Navigating disputes as a minority shareholder in a private company

By Alan Mitchell, Rhiannon Zarro, Henry Materne-Smith & Sam Hannah

There are over 3 million registered companies in Australia, making them the country’s most common legal structure for businesses.[1] A large portion of these are private companies, which can range from small businesses to multi-billion dollar groups.

Private companies are an effective way to co-invest in a business or share control of a trustee, but three of their features increase the risk of disputes between shareholders or between shareholders and directors:

1. They generally have a small number of shareholders,[2] often with a clear divide between a majority shareholder (or a bloc of aligned shareholders) with control of the board and the remaining minority shareholders.
2. Their shares are not listed on a stock exchange, which means it may not be easy to value, buy or sell the shares.
3. They are less regulated than public companies.

However, the law provides important tools for minority shareholders to have their voice heard and ensure proper company management.

This note explains the key avenues available to you as a minority shareholder in a private company, from the more cordial to the more serious, if you are concerned about the management of the company.

Where you can find your rights

Your first step is to gain an understanding of your rights as a shareholder in your specific company.

Many of these are found in the Corporations Act 2001 (Cth) (the Act). However, some of the rights afforded by the Act may be overridden, or supplemented and extended, by the company constitution. Often the constitution regulates the powers and duties of directors and contains rules regarding transferring shares and meetings of the company.

In the context of private companies, it is also common to have a shareholders’ agreement. This will govern the relationship between shareholders. Any such agreement could therefore provide additional rights or avenues open to you.

The constitution and shareholders’ agreement may have been heavily negotiated, particularly where the company has previously been involved in a merger or acquisition. Ensure that the version you are considering is the current version incorporating all amendments.

Additionally, if your company is the trustee of a trust, the trust deed may contain important rights or restrictions in respect of your shareholding.

Applying scrutiny by seeking further information

If you are concerned about the management of the company, an initial step is simply to request information from the directors and senior management about what is happening. That information may resolve your concerns. Alternatively, it may allow you to identify specific issues, such as suspicious transactions, poor performance or inadequate records. The scrutiny could itself lead to better management.

If those in control of the company refuse your requests, section 247A of the Act affords you the right to apply to the court to inspect the company’s books – a useful point of leverage. However, the court will not so order unless you are acting in good faith and the inspection is for a proper purpose. Those two criteria require a purpose connected with the proper exercise of the rights of a shareholder as a shareholder.[3] “Books” has a broad meaning and includes share registers,[4] financial reports and records, documents and any other record of information.[5]

This right applies only to “books” that already exist. The company is not obliged to make a new document (for example by preparing a narrative account of events) that it is not already required to keep.[6]

The right given by section 247A will not limit any similar rights in the constitution or shareholders’ agreement, which may contain more favourable rights of inspection. Such agreements regularly mandate that companies provide minority shareholders with regular financial reports and like items (often at the company’s expense).

Resolving the issue internally

Another avenue you can explore is calling a shareholders’ meeting (also known as a members’ meeting) and putting forward resolutions. This is a useful option for minority shareholders whose concern could be resolved through discussion, or who wish to set out their issues before escalating to other options. A meeting of a company’s members must be held for a proper purpose.[7]

Section 249D(1) of the Act provides that the directors of a company must call and arrange to hold a general meeting on the request of members with at least 5% of the votes that may be cast at the general meeting. There may also be other rights to call meetings in the company’s constitution, shareholders’ agreement or trust deed. Consider seeking legal advice to ensure you satisfy all the procedural requirements. You may also be able to request that the company provide all other shareholders with an explanatory statement setting out that a request has been made for a proposed resolution to be moved at a general meeting.[8]

In the event your proposed resolution is not passed at the meeting due to a lack of votes, calling a meeting can be a useful way to remind directors of their obligations and discuss any issues of concern.

Escalating to legal proceedings

Where seeking information or calling a meeting prove fruitless, you may need to consider issuing legal proceedings. Going to court is a serious step. Any goodwill and relationship you still have with the major shareholder(s) and director(s) could be lost. Litigation may also lead to the disclosure of commercially sensitive material and, potentially, media attention. Seeking legal advice can help you to understand your options, three of which are summarised below.

a) Statutory derivative action

Sections 236 and 237 of the Act may allow you to commence proceedings against the directors on behalf of the company. This can be particularly effective where you consider the directors are not acting in the best interests of the company. You first need to gain permission from the court. If granted, you can then bring the substantive proceeding. Courts do not give permission lightly.[9] While there are a number of requirements to overcome,[10] such proceedings (indeed, even the threat of such proceedings) can ensure directors are performing their duties and acting in good faith and for a proper purpose.[11]

b) Oppression

Section 232 of the Act may allow you to seek orders from the Court where, in broad terms, the company is acting in a way that is contrary to the interests of the members (shareholders) 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. The defendant in such a proceeding is the company itself. A wide range of remedies are available, including orders that would regulate the commercial decisions of the directors.[12] An oppression action can be a useful option in many circumstances, such as where the company has engaged in uncommercial transactions to benefit majority shareholders, or paid excessive amounts to majority shareholders, or issued shares to dilute the stake held by minority shareholders.

c) Breach of the constitution

A further option may be to issue proceedings for breach of contract where the directors, or other shareholders, have breached the company constitution. A company constitution is treated as a contract between the company and each member, the company and each director and between members,[13] so you could seek monetary damages or an injunction. The injunction could be a prohibitive one (i.e. to prevent the directors doing something) or a mandatory injunction (i.e. to compel directors to do something, such as complying with the constitution when calling meetings or paying dividends). Where the company has a particular obligation, for example to pay a certain dividend each year, that obligation may be enforced by shareholders through a mandatory injunction.

Ending the relationship

If none of the options set out above are appropriate or successful in your situation, the last resort is to bring the relationship to an end. Two options to achieve that outcome are discussed below.

a) Selling your shares

Cutting your losses and selling your shares may be the most commercially viable option and could avoid a lengthy legal battle. In private companies, this typically means selling your shares to existing shareholders. Typically the shareholder agreement or company constitution governs this procedure. Be sure to check these documents for applicable rules such as right of refusal requirements, tag-along rights and the way that your shares will be valued.

b) Compulsory winding up of the company

In selling your shares you will often be at the mercy of the other shareholders. Another option remains to seek to wind up the company in accordance with section 461 of the Act. You may ask the court to wind up a company in several circumstances. For example, one of the many bases is where the directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members.[14] A company may also be wound up where there has been an irretrievable breakdown in the relationship between shareholders or directors. However, the court will not make such an order where some other, less imposing, remedy is available, and it is unlikely where the company is profitable.[15] Winding up a company is an extreme and permanent decision. Accordingly, it is an option of last resort.

Conclusion

A minority shareholding often allows people to enjoy the benefits of company ownership and to structure their affairs in an effective way. However, if you have issues with the conduct of those in control of the company, there are several options available to you as outlined above. Specialist legal advice can help guide you through these options and assist you to formulate an optimal resolution strategy.

[show_profile name='Alan' surname='Mitchell' jobtitle='Partner, Melbourne' phone='+61 3 9288 1401' linkedin="https://www.linkedin.com/in/alan-mitchell-2789622/"]

 

 

 

 

 

 

 

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[1] ASIC, Company registration statistics (Web Page, 16 February 2024) <https://asic.gov.au/regulatory-resources/find-a-document/statistics/company-registration-statistics/>; Australian Bureau of Statistics, Counts of Australian Businesses, including Entries and Exits (Web Page, 16 February 2024) <https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release#type-of-legal-organisation>.

[2] A proprietary company must have no more than 50 non-employee shareholders: Corporations Act 2001 (Cth), s 113.

[3] Cescastle Pty Ltd v Renak Holdings Ltd (1991) 6 ACSR 115, 117-8, cited with approval in Mesa Minerals Ltd v Mighty River International Ltd (2016) 241 FCR 241, 245-6 [22]. It will not be for a proper purpose if you are seeking to inspect the books as a litigant in proceedings against the company.

[4] Section 9 of the Act when read with section 881.

[5] Section 9 of the Act, definition of “book”.

[6] Hammond v Quayeyeware Pty Ltd (2021) 389 ALR 248, 274 [131] but note this decision was made in reference to directors’ statutory right of access.

[7] Corporations Act 2001 (Cth), s 249Q.

[8] Corporations Act 2001 (Cth), s 249P.

[9] Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, [24].

[10] See, generally, Part 2F.1A of the Act.

[11] Section 181 of the Act.

[12] See, for example, section 233(1) of the Act as it was applied in Tzavaras v Tzavaras & Sons Pty Ltd [2023] NSWCA 168, [30] and [140].

[13] Section 140 of the Act.

[14] Section 461(1)(e) of the Act.

[15] Section 467 of the Act. Where the company is profitable, it is unlikely to be wound up: Re Hollen Australia Pty Ltd [2009] VSC 95, [89].