How to resolve a director / shareholder dispute

Due to the mounting pressure produced as a result of Covid 19, we are seeing a striking increase in disputes within companies, particularly shareholders and directors.

There are several distress indicators that may arise when underperformance and disputes occur within a company including but not limited to the following: –

1. Decline in financial performance;
2. Cashflow constraints;
3. High staff turnover;
4. Difficulty obtaining finance;
5. Lack of a business plan;
6. Loss of clientele/customers and
7. Decline in share price.

This article aims to provide several valuable tips on how internal disputes between directors and shareholders can be dealt with.

If you have a shareholder’s agreement it will generally set out the resolution process such as mediation.

There are numerous reasons why it is important to seek legal advice at the very beginning to avoid or minimise the chance of lengthy disputes in future.

If a relationship breaks down within a company then negotiation is the first and most ideal place to start.

Negotiate

Negotiation is a far more effective way to try and resolve a dispute early. If you are unable to negotiate directly then assistance from an independent third party through mediation is an effective way to obtain a resolution.

In any effective negotiation the process involves both sides coming together to explain their positions or concerns, with the aim of reaching a mutually beneficial outcome.

Pros of Mediation

Disputes can be resolved faster and at less cost than through the Courts. Parties control the outcome rather than the Court and have an opportunity to put forward their position. Independent mediator can provide informative information about the strength of a case.

Cons of Mediation

Parties cannot be compelled to attend unless ordered by the court. May not be cost effective for a minor dispute, need all parties present that have authority to settle the matter.

Sell your share / buy out the other

Choosing to sell or buy out your share is a big decision, and you’ll need to weigh up several factors:

1. how profitable is the company;
2. how likely is it to grow into the future; and
3. is your personal life and health being affected?

Once you have answered these questions for yourself you may have a clearer idea on your position. Moving forward, you may choose to engage in a valuer to value your company (and your share in it)  with the intention of using the valuation to either offer to sell your share, or prepare a proposal to buy out the remaining shareholder(s).

If one party chooses to keep their shares and continue to run the business, but the other party chooses to sell, there are two main outcomes:

• The remaining party takes full control of the business (if they hold all the shares);
• The departing party can sell his/her shares to a third party. If this option is chosen then generally you want to ensure the remaining party is happy with the decision and ensure the third party will provide a benefit to the company. The company constitution is set up to provide protection to the remaining party, but this does not stop disputes arising.

Voluntary Administration – Liquidation

Voluntary administration is a more complex process.

When a dispute that cannot be resolved arises between directors and/or shareholders, or if the company is facing insolvency or a director is not able to continue in their role or contribute (eg. due to poor health), then a decision can be made by the director/s to appoint an Administrator to take control over the company.

In this process, the company gets some breathing space while the Administrator takes stock of the assets and liabilities of the company to effectively ‘broker a deal’ with the shareholders and/or creditors.

Going to Court

Shareholder disputes that cannot be resolved will often end up in the Court.

Under Section 232 of the Corporations Act 2001 (Cth) (the ‘Act’), the court has a wide power to issue orders to remedy redress such as oppressive conduct within a company.

Examples of oppressive conduct include:

• 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 Act 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) of the Act to wind up a company on “just and equitable” grounds.

Just and equitable grounds include circumstances where the company was formed on the basis of a personal relationship involving mutual confidence and that relationship and confidence has irretrievably broken down or where a shareholder has been improperly denied access to information or excluded from major decisions.

In conclusion

Company disputes can be incredibly stressful and when a dispute arises you want to quality advisors and advocates at your side.

Some tips to avoid disputes getting out of control is:-

• Seek professional advice early from both an accountant and a lawyer;
• Establish a written agreement between shareholders;
• Being upfront and honest with your partners and understand everyone’s expectations;
• Documenting and understanding what everyone’s roles will involve;
• Doing your homework on your rights and obligations before you sign as director or shareholder;

At the first hint of a dispute, seek legal advice early!

If you are experiencing a shareholder or director dispute in your company, the best and most cost-effective option is to discuss your situation and obtain advice on your options early!

Our litigation, bankruptcy, insolvency and business recovery team are here to help.