Shareholders Dispute: When Friends Fall Out

When you first entered into business everything might have been great between you and your fellow owners (ie shareholders), but sometimes events can take a turn for the worst and you can find yourself in a shareholders dispute.

Case Study:

You are one of a number of shareholders of a private company. There is one shareholder you have had a falling out with. They would like to stop being a shareholder, or you would like them to stop being a shareholder because you’re just not getting along any more.

But you are having difficulty agreeing on the details like price and timing. How can the law help you in this situation?

Shareholder's rights: Shareholders have the right to sell their shares and exercise their powers as they see fit. They cannot be compelled to offer their shares for sale. Likewise, the shareholder cannot compel the company or another investor to buy back the shares. This is stated in the Corporations Act (Cth) (2001).

Director’s duties:  under ss181 and 182 must exercise their duty and power in good faith within the best interests of the company. Directors cannot act improperly for their personal gain. If a director acts improperly they may be liable to the company or company stakeholders for compensation.

What powers does a court have?

A Court can order the company to reinstate the shares back to the shareholder or compel a compulsory sale and purchase of the shares if the director or shareholder acted or proposed to act in an oppressive manner that is unfairly prejudicial (s 232).

The test is called commercial unfairness and reflects on the company’s history and the owner’s intentions when they formed or joined the company. Once it has become public knowledge that the shareholders are divided - the Court will look at whether the shareholder was pressured to sell their shares at a time that they did not choose and perhaps at a lower price.

If the directors have been found to be acting in their own interests or any other manner that appears to be unfair or unjust to the other members then the court can also order the company to be wound up.

Another reason why a company could be wound up would be if the directors and shareholders are incapable of working together (without wrongdoing by either party)(s 461). However, in practice, wind-ups are generally avoided as they don’t benefit anyone and negotiated solutions are preferred where the company survives with a changeover of shareholders (ie owners).

If the shares are partly paid, the directors must have evidence that the company needs the new funds to make a call on those shares. The Court would also look into whether or not the company could borrow on favourable terms. The same reasoning applies if new shares are issued (lessening the value of the original shareholder’s shares).

If it is found that the company is trying to push the shareholder out through either of these avenues then s232 may be applied to the case. If the director(s) refuse to register the transfer of the shares to another party then s1071F(2) entitles the court to override the decision if the refusal is without just cause.

There are only a few legal options if you have a falling out with a shareholder. Depending on your circumstances and whether the Court favours the company or the shareholder, the shares could be ordered to sell or re-instate the shares. In worst-case scenarios where no negotiations seem to be pushing through then, you could end up with your company being wound up. So it might be more beneficial to try negotiations again.

What Next?

Make sure your shareholder’s agreement covers all the non-negotiables – get your FREE Playbook of recommended provisions for a shareholder’s agreement here.

Contact us if you would like to have more information. Our lawyers at You Legal will be happy to assist you in whatever way we can.