Deadlocks commonly arise in companies with equal shareholders who are also directors.
An aggrieved shareholder can ask the Supreme Court to resolve the deadlock if the shareholder suffers oppressive and unfairly prejudicial conduct.
When can the Court Intervene?
The Court may intervene if:
The conduct of a company’s affairs; or
An actual or proposed act or omission by or on behalf of a company; or
A resolution, or proposed resolution, of members or a class of members;
Contrary to the interests of members as a whole; or
Oppressive, unfairly prejudicial or unfairly discriminatory against a member – as a member or in another capacity.
What Order can a Court make?
Under s 233 of the Corporations Act, the courts have broad power to make any orders it considers appropriate. For example the court may order a company be wound up, direct a sale share or changes to the company’s constitution, restrain or order specified acts or authorise litigation by the company.
These broad powers were exercised in 2017 when the Supreme Court of NSW ordered that a director that caused a deadlock by his conduct, should sell his shares to the other shareholder at their fair market value. The director’s oppressive conduct included bullying, attempting to increase his own salary and reducing the salary of the other director, refusing to authorise financial statements and budgets and then resigning his directorship.
The full case note can be found here
Similar circumstances occurred in another case in Western Australia. Equal shareholders were deadlocked and one, the plaintiff, asked the court that the other shareholder, that managed the company, be required to sell its interest or buy the plaintiff’s interest. The court found oppression and ordered that the oppressor shareholder buy out the oppressed shareholder at fair value, but only after adjustments were made to place the oppressed in the position as if there had been no oppression.
You can read the full case note here
Both cases demonstrate that in a 50:50 deadlock, shareholders can get relief based on conduct that is oppressive, even if the “oppressed” 50% shareholder is not a minority, and the “oppressor” 50% shareholder does not control the company.
What should you do?
You should have deadlock resolution mechanisms. These are usually in a shareholder agreement and the company constitution.
Contact Peter McNamara today to avoid and resolve shareholder deadlocks.