Shareholders' disputes

Background law

The Companies Act 1993 grants certain very basic rights to shareholders (i.e., the right to vote in any shareholders' meeting or resolution; the right to share in any board-approved dividend; and the right to share in any surplus assets of the company on liquidation).

The shareholders of a company collectively own the company's capital, but they cannot participate in the company's management (subject to certain exceptions which may allow shareholders to indirectly influence management).

The board (i.e., the directors of the company acting collectively) is responsible for the management of the company, subject to certain decisions which must be referred to the company's shareholders for approval.

What happens when a shareholder fundamentally disagrees with the management of a company or with the strategy or decisions of the other shareholders?

Disaffected shareholders can sell their shares; or vote against management's intentions using the democratic process governing shareholders' powers and decisions within in the company's constitutional arrangements (and/or the Companies Act 1993).

However, particularly in small companies, there may not be a market for the shares, and power blocks of shareholders with different views of the company's management can exist.

The Court will generally uphold the rights of those power blocks in any deadlock or difference of between shareholders as to the management of the company, because the disaffected shareholder has accepted the commercial risk of the company and its democratic structure when investing, and the Court will merely insert its own view on commercial matters in preference of the other investing shareholders who have done the same thing.

The Court will intervene to stop out and out abuses of management power, however.

A shareholder can take a personal action against a director for any breach of a duty of care owed to the shareholder in certain circumstances (Section 169 of the Companies Act 1993).

A shareholder is entitled to request information from the company (Section 178).

The Court can make an order for the inspection and copying of documents on the application of a shareholder (Section 179).

Most prominently, there are broad "prejudiced shareholders" provisions in Section 174 of the Companies Act 1993 allowing the Court to make a broad range of orders on proof the "affairs of the company have been, ... are ..., or are likely to be conducted in a manner that is, ... [has] been, ... or [is] likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to [a shareholder in the capacity of a shareholder]".

Such orders can include requiring the company or any other person to buy the shareholder's shares, pay compensation, regulating the ongoing conduct of the company's affairs, or putting the company in liquidation.

""Oppressive, unfairly discriminatory, or unfairly prejudicial" operation of a company's affairs in respect of a shareholder may involve breaches of the company's constitution or the Companies Act 1993, a want of good faith, a lack of honesty or moral conduct, or unequal treatment, but it may not.

The remedy of Section 174 does not extend to errors of judgement by management, inefficiency, or poor business management without distinct elements of bad faith or self-interest.

Judges also exercise restraint when assessing business strategy when a Section 174 application has been made. The remedy is an alternative to liquidation on the basis of "unjust" grounds, but the Courts will not allow Section 174 to be used to allow an exit from a shareholding on the basis of a mere disagreement over business strategy.

Frequently encountered issues

There is often no shareholders agreement or constitution written in a way that might have been helpful in the circumstances of the dispute;
In disputes, often management and shareholders have not followed the required legalities that would have kept things clear legally;
In fractious disputes, there are often issues accessing the information of the company and whether the procedures of the company in terms of proper meetings have been or will be followed;
Non legal issues are often present (i.e, the disputing parties may be disappointed and/or angry at each other, so the focus has moved away from the commercial imperatives of the arrangements).

What you should provide when instructing us

The name of the company;
A narrative about what has happened in terms of the dispute; your point of view; and the background of the company and its shareholders (e.g., the objectives of the company, a brief history of the company, a narrative about the funding arrangements of the company over time, an understanding of the different contributions of the different shareholders over time, etc.);
A copy of any shareholders agreement and/or constitution of the company;
Copies of all relevant correspondence and documents you have, which have a bearing on the issue;

Copies of any Court documents you have filed or been served to date.

About Us

Peter McCutcheon is a Barrister and Solicitor, specialising in commercial and relationship property litigation. Peter has an economics degree, a post graduate banking diploma (with distinction), and a law degree from the University of Auckland (with honours). Peter's more general litigation practice areas are commercial litigation, relationship property litigation, shareholders' disputes, insolvency and company liquidations, caveat disputes, estate disputes and criminal law. Peter is committed to providing excellent legal services to companies and people who understand value.