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Shareholder Disputes - When it all goes wrong

31 October 2015

Each year, in our firm we see quite a few clients who for one reason or another have reached a stage of standoff with a fellow director or shareholder.  By the time clients come to us they and the other side are often literally at each other’s throats.

Typically the disagreement stems from remuneration; levels of drawings, shareholder employees who are not pulling their weight in the view of other shareholders, the financial and operational management of the business or sometimes unfortunately, in closely held companies, a family dispute.

There are multiple options for resolving this type of problem under Part 9 of the Companies Act 1993; ultimately our advice depends on the factual circumstances of each case.  One line of my advice is always the same, and is a pragmatic but necessary view.

It goes something like this, the hard line is, the Court will not interfere in your business decisions and the Court will expect to see you have tried to resolve things yourself before getting into a Court room.

How do you avoid the company version of Chernobyl? All companies should make sure they have good solid shareholder agreements and company constitutions. Plain mechanisms for dealing with disputes and share buy-backs are necessary insurance for making sure that if it all goes wrong – there is a clear defined process for shareholder exits including the death or incapacity of a shareholder.

We also encourage alternative dispute resolution wherever possible which may include mediation and arbitration as other ways of trying to resolve the dispute without the additional cost, stress, and time expended in the Court process.

If people cannot resolve things themselves, what remedies exist?

There is a wide body of remedies in this area, but the biggest impact is that any shareholder can take an application to court on the grounds that the Company’s affairs have been conducted in a manner which is ‘unfairly prejudicial or oppressive’ to their interests. These are personal actions, not actions brought by the Company, so you can’t stop a shareholder bringing one against you simply because you control the board or shareholder meetings.

These types of applications for both sides of the table consume time and money and are a major distraction to running the business. If an unfair prejudice claim against you is upheld, the Court can grant remedies which may include the appointment of an expert to value the shares, in order to facilitate a forced buy-back of the shares. Unfair prejudice actions are often based on a failure to fulfill what people expected to happen in the company.

Most people understand that a Court can put a company into liquidation where a company is unable to pay its debts. In extreme circumstances, where shareholders have reached a stalemate situation with each other, the Court can, if it is satisfied, liquidate the company on ‘just and equitable grounds’.

The message for anyone experiencing a dispute with your fellow shareholders – start the conversation early with your company lawyer.

 

Rachel Scott is an Associate in the Court & Disputes/Employment team at Norris Ward McKinnon. Contact Rachel at rachel.scott@nwm.co.nz

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