Shareholder Disputes: How to Manage and Resolve Them

Introduction

Shareholders, or stockholders, are individuals or entities that own shares in a company. Depending on the circumstances, there will be several shareholders in a company. As a result of this, disputes often occur and they can significantly impact the functioning and stability of the company.

It is incredibly important that these disputes are effectively managed and resolved to maintain a harmonious relationship amongst the shareholders and ensure the smooth operation of the business.

This article explores how these disputes can be managed and resolved, including the rights of shareholders, the role of a company constitution, the importance of shareholders agreements, common disputes that arise and how to resolve them.

What Rights Does a Shareholder Have?

By owning shares, shareholders become part owners of the company. This ownership affords them certain rights and privileges. For instance, shareholders may be entitled to receive dividends, which are a share of the company’s profits. In addition, shareholders also have the right to access certain company information, such as financial statements, annual reports, and minutes of shareholder meetings.

Typically, shareholders also have the right to vote on matters such as electing directors, approving major decisions, and amending the company’s constitution. In some cases, shareholders may even have the right to purchase additional shares in the company before the shares are offered to other parties.

Company Constitution

The company constitution, also known as the articles of incorporation or memorandum and articles of association, sets out the rules and regulations for the internal management and operation of the company.

A well-drafted and comprehensive constitution can help prevent shareholder disputes by providing clear guidelines and procedures for how conflicts should be addressed and resolved.. It can clarify the rights and responsibilities of shareholders, outline dispute resolution mechanisms, and provide a framework for effective governance and decision-making.

Shareholder Agreements

In addition to the company constitution, shareholders may also enter into shareholder agreements. A shareholder agreement is a private contract among the shareholders that supplements the constitution and outlines additional rights, obligations, and provisions related to the shareholders’ relationship and the operation of the company. While not mandatory, shareholder agreements are highly recommended as they can provide added protection and flexibility for shareholders.

Shareholder agreements often cover areas such as share transfers, dispute resolution mechanisms, restrictions on share sales, dividend policies, and mechanisms for resolving deadlocks or other conflicts. Having a well-drafted shareholder agreement can help prevent disputes by establishing clear expectations and procedures for addressing potential conflicts.

Common Shareholder Disputes

Shareholder disputes can arise due to various factors, including disagreements over company management, strategic direction, financial matters, decision-making processes, and breaches of fiduciary duties. 

Common types of shareholder disputes include conflict between shareholders and the board of directors or company management regarding decision-making authority, the appointment of executives, or the overall company strategy. For instance, shareholders may allege that directors or officers of the company have breached their fiduciary duties, by acting in their own interest rather than in the best interest of the company and its shareholders.

Shareholder disputes can also occur when a particular shareholder, or class of shareholders, believe that their rights have been unfairly disregarded, or their interests have been prejudiced by other shareholders or the company’s management. 

Another dispute which often arises is when there is a deadlock amongst the shareholders. This occurs when shareholders with equal voting power are unable to reach a majority decision on important matters, resulting in a stalemate and hindering the progress of the business. Deadlock’s can also occur when a decision requires unanimous agreement from the shareholders and there is insufficient commonality to reach this level of consensus.

Resolving Disputes

If the constitution or shareholder agreement does not provide for a mechanism to resolve shareholder disputes, the best alternative is to engage in Alternate Dispute Resolution (ADR). This allows a neutral third party to help resolve the dispute.

Mediation, a commonly used ADR process, can be highly effective in resolving conflicts between company shareholders. Mediation involves engaging a neutral mediator who facilitates communication and negotiations between the disputing parties. The mediator is able to assist by identifying common interests, exploring potential solutions, and assisting in reaching a mutually acceptable agreement.

The Corporations Act 2001 is the applicable legislation throughout Australia for matters relating to the governance of corporations. When ADR is unsuccessful at resolving a serious conflict, litigation may be the only solution. An interested party can apply to the court to assert that the company’s affairs are being conducted in a way contrary to the Corporations Act 2001, either because it is contrary to the interests of the members as a whole or oppressive to them. 

In such cases, the court can make orders which remedy the conflict to facilitate the company returning to normal operations. In extreme cases and disputes, this may involve the court ordering the board to be reconstructed or even wound up as a last resort. 

Conclusion

It is essential that shareholder disputes are effectively and efficiently managed so that they can be resolved. These disputes must be resolved in order to maintain a harmonious relationship between shareholders and prevent the disruption of a company’s operations and activities.

Throughout this process it is important that you consult legal professionals familiar with the applicable laws and regulations to ensure that the appropriate dispute resolution procedures are complied with to resolve shareholder disputes.

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