Shareholder & Director Disputes - What are the Next Steps?

The performance of a company can be put in jeopardy when disputes between directors or with shareholders of the business arise. While some disagreements can be resolved through mediation and other dispute resolution procedures, others may be irreconcilable and end in either costly court action, the winding up of the enterprise, or both. In such cases, protection of assets in the company becomes an immediate concern for both directors and shareholders.

The law governing the conduct of companies in Australia, the Corporations Act (‘the Act’), provides mechanisms for dealing with director and shareholder disputes. Sections 232 and 233 of the Act outline the court's powers to intervene when there is conduct contrary to shareholder interests or oppressive behaviour. This article provides more detail on how these provisions work, discusses the potential orders that can be made by the court to resolve these disputes, and looks at the most common causes of company disputes.

The advice and guidance of expert lawyers with experience in commercial law issues is vital in helping parties to a director or shareholder dispute come to a mutually beneficial resolution.

Common causes of director and shareholders disputes

Directors falling out: Where a business is built from the ground up by two or three founders, disputes can over time arise about the direction of the company as it grows. Such disagreements can become acrimonious, requiring the intervention of a third party to help broker a resolution. In some situations, one or more of the directors may decide to leave the business, a process that can become a flashpoint without wise legal advice.

Breach of fiduciary duty: Company officer holders have a fiduciary duty to behave ethically and act in the best interests of the business and the shareholders. Breaching this duty through mismanagement of company funds, assets or confidential information, for example, can potentially lead to action by other directions or shareholders against the offending director.

Conflicts of interest: Closely associated with breach of fiduciary duty are conflicts of interest, either by directors or shareholders who may have secret financial interests, information or third party contractswhich compromise their duties and obligations to the company.

Breach of shareholder agreements: The modern Australian business will have a shareholder agreement which provides details on how the company operates, the rights and responsibilities of all classes of shareholder within the enterprise, and how shares in the company are bought and sold.

Common breaches of shareholder agreements occur when:

• A decision is made by the company’s directors without the agreement of the required majority of shareholders.
• Shares are sold or transferred in a manner that contravenes the terms of the shareholder agreement.
• The confidentiality obligations set out in the agreement are breached.
• Restrictive covenants or other rules within the agreement are breached by one or more shareholders.

A properly drafted shareholder agreement should also address a common cause of conflict – the balancing of interests and control between majority and minority shareholders so that the former class of shareholders do not behave oppressively towards the latter.

Section 232 of the Corporations Act is designed to safeguard the interests of shareholders when a company's conduct is deemed contrary to their interests or unfairly prejudicial. The provision allows the court to intervene and make appropriate orders. Several examples of oppressive conduct are explicitly mentioned in the Act, including unfair dividend allocations, denying access to company information, misuse of company funds, and impeding other directors from performing their duties.

Ways to solve director and shareholder disputes

Common disputes should be pre-emptively addressed in a well-drafted company constitution and a shareholders’ agreement. These documents can provide clarity on expectations of both directors and shareholders, and provide definite conflict resolution steps when disagreements arise.

Dispute resolution procedures such as mediation or arbitration can help end disputes before they become entrenched and destructive of the company’s operations. As a last resort, court action may be required utilising the provisions of sections 232 and 233 of the Act.

Section 233 grants the court extensive powers to make orders when it finds oppressive conduct under Section 232. Such orders aim to rectify the situation and prevent further harm to shareholders. The range of potential orders includes winding up the company, regulating its future conduct, facilitating share transfers, authorizing legal proceedings, appointing receivers, and modifying the company's constitution. The court's discretion in determining appropriate orders ensures flexibility in tailoring solutions to each unique dispute.

Those who initiate legal proceedings must demonstrate that the conduct, omission, or resolution of the company is contrary to shareholder interests or constitutes oppressive behaviour. The court will assess the evidence and, if satisfied, may exercise its powers to remedy the situation.

Consult expert commercial lawyers

Disputes within companies that are allowed to fester and grow can turn into costly and time-consuming legal action, and end in people losing their livelihoods. Seeking the guidance of our commercial law experts at Frigo James Legal at the earliest opportunity after a dispute or disagreement arises, whether between directors or with shareholders, can help explore the issues and options to work towards a timely and cost effective resolution. Our professional team has widely experienced litigation and dispute resolution lawyers who can help you institute legal proceedings to seek the orders you require in the event the matter can’t be resolved. Contact us today for an initial discussion.