Many of us start businesses with friends, family, or colleagues expecting success. But when relationships sour, the fallout can be deeply personal and financially devastating. Shareholders, including minority shareholders, have powerful legal protections against oppression from majority shareholders, who are often also directors, but can also take steps to prevent it, writes Commercial Litigation Partner and NSW Law Society Accredited Specialist in Dispute Resolution, Charles Lethbridge.
Shareholders in private companies across Australia are increasingly finding themselves frozen out of businesses they helped build.
These disputes typically arise in closely held private corporations, where a small number of people own the shares and this tight-knit group makes the corporate decisions.
Attwood Marshall Lawyers has seen a marked surge in enquiries relating to such disputes – disputes that often arise when economic conditions and financial stress start to wear on business relationships.
Australian law protects oppressed shareholders, but the smartest approach is twofold: understanding your legal remedies in the event a relationship sours and implementing safeguards that prevent oppression in the first place.
What is shareholder oppression?
Shareholder oppression occurs when shareholders, often majority shareholders and directors, use their control over a company to disadvantage other shareholders.
Unlike public companies where shareholders can exit by selling shares on the stock exchange, shareholders in private companies often have no practical means of recovering their investment if the company refuses to buy them out at a fair price.
Oppression can take many forms. Dividends may be denied or withheld while majority shareholders pay themselves large salaries or bonuses. Minority shareholders may be excluded from management or decision-making processes. Access to financial information may be withheld, or shareholdings diluted through the issue of new shares at below-market value.
In more serious cases, company assets or profits may be misappropriated through related party transactions.
Typical scenarios where oppression arises
Consider a situation where you hold a 30 per cent shareholding in a family business. When you invested, there was a clear understanding that you would participate in management and a commensurate share in profits.
Over time, however, the other shareholders have gradually frozen you out of decision-making. The company has stopped declaring dividends, citing “difficult economic conditions,” while simultaneously increasing directors’ salaries and awarding bonuses to those same majority shareholders who also serve as directors.
Imagine discovering you’ve been quietly cut out of the business you helped build, no longer invited to meetings, no visibility of the financial situation, and a sinking feeling something isn’t right.
Recent case examples
Attwood Marshall Lawyers recently acted for a company shareholder with an approximate 40 per cent shareholding. He fell out with the co-directors and other shareholders who froze him out of all decision-making and access to accounting systems, stopped paying him dividends and asked that he exit the company for a sum of money equivalent to approximately 10 per cent of the value of his shareholding.
The company was worth about $8 million and despite our best efforts he was unable to resolve the dispute, requiring him to commence legal proceedings in the Supreme Court seeking damages and declaratory Court orders.
We were successful in assisting him to obtain orders in respect of his damages and for the company to be wound up. However, that was only after an eight-day Court hearing and the appointment of a liquidator.
The Judge found that the other shareholders’ conduct in cutting our client’s access to company information, cutting him out of decision-making and refusing to buy him out at fair value, constituted oppression. The Court held that he was entitled to compensation based on the value of his shareholding at the date of the hearing and made an alternative order for the company to be wound up on the “just and equitable grounds.”
While our client was successful in his claim, it’s important to know that shareholders must meet a high evidentiary threshold, and not all shareholder grievances constitute legal oppression.
The financial stakes in shareholder disputes can be substantial and legal proceedings extensive, as also seen in the ongoing US$4.6 billion employee shareholder claim against wealth technology company FNZ, and mattress company Sleeping Duck’s trade secrets dispute, which follows a failed oppression claim.
How to prevent shareholder disputes
Most shareholder disputes can be prevented through proper planning and documentation at the outset. A comprehensive shareholders’ agreement should set out:
- The management structure and description of roles,
- Decision-making processes,
- The dividend policy,
- The access to information policy,
- Dispute resolution mechanisms,
- Buy-sell provisions with valuation methodologies,
- Deadlock provisions, and
- Succession planning.
Clear documentation should explain how capital raises will be conducted, how different share classes operate, and what rights attach to each class.
Transparent corporate governance is also critical. Regular financial reporting, open communication about company performance, and including shareholders in substantive discussions can significantly reduce the risk of disputes.
Legal remedies
If you find yourself in a shareholder dispute, litigation should be considered a last resort. Courts strongly encourage parties to attempt alternative dispute resolution before commencing proceedings.
Mediation involves an independent third-party facilitating discussions between disputing shareholders. It is cheaper compared to litigation and offers faster resolution times with more potential of preserving business relationships.
A common road to resolve a shareholder/director dispute, without the Court’s involvement, is an agreed buyout of the oppressed shareholder’s interest at fair market value, with an agreed independent accounting expert determining the value if parties cannot agree. Attwood Marshall Lawyers regularly assists clients to settle shareholder/director disputes via this form of alternative dispute resolution.
If mediation is unsuccessful, a Court can make orders for compensation against other shareholders and the company itself.
In certain circumstances, Courts can also order that the company be wound up. This is viewed as a remedy of last resort, however, because it affects employees, creditors, and other stakeholders.
What to do if you are experiencing oppression
It’s critical to act early if you believe you are being treated oppressively. Document everything carefully, including communications, financial information, and instances of exclusion or unfair treatment.
These cases can become very complex very quickly, depending on the number of shareholders and corporate structures involved.
An experienced commercial litigation lawyer can assess your situation, advise you on your rights and options, and help develop a strategy for protecting your interests.
In many cases, a well-crafted letter from a solicitor can help disputing parties resolve their differences without court proceedings.
Attwood Marshall Lawyers – dispute resolution specialists
Attwood Marshall Lawyers has been supporting businesses and shareholders since 1946. Our dedicated Commercial Litigation team has extensive experience in shareholder oppression matters, director disputes, and all forms of business disputes.
We provide clear, practical advice about your rights and options, working with you to achieve the best possible outcome through negotiation, alternative dispute resolution, or court proceedings if necessary.
Our team also works closely with our Business and Commercial Law department, which has extensive experience in drafting comprehensive shareholders’ agreements.
For advice about shareholder disputes, oppression claims, or director conflicts, contact our Dispute Resolution and Litigation Department Manager, Georgia Trapp, on direct line 07 5506 8278, email gtrapp@attwoodmarshall.com.au or free call 1800 621 071.
For assistance with drafting shareholders’ agreements or other business and commercial matters, our Business and Commercial Law Department Manager, Sarah Jones, can be contacted on 07 5506 8233, or email sjones@attwoodmarshall.com.au.
