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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 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.

Many factors and scenarios may cause shareholder disputes. They often result from disagreements on company decisions, frustrations with each party’s actions, or even blaming one another when the company fails to perform well financially. No matter the reason, disputes between the company’s key members impact business operations. If the business isn’t performing well, a debate among the shareholders may cause performance to decline even further.

Although shareholder disputes are uncommon, careful strategies must be implemented 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 vital to safeguard the company’s well-being when serious disputes happen. Preparing a shareholders’ agreement and company constitution is essential to lay out each party’s agreements, rights, and duties to guide the company’s decisions and strategies in handling conflicts.

Shareholders’ Agreement

A shareholders’ agreement is a legally binding 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 correctly set out shareholders’ agreement, it is easier to resolve disputes with a plan for conflict resolutions already put in place. As an example, the contract 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 governing the relationship between directors and shareholders. This document includes the proceeding requirements when appointing or removing directors, how director’s meetings will be conducted, and the processes involved in amending the constitution.

If these documents are not ready, the Court may be involved in settling 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 needing any court proceedings. It is also beneficial if conflicts between key company members are resolved without court involvement because litigations are demanding, difficult, costly, and mentally and physically taxing.

Mediation

When disputes arise, the company directors and shareholders and a mediator may convene to devise a resolution and strategy to move forward. This process involves identifying issues and developing settlement options to address the conflicts. The settlement terms are to be written and reviewed by lawyers to ensure the agreed settlement is carried out correctly.

Resignation or Buyout

If the company is profitable, but you find yourself in a dispute and feel like the disagreement 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 to 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 its value and the ideal valuation method suited to their situation. Working with a valuation specialist will help ensure you use the suitable business valuation method to value your shareholdings appropriately 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

However, when oppressive or discriminatory acts bring about shareholder disputes, the Court may 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 handle 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 on the payment of dividends to particular shareholders
  • Denying other directors from carrying out their functions
  • Paying excessive remuneration to key company member/s

Winding Up

When the Court deems that the dispute is gravely severe and cannot be resolved in any way, it may order the company to be wound up on just and equitable grounds or 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. As such, they should be handled well and be carefully strategised to prevent severe damage to the company and its business. 

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

The information provided in this article is general and does not constitute business and financial advice. Every effort has been made to ensure 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 consider their circumstances. Before making any decisions, we recommend you consult a licensed advisor to view your situation and needs.

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