How to Resolve Director and Shareholder Disputes

[Updated 23/09/2024 by Eloise Turnbull]

Due to the current economic climate, we are seeing an increase in disputes amongst companies, particularly between shareholders and directors. This article provides several valuable tips on how internal disputes between directors and shareholders can be dealt with.

Signs of Conflict Between Directors and Shareholders

There are several distress indicators that may arise when underperformance and disputes occur within a company. These include:

• Decline in financial performance
• Cashflow constraints
• High staff turnover
• Difficulty obtaining finance
• Lack of a business plan
• Loss of clientele/customers
• Decline in share price

If you are currently facing a shareholder or director dispute, keep reading to learn more about your options.

Option #1. Negotiate

If a relationship breaks down within a company, then negotiation is the first and most ideal place to start. Negotiation is a more effective way to try and resolve a dispute early.

If you are unable to negotiate directly, then assistance from an independent third party through mediation may be an effective way to obtain a timely resolution.

In any effective negotiation, the process involves both sides coming together to explain their positions or concerns, with the aim of reaching a mutually agreeable outcome.

Pros of Mediation

If you have a shareholders’ agreement, it will generally set out the resolution process such as mediation.

• Disputes can be resolved faster and at less cost than through the Courts;
• Parties control the outcome rather than the Court;
• Parties have an opportunity to put forward their position;
• Independent mediator can provide information about the strength of a case.

Cons of Mediation

Although mediation is the best first step in director and shareholder disputes, there are a few drawbacks to consider.

• Parties cannot be compelled to attend unless ordered by the Court;
• May not be cost effective for a minor dispute;
• Need all parties present that have authority to settle the matter.

Option #2. Sell Your Share or Buy Out the Other

If one party chooses to keep their shares and continue to run the business, but the other party chooses to sell, there are two main outcomes:

• The remaining party takes full control of the business (if they hold all the shares);
• The departing party can sell his/her shares to a third party. If this option is chosen, then generally you want to ensure the remaining party is happy with the decision and ensure the third party will provide a benefit to the company. The company constitution is set up to provide protection to the remaining party, but this does not stop disputes arising.

Choosing to sell or buy out your share is a big decision. Before doing this, you’ll need to weigh up several factors and considerations of any company constitution process.

Consider the Company’s Profitability

You may choose to engage a Valuer to value your company (and your share in it) with the intention of using the valuation to either offer to sell your share or prepare a proposal to buy out the remaining shareholder(s).

Option #3. Enter into Voluntary Administration or Liquidation

Voluntary administration can be a complex process.

If a business dispute arises that is unable to be resolved because:

• the directors and/or shareholders disagree;
• the company is facing insolvency;
• the director is not able to continue in their role or contribute (e.g. due to poor health, or otherwise),

then a decision can be made by the director/s to appoint an Administrator to take control over the company.

In this process, the company essentially has some breathing space while the Administrator takes stock of the assets and liabilities of the company to effectively ‘broker a deal’ with the shareholders and/or creditors.

Option #4. Go to Court

If a dispute between directors and shareholders can’t be resolved, it may result in Court intervention. That may involve seeking remedies to redress unfair and/or oppressive conduct within a company faced by minority shareholders.

Examples of Oppressive Conduct

• Unfair allocation or restrictions on the payment of dividends to shareholders;
• Refusing access to information about the company’s affairs;
• Use of company funds for improper purposes (e.g. personal expenses);
• Denying other directors the opportunity to carry out their functions (e.g. failing to call directors’ meetings when required);
• A combination of the inability to sell out of a private company where improper exclusion from management has occurred and there is no reasonable offer to buy the oppressed party’s shares;
• Paying excessive remuneration to the person having control of the company.

If the Court Finds Oppressive Conduct in Director Shareholder Disputes

The Court has a wide scope of powers to make orders it considers appropriate if it finds there has been oppression between shareholders and directors. These include:

• Winding up the company;
• Making orders regulating the conduct or affairs of the company in the future;
• Ordering the purchase of the shares of any member by other members;
• Ordering the company to institute, prosecute, defend or discontinue legal proceedings, or authorising the institution of such proceedings by a member of the company on behalf of the company;
• Appointing a receiver or a receiver and manager of the property of the company;
• Ordering a person to refrain from engaging in specified conduct;
• Ordering a person to do a specified act or thing;
• Modifying or repealing the constitution of the company.

Tips to Prevent Business Disputes from Getting Out of Control

Business disputes between shareholders and directors can be incredibly stressful.

Some tips to avoid disputes getting out of control are:

• Seek professional advice early from both an accountant and a lawyer;
• Establish a written agreement between shareholders;
• Be upfront and honest with partners and set expectations;
• Document everyone’s roles;
• Understand your rights and obligations before you sign as director or shareholder.

At the first hint of a dispute, seek legal advice!

If you are experiencing a shareholder or director dispute in your company, the best and most cost-effective option is to discuss your situation and obtain advice on your options early.

Need a solicitor to assist you with a shareholder or director dispute? Contact Greenhalgh Pickard for help from our trusted Litigation and Dispute Resolution team.

Disclaimer:

The information contained in this article is for general informational purposes only and is not intended to provide legal advice or substitute for the advice of a professional. This information does not consider your personal circumstances and may not reflect the most current legal developments. Should you need advice, please contact our firm for targeted information relating to personal your situation. 

Greenhalgh Pickard’s Team of Litigation Lawyers