27/08/2015

A recent case highlights the value of a well-drafted shareholder agreement.

Business people sometimes say that they think shareholder agreements are too expensive.  The question must always be: ‘compared to what?’  Compared to the cost of a court case to sort out a dispute among shareholders the cost of a well-drafted shareholder agreement is miniscule.

Take the recent case of Re Australian Blue Mountain International Cultural & Tourist Group Pty Ltd. Here the majority shareholders gave the minority shareholder two hours’ notice of the meeting to discuss the appointment of an administrator to the company.  The majority steam-rolled the decision through and an administrator was appointed who then went about restructuring the company to the detriment of the minority shareholder.

The Court held that two hours notice was not enough and in any case the company was not insolvent, and the majority shareholders knew that, so the appointment of the administrator was invalid.  Result?  The company is back to square one in the disagreements between the shareholders.  Meanwhile the only beneficiaries are the lawyers for all sides.

There are more commonly used ways of resolving shareholder disputes including:

• a claim by the minority against ‘oppression’ (ie the majority being horrid to them, in the corporate sense)
• winding up the company on the ‘just and equitable’ ground (ie the disputes mean the company is going nowhere fast so let’s kill it off for the benefit of all concerned), and
• so-called ‘voluntary liquidation’ (if a proper vote can be held that ensures the liquidation is in fact ‘voluntary’)

All of these are likely to descend into time-consuming and expensive courtroom dramas.

Surely it would be more sensible and show much better management skills to negotiate an appropriate shareholders agreement to deal with issues arising out of shareholder disputes in a way that doesn’t guarantee many months or even years of litigation.  Against that backdrop the price of the shareholders agreement is effectively irrelevant.