The case of the selfish shareholders

POSTED BY Joshua Woo
04 September 2018

posted in Company Law

VIEWED 549 TIMES

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An unpleasant family dispute that ended up in the New Zealand Supreme Court clarifies important principles of company law. The case, Baker v Hodder [2018] NZSC 78, confirms that shareholders can generally act in their own self-interest and are not subject to obligations of the kind imposed on directors. The Supreme Court’s warning that courts must exercise great caution in usurping the decisions of shareholders is also welcome.


Background

The Hodders and the Bakers were involved in a failed farming company. The Hodders were the parents and owned 70% of the shares in the company. Their daughter and son-in-law, the Bakers, owned the remaining 30%. The board of the company, controlled by the Hodders, accepted an offer to sell the company owned farm, Heron Creek. The sale was conditional on the company’s shareholders approving the sale as a major transaction under s 129 of the Companies Act (which requires approval by a majority of 75% of the votes of the shareholders voting and entitled to vote where the transaction involves more than 50% of the assets of the company). The Bakers refused to approve the sale as a major transaction.

The Hodders applied to the court for relief under s 174. Under that section, a shareholder who considers that the affairs of a company have been, or are being, conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholder, may apply to the court for relief. The court may, if it considers it just and equitable to do so, make relief orders including against the company or any other person (i.e. including a shareholder). In the High Court, the Hodders obtained an order requiring the Bakers to approve the sale of Heron Creek. The sale then proceeded and the property was sold.

The Court of Appeal rejected the Hodder’s appeal from the High Court and they appealed further to the Supreme Court, which overturned the High Court and Court of Appeal decisions and allowed the appeal.


Finding

There were various peripheral issues, of mootness given the property had already been sold, and concerning the urgent manner in which the original High Court case had been heard, but, dealing solely with the important company law issues, the Supreme Court decided:

  • Shareholders may act in their own self-interest - The Companies Act maintains the distinction drawn between the powers of management exercised by the directors of a company and the rights of shareholders. Shareholders exercising their voting rights are not subject to obligations of the kind imposed on the directors, including obligations in relation to self-dealing. There are, however, some situations where shareholders are “deemed directors” because they exercise the responsibility and duties of directors, and become bound by the director duties under the Companies Act.

  • Court must be very cautious in awarding any relief - The power to grant relief against shareholders for oppressive conduct must be exercised with great caution and only in limited circumstances. Granting relief by requiring a shareholder to sign a special resolution is, in effect, the court usurping the position of the shareholder. Importantly, in so doing, the Court deprives that shareholder of the minority buy-out rights under the Companies Act that accrue to a shareholder who votes against a major transaction resolution. Where a shareholder is merely exercising its voting rights, relief should not be granted. However, relief may be granted where there are particular circumstances that mean the shareholder is breaching a duty owed to the company or to another shareholder or an understanding among shareholders as to the ongoing conduct of the affairs of the company. An example would be where there is a shareholders’ agreement in place that requires shareholder approval in the circumstances in question.

The Bakers were vindicated in their non-approval of the major transaction resolution. In upholding the Baker’s rights as shareholders, it is also important to note the Supreme Court’s implicit recognition of the importance of special resolution veto rights afforded to a shareholder holding more than 25% of the voting shares in a company. Parties that are negotiating a shareholding in a company - whether in a new company or by onboarding new shareholders - should fully understand the rights and countervailing restrictions associated with the different levels of voting power in different situations.

Image courtesy of Micaela Parente

POSTED BY Joshua Woo
04 September 2018

posted in Company Law

VIEWED 549 TIMES

PERMALINK

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