Shareholder Disputes – you are not without options

Shareholder disputes are not uncommon. Yet, when they arise, a shareholder dispute is nothing short of disruptive, distracting and – usually – detrimental to business.

While shareholder disputes can take various shapes and sizes, they most commonly involve a shareholder disagreeing with the way in which a company is being managed; or shareholders becoming “deadlocked”. Regardless, a shareholder has a range of options at their disposal to resolve disputes with fellow shareholders.

The starting point for any shareholder dispute regularly involves an informal/formal meeting, mediation or arbitration. Each of these options has its merits and can be tailored to suit almost any shareholder dispute. It is also worth bearing in mind that shareholder agreements typically contain dispute resolution clauses. These clauses set out the process that must be followed to address disputes between shareholders. However, should these fail, a shareholder may need to file court proceedings. We explore the options available to shareholders under s 174 of the Companies Act 1993 (the Act).

Oppressive conduct?

Under s 174 of the Act, a shareholder may seek relief from the Court provided it can satisfy two elements. Firstly, proving that the affairs of the company have been, or are likely to be conducted in a manner, or the conduct of the company is, “oppressive, unfairly discriminatory, or unfairly prejudicial”. Secondly, the Court must consider it “just and equitable” to make an order for relief.[1]

For the first element, the question is whether there has been a visible departure from the standards of fair dealing, viewed in light of the history and structure of the particular company and the reasonable expectations of its members.[2] Such a departure does not need to be conducted in bad faith.[3] The focus is on the conduct’s effect on the complaining shareholder. As such, s 174 is designed to provide a broad and flexible remedy for conduct which is unjustly detrimental on a shareholder.

Unfair prejudice will arise in cases of company mismanagement, failing to facilitate a return for shareholders, excluding shareholders from participation and access to financial records, directors acting self-interestedly, and operating a company for the benefit of its parent. Green v Gillette was a recent case example in which the Court of Appeal made an order under s 174 of the Act.[4] Mr Gillette and Mr Green were shareholders in SunPower Limited. Mr Gillette was also employed by SunPower. When SunPower experienced financial difficulty, it ceased paying Mr Gillette’s salary, causing a deterioration in the shareholder relationship. Mr Gillette stopped working for SunPower and brought proceedings against it in the Employment Relation Authority. Subsequently, Mr Green incorporated a new company – “SunPower Solar Limited” – which acquired SunPower’s assets and workflow. Mr Gillette had no knowledge of these transactions. The Court had little difficulty finding that this amounted to unfairly prejudicial conduct. Other forms of unfairly prejudicial conduct can include “cash” or “asset” stripping. This can occur, for example, when a holding company charges illegitimate or overinflated management fees to its subsidiaries.[5]

The Act also deems certain conduct as unfairly prejudicial.[6] Such “deemed” conduct gives rise to an irrebuttable presumption of unfair prejudice.[7] An example of this, is a failure to obtain a special resolution of shareholders in respect of a major transaction.

Relief?

What type of relief can a shareholder expect to receive from the Court?  A “buyout order” by the majority shareholder is the most common remedy.[8] This is because cases often involve tightly held companies in which members can no longer do business together. That being said, a buy-out will not always be appropriate. If a shareholder (or director) devalues the company, a buy-out would not adequately resolve the wrong to the complaining shareholder.[9] A buy-out may not also be appropriate when a company is difficult to value.[10] Importantly, compensation may be awarded against director of companies, as “any other person” under s 174(2)(b).[11] The important point is that the suitable form of relief is that which repairs the actual harm done.

The courts may also wind-up a company under s 174 of the Act. Having said that, such a remedy is considered “blunt” and “drastic” – especially when dealing with a solvent and successful business.  A liquidator may be appropriate where steps need to be taken to recover funds properly owed to the company,[12] which could include a shareholder’s overdrawn current account. It may also be necessary to grant compensation alongside liquidation.[13]

Conclusion

All of this is to say that, while shareholder disputes are frustrating, you are not without options. The Companies Act 1993 provides other mechanism to address shareholder disputes and the above is an example of one such option. The above is only very general guidance and should not be relied on as legal advice.

1. Companies Act 1993, s 174.
2. Thomas v H W Thomas Ltd [1984] 1 NZLR 686; (1984) NZCLC 99,148(CA) at p693,155 (referring to the s 209 of the Companies Act 1955); affirmed in Sturgess v Dunphy [2014] NZCA 266 at [138].
3. Sturgess v Dunphy [2014] NZCA 266 at [139].
4. Green v Gillette [2022] NZCA 408
5. Oppenheimer NZ Ltd v Struthers [1994] MCLR 156.
6. Section 175.
7. Kim v Pink Nails Ltd HC Hamilton CIV-2009-419-1472, 11 August 2010.
8. Sturgess v Dunphy at [148].
9. Kyle v Huapai [2014] NZHC 1981, at [14].
10. Hayes v Taniwha Buses Ltd [2014] NZHC 1965.
11. See, for example, GJ Holding Trustee Ltd v Frith [2023] NZHC 563; and Maryatt v PC Home Hire Ltd HC Auckland M269-SD00, 2 September 2002; (2002) 9 NZCLC 263,033 at [92].
12. Ross v Smith [2012] NZHC 3034, at [24].
13. Kyle v Huapai Enterprises Ltd [2014] NZHC 1981, at [14].