How to Resolve Director and Shareholder Disputes: Legal Solutions for Business Conflicts

Disputes between directors and shareholders can be disruptive and potentially harmful to a company’s operations.

In Western Australia, where business laws are governed by both state and federal regulations, resolving these disputes effectively is critical to maintaining the stability of your company.

Whether it’s a disagreement over business strategy, management issues, or shareholder expectations, there are legal dispute resolution avenues available to resolve the conflict and safeguard the company’s future.

In this article, we’ll explore the most common causes of director and shareholder disputes, how to approach resolving these issues, and the legal options available in Western Australia.

Common Causes of Director and Shareholder Disputes

Disputes between directors and shareholders in Western Australia can arise from a variety of issues.

Some of the common issues include:

1. Disagreements Over Business Strategy and Operations

Directors may have differing views on the strategic direction of the business. Shareholders may also clash over the allocation of profits or reinvestment policies.

2. Breach of Fiduciary Duties

Directors in Western Australia have a fiduciary duty to act in the best interests of the company and its shareholders. If they fail to do so—for example, by mismanaging funds, acting in self-interest, or engaging in fraudulent behaviour—this can lead to serious disputes.

3. Deadlock or Governance Issues

A situation where shareholders or directors are equally split on key decisions can result in a deadlock. Lack of clarity in governance arrangements or company documents, such as the shareholder agreement or constitution, can exacerbate this issue.

4. Exit and Buy-Out Disagreements

Disputes often arise when a shareholder wishes to exit the company, either by selling their shares or withdrawing from the business. If there are no clear mechanisms for buy-outs in the shareholder agreement, conflict can quickly arise.

5. Ownership and Control Disputes

Disputes over control of the company or decision-making authority can create division among directors or shareholders, especially in companies with multiple shareholders or directors.

Steps to resolve a director or shareholder dispute in Western Australia

In Western Australia, there are several practical steps you can take to resolve a director or shareholder dispute, which include:

1. Attempt to resolve the dispute informally

Disputes don’t always need to escalate to litigation.

In many cases, directors and shareholders can resolve disagreements through informal negotiations or alternative dispute resolution (ADR) methods such as mediation.

In Western Australia, open communication and mediation is encouraged as a less formal and less costly way to resolve conflicts. These include:

• Open communication: Direct and honest conversations can sometimes clear up misunderstandings or lead to a resolution.
• Mediation: A qualified mediator, often a lawyer or retired judge, can help the parties come to a fair resolution. Mediation is particularly effective in resolving governance or operational disagreements without damaging business relationships.

2. Review the shareholder agreement and corporate documents

Before taking formal action, it’s essential to review the company’s governance documents, such as the constitution (or articles of association), and any shareholder agreements.

These documents may contain dispute resolution clauses, voting mechanisms, buy-out provisions, or other terms that can guide the resolution process.

For example, many shareholder agreements include clauses on how to resolve disputes or address deadlock situations. If such provisions are included, they should be followed to avoid legal complications.

3. Engage in mediation or arbitration

In some cases, if the dispute cannot be resolved through negotiation, the parties may be required to use formal methods like mediation or arbitration. These are often outlined in shareholder agreements.

While arbitration is more formal, it is typically faster and more private than litigation.

Mediation and arbitration are generally recommended first steps to avoid litigation but while they are encouraged to help parties avoid prolonged litigation, unfortunately mediation or arbitration may not be available, and litigation is the only option.

4. Seek legal advice or consider litigation

If the dispute remains unresolved after informal methods have been exhausted, litigation may be the next step. Potential legal actions include:

• Court Action: If a breach of fiduciary duty, breach of contract, or other legal violations are involved, litigation may be necessary.
• Injunctions: If a director or shareholder is acting in a way that could harm the company (for example, improperly selling shares or diverting company funds), you may seek an injunction from the court to prevent further action.
• Derivative Actions: Shareholders may bring a derivative action if they believe directors are failing in their duties or acting improperly.
• Winding-Up Orders: In serious cases, if the conflict cannot be resolved and the business cannot continue effectively, the court may order the company to be wound up under the Corporations Act 2001 (Cth) (Corporations Act).
• Shareholder Oppression Remedy: Under Section 232 of the Corporations Act, shareholders in Western Australia can apply to the court for a remedy if they feel that the conduct of directors or other shareholders is oppressive, unfairly prejudicial, or discriminatory.

Section 233 of the Corporations Act grants the court a wide scope of powers to make orders it considers appropriate if it finds there has been oppression, including:

• Winding up the company;
• Making orders regulating the conduct or affairs of the company in the future;
• Ordering the purchase of the shares of any member by other members;
• Ordering the company to institute, prosecute, defend or discontinue legal proceedings, or authorising the institution of such proceedings by a member of the company on behalf of the company;
• Appointing a receiver or a receiver and manager of the property of the company;
• Ordering a person to refrain from engaging in specified conduct;
• Ordering a person to do a specified act or thing;
• Modifying or repealing the constitution of the company;

The court also has further powers to wind up a company on “just and equitable” grounds.

As an alternative to litigation, in some cases one shareholder or director could buy out the other party. This can be an effective way to resolve deadlock situations or exit disputes. If the company has a buy-sell agreement or specific clauses in the constitution or shareholder agreement addressing how buy-outs should be handled, these terms should be followed.

If a buy-out is not feasible under the current agreements, you may need to negotiate a fair price and terms for the buy-out. Our experienced team of Perth litigation and dispute resolution lawyers can help draft the necessary agreements and ensure that the transaction complies with all legal requirements.

Proactive solutions for director and shareholder disputes

Director and shareholder disputes can disrupt business operations, damage relationships, and cause financial harm. However, with the right legal approach, these disputes can be resolved to preserve the company’s future.

You can often reach a resolution that satisfies all parties by taking a proactive approach through communication, reviewing governing documents, and exploring dispute resolution methods.

If you are involved in a director and shareholder dispute in Western Australia, seeking expert legal advice is important to understand your options and protect your business interests. Our experienced team of litigation and dispute resolution lawyers is here to help guide you through the process and provide tailored legal solutions that best suit your circumstances.

Get in touch with Lewis Kitson Lawyers today for help resolving a Director or Shareholder dispute.