Shareholder’s Agreement.

If you require urgent confidential advice, please contact Senior Solicitor Mr Evatt Styles or Streeterlaw’s Principal, Mr Mark Streeter – an Accredited Specialist in Commercial Litigation on 8197 0105 or email advice@streeterlaw.com.au

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