Courts Prepared to Recompense Aggrieved Shareholders

POSTED BY Andrew Wallace
20 May 2012

posted in Business | Caselaw | Company Law

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A fellow shareholder has gone off the rails and is causing the company to do various things which are to your detriment. What do you do? There are a number of solutions available, but two recent court cases serve as a reminder of the power of a particular remedy that's available to aggrieved shareholders under New Zealand company law.

The Companies Act enables a shareholder who considers that a company's affairs have been conducted in a way that's oppressive, unfairly discriminatory or unfairly prejudicial to him or her to apply to court for relief. You can't get the relief where have just been errors of judgement, inefficiencies or poor management (courts are reluctant to second-guess business decisions).

The alleged conduct needs to be unfair or unjust, which is often the case where there has been a real breakdown in the relationship. Certain actions are deemed to be unfairly prejudicial for the purpose of the rule – such as issuing shares without complying with certain rules in the Companies Act or entering into a major transaction without getting the required shareholder approval.

One of the powerful things about the prejudiced shareholder rule is the breadth of the available remedies. Put simply, as long as the court considers it's just and equitable to make an order under the rule, it can grant any remedy that it thinks is appropriate. For example, orders can be given directing that the company should be conducted in a particular way, that one party must buy the other party out, that compensation should be paid or, in extreme cases, that the company must be liquidated. In the end, the court engages in a balancing exercise, weighing up the interests of all the parties.

In March the High Court decided that the rule applied in McKay v Cheviot Park Motor Lodge 2006 Ltd where the actions of a shareholder/director had the effect of bringing a company to its knees. The individual was found to have made representations to the company's bank and some of its suppliers that his fellow shareholder/director had been removed from the board, and taken steps to have vital services to the company terminated. He also declined to cooperate in resolving a dispute the company had with its landlord, or engaging an accountant to prepare accounts that were needed by potential purchasers of the business. It wasn't difficult for the court to find that it was appropriate to grant relief, and the aggrieved shareholder/director was awarded money for the loss in value of their shareholding and amounts owed to them by the company. On top of this, the court ordered that the company should be liquidated.

Then last month the Court of Appeal ruled in Stilwell v Ice Group (NZ) Ltd that the conduct of a shareholder who failed to formalise the buy-out of his two fellow shareholders, and then ran the company as if he were the only shareholder, was unfairly prejudicial to those other two shareholders. Here too the court thought it was appropriate to grant relief, and it ordered the shareholder to buy out his two fellow shareholders (and pay them interest).

For all shareholders and directors the message is simple. In essence, play by the rules and play fair. It's also worth keeping in mind that many of the types of scenarios which could lead to shareholder prejudice claims can be prevented by ensuring that a shareholders' agreement with appropriate protections and mechanisms for dealing with disagreements and breaches is entered into at the outset.

This article was first published in the Your Law column in the Sunday Star Times on 20 May 2012.

POSTED BY Andrew Wallace
20 May 2012

posted in BusinessCaselawCompany Law

VIEWED 13399 TIMES

PERMALINK

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