Call 07 834 6000

Understanding company decision-making

18 January 2019

A company is a useful structure for the ownership of a property or business. A company structure may make it easier to raise finance, there may be tax benefits and the entry and exit of shareholders may be easier than if the business is carried on by a sole trader or partnership. Whatever ownership structure is used, if the likelihood of disputes is to be reduced, it is critical to understand at the outset how control of the entity will be held and exercised.

Family dispute over sale of farm

An unfortunate dispute over a family’s decision to sell a company owned farm made its way right through our court system to our Supreme Court recently – no doubt an expensive and stressful experience for all involved, not to mention the irreparable breakdown in family relationships that must have resulted. The shareholdings in this company were held by Mr and Mrs Hodder (70%) and the Mr and Mrs Baker (30%). Mrs Baker was the daughter of Mr and Mrs Hodder. Mr and Mrs Hodder’s entities contributed a substantial amount of finance to the purchase of the company’s farm - Heron Creek. Heron Creek was leased to Mr and Mrs Baker’s business. Unfortunately the Baker’s business was unsuccessful and it owed a substantial amount of rent to the company. The Hodders sought to sell Heron Creek to minimise their losses. The Bakers endeavoured to block the sale by refusing to sign the shareholders’ resolution that was legally required under the Companies Act 1993 for the sale to proceed.

The Supreme Court decision

The Hodders resorted to court action claiming relief under section 174 of the Companies Act on the grounds the Bakers’ refusal to sign the shareholders’ resolution was conduct that was oppressive, unfairly discriminatory or prejudicial. The High Court granted the Hodders relief in the form of an order requiring the Bakers to sign the shareholders’ resolution. The farm was sold.

After an unsuccessful appeal to the Court of Appeal the Bakers were successful in the Supreme Court. The Supreme Court cancelled the order requiring the Bakers to sign the shareholders’ resolution even though the nothing could change the fact the farm had been sold. This was because there were implications to the Bakers as to the costs awards in the lower courts, the effect on their ability to bring further action against the Hodders, the stigma associated with the order against them and the important company law issues at stake. The court stated that the shareholders were entitled to act solely in their own interests (which in this case was preserving their bargaining chip with the Hodders as to whether the sale proceeded or not) despite the fact there was no possibility of them recovering any money from the company when the farm was sold.

Being forewarned is being forearmed

If you decide to use a company structure, understanding how company decisions must be made, who exercises control of the company and whether the default Companies Act requirements apply or can be changed by you, prepares you to deal with situations that could arise in future and reduce the likelihood of expensive and acrimonious disputes. Professional advice is invaluable.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott