Many people set off to start a business with friends or colleagues and often these ventures are successful and their businesses strive. A lot of start-ups consist of young individuals with great ideas, a lot of time, but little to no capital.
Because of this they often put their blood, sweat and tears into their businesses, as a substitute for the lack of capital, trying to develop and market their business as much as possible. Due to these financial constraints, little time and resources are devoted to the legal side of the business and often no formal agreements are in place between business partners.
However, when things go sour or circumstances change, this is when the need for well-drafted legal agreements or contracts are appreciated. Within Australian companies, disputes between directors and shareholders are common. These disputes not only take up a significant amount of the individual’s resources and time, but also the financial resources of the company.
What rights do I have as a shareholder?
In Australia, the rights and obligations of both directors and shareholders are set out in the Corporations Act 2001 (Cth). A company’s internal management might be governed by its ‘replaceable rules’, its constitution, or a combination of both. Most companies also have a Shareholders Agreement.
If there is a dispute amongst shareholders of a company, normally the first step is to review your Shareholders Agreement to check whether there is a method of resolving the dispute and might set out the procedures that the shareholders are required to follow in the event of a dispute between shareholders.
Often, agreements (including Shareholders Agreements) will have a dispute resolution clause which the parties must follow prior to commencing any legal action. This can involve alternative dispute resolution methods, such as mediation which involves an impartial third party (or dispute resolution practitioner) to get involved to facilitate the resolution of the dispute.
The dispute resolution clause will normally not apply to situations where there is a need for urgent injunctive relief, for example, if you need a Court order to prevent a party from dissipating assets (Mareva injunction, also known as a ‘freezing order’).
What do you do if there is no Shareholders Agreement?
If there is no Shareholders Agreement, you should check to see whether the constitution contains any provisions which may assist or provide guidance as to how to resolve the dispute or help define the parties obligations.
If not, there may be legal causes of actions and remedies available to you in Equity, under the Corporations Act or some other legislation.
Even if there are contractual methods of dealing with your disputes, remedies in equity and under the Corporations Act may also be available.
Common types of Shareholder disputes
A shareholder may need to bring an action in their personal capacity as a shareholder to enforce a personal right. Some examples of these actions are:
- Breach of fiduciary duty by a director if a fiduciary relationship can be established (usually this fiduciary duty is owed by directors to the company);
- Allotment of Shares in the company for an improper purpose; or
- Where a company exercises its power to alter the constitution in a manner which harms the shareholders or their rights.
This enables shareholders in a company to bring statutory derivative actions in the name of, and on behalf of, the company in which they hold shares. These could be made against directors of a company for alleged breaches of the constitution or their duties under the Corporations Act, as an example.
They can also be used to pursue rights against third parties, where the company would not do so because of perceived conflicts between the board of directors and third parties.
To bring a derivative action is not an automatic right and requires approval (leave) of the Court under Section 237 of the Corporations Act.
If you are having a dispute with a business partner or shareholder and would like to have a confidential discussion with one of our experienced business and commercial lawyers in Sydney, get in touch with Rockliffs today.