Shareholder disputes can arise for a variety of reasons, but one common cause is someone feels entitled to be paid more than the other or more than previously agreed. Perhaps they feel like they get more work, or do more work or get more clients.
These disputes can have serious consequences if left unresolved, potentially leading to financial losses and damage to the company.
At Norling Law, we are experts in resolving shareholder disputes and are here to help. Here are 5 tips for resolving shareholder disputes in New Zealand.
1. Communicate openly and honestly with all parties involved. Clear and transparent communication can help to identify the root cause of the dispute and find a resolution that is acceptable to all parties.
2. Seek professional advice from a lawyer or mediator. Shareholder disputes can be complex and emotionally charged, so having a neutral third party to guide the process can be invaluable.
3. Identify and address any underlying issues. Shareholder disputes are often symptoms of deeper issues such as mismanagement or a lack of transparency. Addressing these underlying issues can help to prevent future disputes.
4. Explore all possible options for resolution. This can include negotiation, mediation, or legal action. Each option has its own advantages and disadvantages, and the right choice will depend on the specific circumstances of the dispute.
5. Be prepared to compromise. Resolving a shareholder dispute often requires compromise from all parties involved. By being willing to listen to the concerns and perspectives of others, a resolution that is acceptable to all can be found.
Shareholder disputes can be challenging to resolve, but with the right approach and the right team, a resolution can be found. At Norling Law, we have the experience and expertise to help you navigate the process and find a resolution that works for all parties involved. If you are having issues, we offer a free 30-minute consultation to discuss your options. Book your consultation here
The ins and outs of creating a shareholders agreement
The start of a new business venture is an exciting opportunity. One would hope all involved parties only have the best intentions in mind. In our experience, although these relationships start on a positive note external factors and influences can create a shift in position. This can turn the business relationship sour virtually overnight. In these situations, a robust shareholders agreement will be of indisputable value.
A business is like a marriage
It is imperative to have good communication skills and the ability to resolve and manage conflicts in both business and marital relationships. Without these skills, it will be difficult for all parties to build and maintain trust and confidence in one another, especially when it comes to overcoming challenges. A successful relationship needs clearly defined boundaries, goals, and a mutual understanding of what’s working, and what isn’t, and how to better collaborate to ensure these goals are met.
People often get caught up by the excitement of a new opportunity and rush into business relationships without first setting a strong and stable foundation. Without careful thought into the business or relationship it will be more susceptible to tough periods.
Disputes are inevitable
Shareholder disputes are inevitable. In our experience shareholder disputes in declining companies are just as common as disputes in successful companies. Arguably, it is more common for successful companies to have shareholder disputes. Rapid growth and high cash flow can cause shareholders to have a shift in perspective, leading to a potential conflict of interest as to how the company should be run in this new and exciting stage.
The taste of success or the prospect of doom can affect even the humblest of business partners and cause a dispute. However, it will be how you handle said dispute that will determine the solution.
If you fail to prepare, prepare to fail.
It is better to be safe than sorry, especially in situations where money and reputation are on the line.
Our past clients will tell you that it’s easier to agree on set rules and boundaries when the relationship is good, rather than in the face of a dispute. When a business relationship turns sour trust can be fleeting resulting in more time and money spent on negotiating a mutually agreeable outcome. If there are more than two shareholders involved the situation can evolve into an exercise of whose side to pick.
A simple sit-down conversation at the beginning of a business relationship has helped our prior clients:
Learn more about the character, beliefs, and general position of their (potential) business partner(s);
Communicate with their (potential) business partner(s) what is fundamentally important to them;
Realise what needs to be documented to help safeguard the best interests of the parties and the company moving forward; and
Sometimes, decide not to be involved with the other person(s) in business.
In saying this, great care needs to be taken when it comes to creating the shareholders agreement itself. Unlike other legal documents, a standard template will not be of value. Each shareholder agreement must be the product of the circumstances and the discussions of the individual shareholders.
A good shareholders agreement is a ‘living’ document. A well drafted agreement will encompass a wide range of possible scenarios and will provide solutions/guidance on each occasion. Shareholders agreement can also be regularly updated with the consent of all participating parties. In comparison, a standardised document will not be of use when push comes to shove. The upfront cost of preparing robust documentation is easily justified if a business relationship sours and lawyers are called in to fight.
If it all goes wrong
Sometimes, even with good documentation, disputes are inevitable and Court intervention may be required.
This is where our innovative solutions for shareholder disputes provide clients with the most value.
We are specialist lawyers who resolve commercial disputes and can help you strategically navigate any commercial dispute or Court action quickly and efficiently. If you want to talk, schedule a no obligation 30-minute consultation with our experts here:https://norlinglaw.co.nz/consultation/
Overall, the key takeaways are:
Shareholder disputes are extremely costly to resolve.
They can be avoided if you have a robust, well-drafted, and well-considered shareholders agreement put in place.
Unfortunately, there is some upfront cost for this, but that is easily justified when a dispute arises, or shareholders wish to part ways.
Sometimes Court intervention is unavoidable. For the best result, you should engage transparent expert commercial lawyers who can tackle your problems strategically and efficiently.
Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Bankruptcy is an incredibly onerous process; upon adjudication, all property belonging to the bankrupt or vested in the bankrupt automatically vests in the Official Assignee (OA) (s 101 Insolvency Act 2006 (the Act)). The definition of property under the Act is wide and includes “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise” (s 3(1)). As a result, shares in a company are included in this definition.
Context
We have recently been engaged to act for the spouse of a discharged bankrupt. Our client and their spouse both held 50% shareholding in a company that was essentially their retirement fund. Upon bankruptcy, 50% of the shareholding vested in the OA pursuant to s 101 of the Act. As there was no shareholders’ agreement for the company, there were very few restrictions on what could be done with the shares.
What happened
The OA wanted to realize the value of the shares that the bankrupt held in the company for the benefit of the creditors of the bankrupt. The OA offered to sell the shares to the remaining shareholder (our client) for circa $110,000.00 and warned that the OA would take steps to either liquidate the company or sell the shares on the open market, if this offer was not accepted. The basis of the OA’s valuation of the company’s shares was to simply ascertain the value of the net assets of the company. After calculating the value of the net assets, the OA then halved this to represent the 50% shareholding it held and then adjusted this figure for the shareholders’ current accounts.
The previous advisors of our client recommended accepting the value prescribed to the shares by the OA.
Upon being engaged by the client, we ascertained that:
The company had only been able to retain a level of value in the assets it owned due to the efforts, including unpaid work, of our client and the spouse.
They had not received any remuneration for work carried out for the company since its incorporation, over 20 years ago.
Taking a simple net asset position divorced from all other factors is not a reliable method of assessing the value of shares in a company in these circumstances.
As our client’s spouse had been adjudicated bankrupt and no longer eligible to be a director, this left our client as the sole director of the Company, and subsequently, our client had the power to set the director’s remuneration pursuant to s 161 of the Companies Act 1993. In such circumstances, any excess in the company could simply be remunerated to our client, making the shares worthless even with the net asset valuation method. The company was not simply profitable without our client’s unpaid services as a going concern.
We explained these concerns to the OA. After negotiations, our client was able to purchase the shares at a fraction of the amounts that the OA had been offering, which was also in full and final settlement of any claims that the OA may have had against our client and the company.
Key takeaways
This case demonstrates the importance of having a comprehensive shareholders’ agreement in the event a situation as this occurs, and also to obtain a valuation before purchasing items like shares, the value of which is not always obvious.
There are various reasons why shareholders could require the company’s information. This could be for mere supervision of the management of the company, or as is common, where there is a shareholder dispute, and the oppressed shareholder wishes to investigate questionable behavior by the oppressing director/shareholder.
Where the relationship between the shareholders and directors is healthy, information is often voluntarily provided by the directors on an informal basis or during the meetings. However, where there is a shareholder’s dispute, and/or the directors are not being cooperative, there are various formal mechanisms under the Companies Act 1993 that are available to obtain information of the company.
The general right of access to information held by the company
Section 178 of the Companies Act 1993 provides a right to the shareholder to obtain information held by the company by making a written request specifying the information sought. The company can charge the shareholder for the provision of this information; however, any such charge has to be reasonable.
Once the written request is received, the company has 10 working days to either:
Provide the information;
Agree to provide the information within a specified period;
Agree to provide the information within a specified period if the shareholder pays a charge to meet the cost of providing; or
Refuse to provide the information and specifying the reasons for refusal.
Section 178 allows the company to refuse the disclosure of the information in limited circumstances, being:
The disclosure of the information would or would be likely to prejudice the commercial position of the company and/or any other person; or
The request for the information is frivolous or vexatious.
If the company fails to cooperate with the provision of information, by either seeking an unreasonable fee, unreasonably delaying the provision of information, or refusing to provide the information at all in circumstances where there is no legitimate ground for refusal, the shareholder can make an application to Court to enforce his/her rights. The Court can make orders requiring the company to provide the information within such period and for such fee as the Court thinks just.
Alternatively, s 179 of the Companies Act 1993 allows a shareholder to make an application to Court seeking the appointment of a suitable person to inspect and copy the company’s documents. The appointed person can be the shareholder making the application, or a third party. The Court also has powers to make ancillary orders such as allowing the appointed person to conduct an audit or requiring the directors to assist with the inspection.
To be successful with the application, the shareholder needs to demonstrate that:
He and/or she acts in good faith, and the proposed inspection is for a proper purpose; and
The person to be appointed is a proper person for the task.
The costs of the inspection are generally met by the company unless the Court orders otherwise.
Section 179 would generally be used where the company refuses to provide information under s 178 of the Companies Act 1993, or there are other circumstances that would make an order under s 179 of the Companies Act 1993 more practical. However, proceeding under s 179 of the Companies Act 1993, without first attempting the process provided by s 178 of the Companies Act 1993, would generally require exceptional circumstances.
Right to receive specific information
Apart from the general rights to information, there are other provisions allowing receipt/inspection of specific documents.
Section 207F of the Companies Act 1993 entitles shareholders, in certain circumstances, to request copies of the financial statements prepared for tax purposes of the company. If circumstances are satisfied, the company must provide the documents within 10 working days of receiving the request, and free of charge.
S 216 of the Companies Act 1993 allows a shareholder, who issued a notice in writing, to inspect the following records:
Minutes of all meetings and resolutions of shareholders;
Copies of written communications to all shareholders or to all holders of a class of shares during the preceding 10 years, including annual reports, financial statements, and group financial statements;
Certificates are given by directors under the Companies Act 1993; and
The interests register of the company.
In the event of non-compliance with s 216 of the Companies Act 1993, the company and every director commit an offense and could be liable on conviction for a penalty of up to $10,000.
Lastly, the company’s constitution and/or shareholder agreement, if well prepared, may provide additional rights to shareholders to request and inspect the company’s records.
Conclusion
The shareholders own the company, and accordingly, the ultimate owners of all property owned by the company, including its information and records. Directors of the company are merely agents and fiduciaries and are under an obligation to make information available to the shareholders where reasonable requests are made.
If you are a shareholder who is being denied with information of the company or a director who is faced with unreasonable and/or prejudicial requests for information, our experts will be able to assist you with further steps to leverage your rights and entitlements to get information without necessarily going to Court.
66% of businesses fail. Because of our expertise, we see a lot of these businesses. There are many reasons why a business can fail, and a dispute between the shareholders is one of the reasons which is common.
As such, it is important to properly document arrangements between the shareholders before hands are shaken. Having a robust and a tailored to your personal needs shareholder agreement can help to avoid disputes. Also, if the shareholders do end up in dispute, the shareholder agreement can make the resolution of the dispute simpler and faster.
Based on our experience, a poorly drafted or a ‘templated’ shareholder agreement often causes more problems than not having one at all!
This guide is intended to give the top issues to be discussed, agreed and documented upfront between the prospective shareholders to reduce the chances of dispute. It is important that prospective shareholders turn their minds to these issues and document them properly.
Right to appoint and remove directors
Who has this right?
How is it triggered?
Minority Shareholders
How are they protected so that unanimous shareholder approval is required for some company decisions? Or do they not require this?
Exit strategies
If someone wants to leave, do shareholders have freedom to dispose of shares freely?
Are there pre-emption rights?
Can they sell to third parties?
What happens if a shareholder dies? Will the other shareholders be in business with their spouse or children or are there rights to purchase from existing shareholders?
What valuations apply to the transaction?
Are minority shares worth less (because they hold less control) or are all shares equal in value?
Nature of business
Are there any restrictions over the nature of the business and any change of this business?
Raising Capital
How will this occur?
What is the maximum commitment each shareholder is obliged to make? What happens if a shareholder does not make a contribution? Are they ‘kicked out’ or is their share simply diluted?
How will share dilution be avoided? Will it be avoided?
Dividends and other monetary contribution
Is there a policy for dividends?
Will certain shareholders agree to waive dividends for an agreed period or permanently?
Are shareholder’s drawings to be allowed and if yes, in which circumstances?
Directors
Do the directors have freedom of action, for example to invest in a new capital project or charge the company’s assets?
How are day to day decisions made?
How are the directors to be remunerated?
Do major transactions require 75% shareholder agreement or will it require a unanimous decision?
Business plan
Is there a business plan?
Non-compete covenants
Can shareholders compete with the company while still being shareholders?
Can shareholders compete with the company for a period after they sell their shares (say for 12 months)?
Shareholder disputes
How are shareholder disputes to be resolved? Arbitration? Mediation? Court?
Can there be an automatic forfeit of shares in certain defined circumstances? If so, what?
