Shareholder and Partnership Disputes

If you're involved in a dispute with another shareholder, there are various ways in which it can be resolved.

Negotiation. The first step should always be informal discussion and negotiation. By communicating key issues and objectives early, it is often possible to reach an agreement without delving further into the litigation process. Aptum can assist in this process by investigating your position, determining reasonable objectives, and crafting the correspondence to assert your intentions.

Turning to the agreement. Shareholder agreements will often include provisions for dealing with disputes, such as whether mediation is required and when the parties can proceed to litigation.

Court. If the parties accept that the shareholders cannot remain together, but an agreement cannot be reached, the Court's focus shifts to who buys and who sells their shares, and at what price. A party may seek an order that they buy out the shares of the other. If the company is solvent, this is generally preferable (to both the parties and the Court) to winding up the company.

Winding up the company. If the dispute has caused significant damage to the business, it may be appropriate for the company to enter into voluntary administration. This will be influenced by the financial strength of the company and the preferences of shareholders.

Shareholder oppression occurs when majority shareholders use their power or influence for their own benefit at the cost of others or the company.

What constitutes shareholder oppression is set out in section 232 of the Corporations Act 2001 (Cth), which states that the conduct must either be:

• Contrary to the interests of the members as a whole; or
• Oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

Contrary to some belief, oppression does not have to be unlawful, but it does need to be an abuse of power of some kind.

Oppression may have taken place if there was a failure to pay dividends, access to company material was restricted, someone was excluded from management, or funds were used for personal reasons.

Common examples include: a majority shareholder paying themselves excessive salaries or bonuses while refusing to declare dividends to the minority; the minority being excluded from board meetings, management decisions or access to the company's books; the company entering into related-party transactions on non-arm's-length terms that benefit the majority; the majority causing the company to buy assets from or sell assets to entities they control at unfair prices; and the diversion of business opportunities from the company to a related entity. What matters is not just the conduct itself but the effect on the minority's rights as a shareholder.

It is conduct by majority shareholders, or by the company under majority control, that unfairly prejudices the minority's rights as a shareholder. The claim is brought under section 232 of the Corporations Act 2001 (Cth) and is available to minority shareholders in proprietary companies and public companies alike. The most common remedy is a buy-out order under section 233: either the majority is ordered to buy the minority's shares at a fair price, or (rarely) the minority is ordered to buy the majority. The Court can also order winding up on the just and equitable ground.

"Unfair prejudice" is one of the three categories of conduct that triggers section 232. It is conduct that unfairly disadvantages a shareholder in their capacity as a member, or in another capacity that flows from membership. The word "unfair" is critical: shareholders are not entitled to a particular outcome, but they are entitled not to be prejudiced by conduct that is not commercially justifiable or that departs from the reasonable expectations they had when they invested. Courts assess unfair prejudice by reference to what a reasonable shareholder in the applicant's position would consider unfair.

No. Shareholder oppression is a statutory remedy under Part 2F.1 of the Corporations Act 2001 (Cth), not a tort. That means the claim is not for damages in the traditional sense. The Court's power under section 233 is to make orders regulating the conduct of the company's affairs, ordering a buy-out of shares, restraining or requiring certain conduct, appointing a receiver, or winding up the company. Damages-type orders can be made where compensation is warranted, but the primary remedies are structural.

The Court has a broad range of remedies for shareholder oppression. Generally, those remedies include winding up the company or requiring the purchase of shares such that one shareholder buys, and one sells, with an appropriate reduction in the company's share capital.

Some key provisions in shareholder agreements that aid the dispute resolution process can include:

• Dispute resolution clause. A dispute resolution clause may set out whether mediation is required in certain timeframes, what constitutes a dispute, and when the parties can proceed to litigation.
• Right of refusal or offer clause. If you, or someone else, is exiting the company, this clause may require shares to be offered to existing shareholders first before any third-party purchasers.
• Drag along and tag along rights. Where a third party wishes to purchase some (or all) of the company, a drag along clause may require a minority shareholder to sell shares. A tag along right may enable minority shareholders to sell alongside a majority shareholder.
• Some shareholder agreements will include how to determine the sale and price of your shares.

Identifying the appropriate value for a party's shares can be a complex task, and there is no prescribed methodology for undertaking a valuation (and indeed the appropriate methodology will change depending on the nature of the company and even the tendency of a particular expert valuer).

Ordinarily, the Court will appoint an expert to value the shares, with the trend being to appoint a single expert. Each party has the option of making submissions and the Court will ensure that the expert gets all the relevant information to carry out the valuation exercise.

While there is surprisingly little authority about how a court would determine a dispute where both parties are wanting to be buyers, ordinarily, the majority holder will buy out the minority holder.

In circumstances where shareholders are equal, it is more likely to follow that the party responsible for the oppression will buy out the shareholder who has been oppressed.

This satisfies the objective of allowing release of the oppressed party from the company and recognises that an order providing for a minority to acquire the shares of a majority is rare.

When determining the value, the Court will consider whether the value should be set so as to ensure that the shareholders responsible for the oppression do not benefit from the oppression. Other than adjustments that relate specifically to damage caused by the oppression, this is often carried out by ensuring there is no minority discount applied to the value for a minority shareholding.

Oppression proceedings are brought before the Supreme Court or Federal Court.

In 2018, the Supreme Court set out a new procedure for bringing oppression proceedings, aiming to fast track the process and save parties time and cost.

Oppression proceedings are commenced in the Supreme Court by originating process and supporting affidavit of no more than three pages in length, which sets out a clear and succinct summary of the facts alleged to constitute the acts of oppression, the estimated value of the shares in the company, and exhibits a current ASIC search of the company.

If initiating in the Federal Court, a document of up to five pages is allowed, which should summarise the important facts, the relief sought, the primary legal grounds, and the alleged harm.

Under the fast-track oppression procedure in the Supreme Court, matters can move from originating process to first substantive hearing within six to twelve months. Many oppression matters resolve at mediation within that window because the fast-track process forces both parties to a valuation and a buy-out proposal early. Matters that don't settle typically run for 12 to 24 months to final judgment. Aptum's project management framework gives you a forecast timeline at the pathways assessment stage and updates it as the matter progresses.

It depends on how contested the matter is and how far it needs to go. A defined oppression demand and buy-out negotiation can often be run for tens of thousands. A fully contested oppression matter through to a valuation hearing runs into six figures. Aptum discusses the cost-benefit at the diagnostic call and provides a stage-based cost forecast at the pathways assessment stage. Where the scope allows, fixed-price options are available for defined phases.

Yes. Partnership disputes are governed by the Partnership Act in each Australian state or territory and by the partnership agreement, if there is one. A partner can seek dissolution of the partnership, an account of partnership assets and profits, orders regarding partnership property, and damages for breach of the partnership agreement or breach of fiduciary duty. The typical outcome is one partner buying out the other, with the terms decided commercially or (rarely) by the Court.

Yes, in the right circumstances. The Corporations Act sets out different pathways depending on whether the company is proprietary or public and what the constitution says. Aptum has published a detailed guide on removing a director, including the resolutions required and the notice periods.