Current Situation Around Shareholder Disputes Under Australian law

Current Situation Around Shareholder Disputes Under Australian law

Company law of Australia regulates shareholder disputes and various methods of dispute resolution. In case a business entity is owned by two or more shareholders, is managed by two directors and there is no shareholders agreement, the business entity will not be immune from a variety of disputes that may occur there and create deadlock between the members. There are several dispute resolution strategies that help Australian companies survive. Present-day shareholder agreements tend to handle situations when it is necessary to share sales proceed. Also, modern shareholder agreements may regulate how “bad leavers” – shareholders and employees who have resigned or been terminated with cause – be compelled to sell their shares back to the company. However, if there is no shareholder agreement, there may be much more difficult to settle shareholder disputes under Australian law. In this connection, the disputing parties frequently have recourse to the company constitution, according to which deadlocks can be resolved by way of a casting vote of the chairman. In case a shareholder shows intent to get rid of this shares, he has to propose them to other shareholders, in accordance with the company constitution, or, if the company does not have any constitution, in conformity with the replaceable rules in the Corporations Act that empower the company in cases when, for some reason, the company does not have constitution.

Based on what the legal documents provide, the most usual occurrence is that as soon as shares are offered to other shareholders and offer is not accepted, the shareholder is entitled to sell the shares to a third person. Despite this, however, company constitutions rarely force one company to sell its shares to another company – they merely regulate the scenarios when one shareholder decides to sell the shares when he pleases.

Legal framework regulating shareholder disputes in Australia

There is a variety of laws that regulating shareholder disputes in Australia. They consist of both legal statutes and regulations. The Corporations Act 2006 is one of the major pieces of statutory law in this field.[1] In addition to Corporations Act 2006, it is also essential to emphasise several regulations that address the same issues in question. Thus, the Corporate Law and Securities Regulation of 1996 is aimed at regulating various issues related to shareholder disputes.[2] Under Australian law, shareholder litigation plays crucial role in terms of corporate governance. Shareholder disputes may manifest themselves as either direct actions of shareholders against the corporation or derivative suits of certain minority shareholders on behalf of the corporation. In addition to the statutory framework, it is vital to evaluate the common law position in this field. Thus, in Foss v. Harbottle, the court addressed a number of malpractices against the company and decided that it is incumbent on the corporation to sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative.[3] Specifically speaking, the case illuminates that the proper plaintiff in the action regarding a malpractice allegedly committed against a corporation or association of people is prima facie the corporation or the association of individuals itself. Also, it was highlighted by the court that, in case the alleged malpractice is a transaction which might bind the company and all its members by a simple majority of the members, no individual member of the corporation is permitted to maintain an action in regard to the issue in question for the mere reason that, if a simple majority of the members of the company is in favour of what has been done, then ‘cadit quaestio’.

[1] Corporations Act 2006.

[2] Centre for Corporate Law and Securities Regulation of 1996.

[3] Foss v Harbottle(1843) 2 Hare 461, 491; 67 ER 189.