Shareholder Disputes – you are not without options

Civil Litigation & Dispute Resolution
May 23 2024
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].
AUTHORS

You may also like ...
Baigent’s Damages
Lawyers are used to talking about historic cases by referring to the main parties to a proceeding.  Names like Crown v Brown and Collins v Smith are common place, even for important cases.  However, in the history of the law there are a handful of cases that are referred to with special names.  Some of these names are descriptive, like the so called Ship Money Case that in many ways triggered the English civil war, while others carry the name of an important participant.  This is the case with the example of Baigent’s case. Legal origins Baigent’s case was an important step in the development of New Zealand’s human right law.  It was the case that first recognised the Courts power to award compensation to people who had been the victim of government actions in breach of the New Zealand Bill of Rights Act 1990 (the Bill of Rights).  Its official description is Simpson v Attorney-General, but it has long been called “Baigent’s case”.  The Baigent of Baigent’s care was Mrs Baigent.  Although she had passed away by the time the Court of Appeal released its judgment in July 1994 it was her experience during an unlawful police search that lead the Court of Appeal to confirm that claims for damages for breaching the Bill of Rights were available in New Zealand. Mrs Baigent’s story has a simple beginning.  She was the victim not of a mistaken of identity but of a mistaken address.  A police officer, acting on a tip about a tinny house, mistakenly identified her address as the address of a suspected drug dealer.  A search warrant was issued for the address and the police went to search it.  When the police arrived at Mrs Baigent\'s home she was not there, but her son informed them that they had the wrong address.  He spoke to his sister (a Wellington lawyer) who also explained that the address belonged to Mrs Baigent.  Despite this the police were heard saying “we often get it wrong but while we are here we will have a look around anyway”, and this is exactly what they did.  The police searched the address and found nothing. The Court of Appeal was asked to answer the question of whether Mrs Baigent’s claim for compensation for the unlawful search should be struck out as having no proper legal basis.  Ultimately, the Court found that it was open to New Zealand Courts to give an award of damages for breaches of the Bill of Rights.  Although not required to make a decision in that particular case, President Cooke of the Court of Appeal suggested that an award of something less than $70,000.00 would probably be appropriate.  The Court was never required to decide the question as the matter was (it is understood) confidentially settled some time later.  Despite this, the case has become an important part of New Zealand’s Bill of Right jurisprudence. Baigent’s place Since Baigent’s case there have been dozens of claims for compensation after breaches of the Bill of Rights.  The breaches cover a wide variety of state actions.  Many relate to excessive use of force or degrading treatment by government agencies, like the police or the Department of Corrections.  Others relate to unlawful seizures and breaches of fair trail rights.  The awards that have been given for these claims vary.  The largest – for a criminal defendant who was sentenced to a long prison term for minor offending under the former three strikes law – was $450,000.00.  Other awards have tended to focus on emotional harm and often measure in the thousands or tens of thousands. Baigent’s case and what are often called “Baigent’s damages” are an important part of holding the government to account and upholding the Bill of Rights.  While a range of other remedies exist – for example, declarations that either a particular law does not comply with the Bill of Rights or that government actions have breached the Bills of Rights, and orders to reverse or stay decisions in breach of the Bill of Rights – many of these tools only prevent breaches from continuing.  In cases where the parties have suffered real harm, the availability of financial compensation is the only tool that really exists to remedy what has gone wrong. How we can help Holland Beckett has experience acting for claimants in Baigent’s damages cases resulting in both Court ordered compensation and confidential settlements.  Holland Beckett has also advised government bodies about compliance with the Bill of Rights to ensure damages claims cannot be made. This is a complex area of the law and Holland Beckett is available to assist both in advising people who feel their rights have been breached and agencies that want to ensure they comply with their legal obligations.
Read more
What is a Discharge without Conviction?
Frequently, when a prominent New Zealander is being sentenced for criminal offending, there will be discussions about Discharges without Conviction.  Discharges are commonly misunderstood and this article sets out what a discharge is and when it is likely to be available. A Discharge without Conviction is an Order that Court can make when a person has either pleaded guilty or been found guilty of a criminal offence.  Despite the finding of guilt, the Court may consider that the“direct and indirect consequences of a conviction would be out of all proportion to the gravity of the offence”.  This language comes from section 107 of the Sentencing Act 2002 which is the current test for a discharge without conviction. What this means is that there are situations where even a conviction (whether or not a sentence is also imposed) will have consequences for a person that are too serious to be justified by what they have done.  This can be either because the offending itself is so minor or because the consequences that the person will face if convicted are so significant.  Often, it is a combination of both of these factors that will mean that a discharge without conviction is appropriate. When deciding whether to grant a Discharge without Conviction, a Court will first determine how serious the offending is.  This is referred to as the “gravity of the offence”.  The gravity of the offence is more than just the seriousness of the act itself – it also considers how it came about, the personal circumstances of the offending and steps that they have taken subsequently.  For this reason, people who are seeking a Discharge without Conviction will often plead guilty and show remorse, both of which help reduce the seriousness of the offending in the Courts eyes. Once the Court has determined how serious the offending is, the Court will consider the consequences that the person will face if convicted.  In very low level cases, the Court may be satisfied that the ordinary consequences of the conviction (things like it being harder to get employment and the shame associated with a conviction) are enough that a conviction should not be entered.  More commonly, the Defendant will provide evidence showing that a conviction will have a particularly severe impact on them.  This commonly involves the loss of employment, consequences for their immigration status or consequences for their ability to travel in the future. Courts will not easily be persuaded that consequences are out of proportion to the gravity of offending.  Defendants must show both that the consequences are likely to occur and that the impact on them is severe.  For things like travel, they will need to show both that they have no path way to continue the travel they had planned and also that the travel is something that they were actually intending to do.  This is to prevent people from making speechless arguments that they will be impacted when in reality a conviction will not impact on their life.  Likewise claims of employment consequences or immigration consequences will generally need to be backed up by evidence from a person who can comment on the likelihood of those outcomes. In a handful of cases, defendants have pointed to the impact that it will have on their professional registration status as a reason why they should be discharged without conviction.  However, these arguments are commonly rejected.  This is for two reasons.  First, the Court is always very hesitant to prevent a professional registration body (such as the Law Society, the Medical Council or the Licenced Building Practitioners Board) from considering whether criminal offending has an impact on that person’s ability to fulfill their role.  Secondly, in most cases, the professional registration body will follow a detailed process to determine the outcome.  The removal of a practicing certificate is far from a foregoing conclusion in these cases, especially where the offending is minor.  For these reasons, Courts will usually refuse a Discharge without Conviction solely on these grounds and will require that person to face their professional body to determine the appropriate outcome for their registration. There are certain kinds of offences where discharges are more difficult to obtain – famously drink driving.  This is because the Courts review certain kinds of offending as inherently serious.  When this is the case, the Court must be persuaded that there are clear consequences before the Court will be persuaded that Discharge without Conviction is appropriate.  It is for this reason that many applications for Discharge without Conviction in cases like this fail. If a Discharge without Conviction is granted, then the legal effect of this is to treat the person as though they were acquitted of the charge.  This means that no sentence can be imposed on them.  It also means that they will have no criminal record for any purpose going forward.  The Court can, however, order a disqualification from driving or reparations in appropriate cases.  It also does not mean that a person is not required to report what has happened to a professional body or a government agency if they have a separate obligation to do so.  It does, however, mean that a person does not need to disclose a criminal conviction on job applications or travel applications either within New Zealand or internationally. For people who are unable to get a Discharge without Conviction, the Clean Slate legislation provides a useful alternative.  This legislation means that where a person has been convicted of a relatively minor offending (meaning they were not sentenced to imprisonment and if it is not of a specified class of offenses, such as sexual offending) that person will only have a conviction on their record for 7 years.  If at the end of 7 years they have had no further convictions of any kind then they may tell employers and other people within New Zealand that they have no criminal convictions.  This legislation only applies in New Zealand however, and so it does not impact on international obligations. Holland Beckett regularly advises clients on the availability of Discharges without Conviction for a range of offending.  Our lawyers have successfully argued discharges for drink driving, minor criminal offences and even offending under the Resource Management Act 1991.  If you would like to understand more about this process, please contact one of our legal specialists.
Read more
Buying property with family – fun or potential fiasco?
In the present economic climate, getting into (or climbing) the property ladder is tough. To get a deal across the line, purchasers are increasingly looking to alternative ownership options. One such option we commonly see is ‘co-ownership’ of property between family members. Taking matters a step further than the traditional parental guarantee of a child’s purchase, we are now seeing co-ownership between multiple relatives (such as siblings and their spouses, or parents and all/some of their children). This is despite that not all owners intend to live in or maintain the property. While this sounds good on paper, unfortunately these arrangements often proceed without the appropriate documentation and can go wrong. Untangling them can be complex where there has been intermingling of purchase funds, family members not being treated equally, deaths occurring and relationships souring over time. What to do if you want to buy property with other people? If you are buying property with others (often who are not your spouse or partner), you should have a written agreement to cover key aspects. The terms can cover: ownership shares and monetary contributions to purchase (including bank loans); who will live in the property; who will pay property expenses and maintenance; what will happen if someone wants to sell the property and others don’t; what happens on death of a party; and how will any proceeds of sale be distributed. This way, if a dispute does arise there will be a clear path forward to minimise any fall out (if possible). Property Sharing Agreements are used to document these arrangements, which are simple but effective. Purchasers can also consider whether funds should be gifted or loaned. Our property lawyers can assist you with this process. You can also read our article on Gift v Loan. If you are wanting to buy property with your partner or spouse, there are a different set of questions and documentation to consider (for example, whether you need a contracting out agreement). Our dedicated family team can advise you on all aspects of relationship property. See also our article on Contracting Out Agreements 101. When it goes wrong A recent example of an undocumented family property purchase is the case of Boot (As Executor and Trustee of Estate of Hart) v Stephens [2023] NZHC 3863. Parents (the Harts) helped their daughter and her husband (the Stephens) buy a property.  The title said that each couple owned a 50% share of the property, but in reality, the Stephens contributed more to the purchase price. They also paid for most of the property expenses in that time. Years later, both the Harts died, and their other five children wanted to sell the property so that 50% of the sale proceeds could be distributed to the children via their mother’s estate. The Stephens claimed that they were entitled to 67% of the property. Additionally, they had lived in the property for 17 years and did not want to sell. Ultimately, the Court held that, given the family’s intentions and contributions, the Stephens were entitled to 66% and could buy out the estate’s 34% interest. Regrettably, the dispute and litigation took a toll on the siblings’ relationships. If you own property with your family and there is a dispute There are a number of options to resolve a dispute if there is no written agreement, including obtaining Court orders to force a sale under the Property Law Act 2007. First and foremost, our experienced litigation lawyers can help you to resolve matters before Court through negotiation or mediation, if possible. If negotiations are not successful, we can guide you through the litigation process.
Read more

Start typing and press enter to search

Scroll to Top