Business Advice

Shareholder Disputes – What are they and how to handle them

Careful strategies must be put in place to address disputes before they pose serious threats to the company.

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The pressure that is put upon the shoulders of a company’s directors and shareholders is not to be taken lightly. Especially with the many changes that may happen both in their personal and professional lives, not to mention the national and global crises we’ve been experiencing lately.

There are many factors and scenarios that may cause shareholder disputes. They often come as a result of disagreements on company decisions, frustrations with each party’s actions, or even blaming one another when the company fails to financially perform well. No matter the reason, disputes between the key members of the company impact the way the business runs. If the business isn’t performing well, a dispute among the shareholders may cause performance to decline even further.

Although shareholder disputes are uncommon, careful strategies must be put in place to address these conflicts before they pose serious threats to the company.

 

Prevention is better than cure.

 

Just like in any other aspect of business, planning is important to safeguard the company’s well-being when serious disputes happen. This is why it is essential to prepare a shareholders’ agreement and company constitution to lay out the agreements, rights, and duties of each party so as to guide the company’s decisions and strategies in handling conflicts.

 

Shareholders’ Agreement

A shareholders’ agreement is a legally binding agreement between a company’s shareholders. This outlines the rights of the shareholders, rules in the management and operations of the company, how a shareholder can exit the company, etc.

Companies are not required to create a shareholders’ agreement, but it is always best to have this handy in case a dispute arises. With a properly set out shareholders’ agreement, it is easier to resolve disputes with a plan for conflict resolutions already put in place. As an example, the agreement may outline whether the shareholders have already agreed to use a mediator to assist with resolving conflicts should they occur.

 

Company Constitution

A company constitution outlines the rights and obligations that govern the relationship between a company’s directors and shareholders. This document includes the proceeding requirements when appointing or removing directors, how director’s meetings are to be conducted, as well as the processes involved in amending the constitution.

If these documents are not ready, the Court may be involved to settle the conflicts as mandated by the Corporations Act 2001.

 

Is it always necessary for the Court to settle disputes?

 

Companies can settle shareholder disputes in various ways without the need for any court proceedings. It is also beneficial if conflicts between key company members are settled without any court involvement because litigations are demanding, difficult, costly, and mentally and physically taxing.

 

Mediation

When disputes arise, the company directors and shareholders, together with a mediator, may convene to come up with a resolution and strategy to move forward. This process involves the identification of issues and coming up with settlement options to address the conflicts. The terms of the settlement are to be put in writing and reviewed by lawyers to ensure the agreed settlement is carried out properly.

 

Resignation or Buyout

If the company is profitable, but you find yourself in a dispute and you feel like the dispute has been detrimental to your health and personal life, you may settle the dispute through resignation or buyout.

You may consider resigning and selling your shares so you can exit the company. Or you may opt to buy out your business partner or another shareholder. Either way, it is best to work with a valuation specialist.

Most business owners tend to undervalue their business due to a lack of understanding of what business value is, as well as the ideal valuation method suited to their situation. Working with a valuation specialist will help you ensure you are conducting the right business valuation method to appropriately value your shareholdings and get the best financial outcome.

 

When is Court involvement necessary to settle disputes?

 

Under Section 232 of the Corporations Act 2001, the Court may intervene under Section 233 of the Act if the conduct of the company’s affair is either:

  • Contrary to the interests of the members as a whole
  • Oppressive, or unfairly prejudicial to or unfairly discriminatory against a particular member/s

Simply put, when shareholder disputes are brought about by oppressive or discriminatory acts, the Court may step in and take necessary investigations and actions to address the conflict. The worst-case scenario for companies under Court litigation is to be wound up.

 

Oppressive Acts

If oppressive acts are proven, the Court may be involved in handling the disputes. Some of these oppressive conducts include:

  • Refusing to grant a member/s access to information about the company’s affairs
  • Improper use of company funds
  • Unfair allocation or restrictions of the payment of dividends to particular shareholders
  • Denying other directors from carrying out their functions
  • Paying excessive remuneration to the key company member/s

 

Winding Up

When the Court deems that the dispute is gravely serious and cannot be resolved in any way, it may order the company to be wound up on just and equitable grounds or on the grounds of oppression. Winding up refers to the liquidation of the company. When this happens, the company will cease to exist.

 

Shareholder disputes, whether big or small, can take their toll on the company’s health. And as such, they should be handled well and be carefully strategised to prevent serious damage to the company and its business. 

Safeguard your company’s well-being before it’s too late. If you need help drafting your shareholders’ agreement or expert advice on shareholder matters and disputes, Clout Advisory is here to advise you on the best course of action. Contact us today.

 

The information that is provided in this article is general in nature and does not constitute business and financial advice. Every effort has been made to ensure that the information is accurate, but information may become outdated as legislation and new government announcements are made. Individuals should not rely on this information to make a business decision as it does not take into account their personal circumstances. Before making any decisions, we recommend you consult a licensed advisor to take into account your particular situation and needs.

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