Advising on Shareholder Disputes

Lawyers advising clients on shareholder disputes should have in mind the following: (i) corporate oppression; (ii) the derivative action; and (iii) just and equitable winding up. Consideration of whether a shareholder client wishes to remain with the company – “stay” – or exit the company – “go” – can assist in determining the appropriate approach.

Introduction
Disputes between shareholders can be complex. This is particularly so where there has been a breakdown of relationships. There are a wide range of potential remedies which might be pursued. Three options available to disgruntled shareholders include the corporate oppression remedy, the derivate action, and winding up the company on just and equitable grounds. These options may be pursued concurrently.

When advising shareholder clients on the best way to approach their issue, it can be useful to consider, ask, and advise on whether they want to “stay” or whether they want to “go”. In other words, do they want to remain a member of the company (perhaps in the hope or expectation that the value of their shareholding will increase), or do they want to exit the structure (usually in exchange for a portion of its value)?

Each of the three options fits relatively neatly in either the “stay” or “go” category. We consider them in turn below.

Corporate Oppression
Perhaps the most well-known shareholder action, it is sometimes referred to as minority shareholder oppression (notwithstanding that there is no requirement that a plaintiff shareholder be a minority shareholder). Corporate oppression pursuant to the Corporations Act 2001 (Act) has its origins in the equitable doctrine of fraud on the minority and is best thought of as a statutory remedy, which is akin to an equitable remedy. In practice, it might be pursued by a shareholder client who wishes to “go”.

Important features of corporate oppression include that:

1. Even if oppression is made out, the Court has discretion as to whether it will grant a remedy (see s 232 of the Act) and if so, which remedy it may grant (see s 233 of the Act); and
2. The purpose of the relief is to terminate the effects of oppression. This means that relief will generally not be granted as a matter of discretion if there is no continuing oppression (Campbell v Backoffice Investments Pty Ltd [2009] HCA 25).

While the Court’s discretion as to remedy pursuant to s 233 is unlimited, the most common remedies are orders for the sale or purchase of shares, or an order winding up the company. Hence, its usefulness as a remedy for shareholders wishing to “go”.

The case of Dr Leo Shanahan v Jatese Pty Ltd [2018] NSWSC 1088 assists in our understanding of these principles.

The company in question operated an eye hospital, with shares held in two blocs: the “minority” 43% shareholders and the “majority” 57% shareholders. All shareholders were eye surgeons operating in the company’s hospital. The minority retired from practice while remaining shareholders. As such, they earned a “passive income” from the exertions of the majority who continued to work. The relationship between the minority and the majority deteriorated and the majority caused the company to be placed into administration. During the course of the administration, the minority sold their shares to the majority for $1,776,000.00 plus 43% of the value of the company’s stock. The minority commenced oppression proceedings.

The Court reviewed the conduct of the majority and made a clear finding that the conduct was oppressive. This satisfied the s 232 test, enlivening the Court’s s 233 discretion to make orders.

The Court considered the amount paid to the minority (being the $1,776,000.00 plus 43% figure) and expert evidence of the value of the company. It found that the amount the minority was paid exceeded the value of their shares; meaning that although there had been oppressive conduct within the meaning of s 232, due to the sale, there was no longer any oppression to be cured, and it would be inappropriate to grant relief pursuant to s 233.

A judgment on costs was delivered separately. Costs followed the event meaning that, despite their victory on what they described as the “overwhelming dominant issue of whether there was oppressive conduct”, the minority plaintiffs were obliged to pay the majority’s legal costs.

Derivative Action
The derivative action is a mechanism which might allow members to stand in the shoes of a company and sue third parties on its behalf. This might be done where the proposed defendants are the directors or controllers of the company and are therefore reluctant to cause the company which they control, to sue themselves.

Section 236 of the Act provides for the mechanism of the statutory derivate action where the person wishing to bring the action has been granted leave under s 237. Unlike sections 232 and 233 (corporate oppression), the Court’s power to make an order under s 237 is not discretionary. An order granting leave must be made if the five criteria in s 237(2) are met.

Subsections 237(2)(a) – (d) are as follows:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings—there is a serious question to be tried …

Subsection 237(2)(e) is an uncontroversial notice requirement.

Leave pursuant to s 237 is not granted as of right. The case of Mount Gilead Pty Ltd v Macarthur-Stanham (as executor of the Estate of the late Lee Macarthur-Onslow) [2023] NSWCA 37 (in which one of the authors acted both at first instance and on appeal) demonstrates how applicants may face difficulties in establishing they have met the statutory criteria.

The case concerned a land transaction, which the applicant contended was for an undervalue. The evidence of the applicant in support of that contention focussed largely on a comparable transaction. The Court:

1. Acknowledged the interconnectedness of the “serious question to be tried” criterion and the “best interests of the company” criterion; and
2. Upheld the decision at first instance which held that the applicant had not discharged its onus of proving that the company had suffered loss and damage by entering into the transaction alleged to be for an undervalue.

It must be remembered that even if the Court makes an order and the litigation is successful, the plaintiff in the litigation (and holder of the chose in action) is the company itself, not the shareholder. Accordingly, it is an approach that ought to be considered where a shareholder client is inclined to “stay”.

Just and Equitable Winding Up
A contributory (which includes a shareholder) may apply to wind a company up on the just and equitable ground pursuant to s 461(1)(k) of the Act. A Court may wind a company up on this basis where there is deadlock or disagreement in the management of a company’s affairs, misconduct by one or some of the directors of the company, or if there has been a failure of the substratum of the company. These examples are not exhaustive.

An application for a just and equitable winding up would be appropriate for a shareholder client who wishes to “go”. That is, a liquidator will be appointed, severing the applicant’s ability to control it, with the likely outcome being a sale of the enterprise and distribution of the proceeds.

Naturally, Courts are reluctant to wind companies up without good reason. It is important to bear in mind the interaction of s 461(1)(k) with s 467(4), which provides that where a Court is satisfied that an order should be made, it must make the order unless it is of the opinion that: (i) there is another remedy available to the applicants; and (ii) they are acting unreasonably by seeking to have the company wound up rather than pursuing that other remedy.

The case of Matrix Global Investment Group Sydney Pty Ltd [2021] NSWSC 80 is illustrative of this point. In that case, the relationship between shareholders of a company conducting a real estate enterprise had broken down, with one shareholder accused of transferring a commission received, from the company’s bank account to their related entity, without authority. While the Court made the winding up order applied for, it did so while noting that the applicants had already pursued the alternative remedy of obtaining a Court order requiring the Company’s funds to be paid into Court. However, ultimately they weren’t successful in obtaining that remedy, as the respondent had failed to comply with that order.

Practical Suggestions
The “stay” or “go” dichotomy provides a useful framework for approaching disputes between shareholders. When advising a shareholder or director client, instructions should be sought and advice given on the implications of the “stay” and “go” alternatives.

Should your client wish to “go”, one additional consideration might be: did your client contribute to the relationship breakdown? If so, an application for s 461(1)(k) orders may be able to more easily argued than a corporate oppression claim.

It is trite to say that litigation is expensive and ought to be avoided if possible. While not a silver bullet (noting that conduct that is compliant with the terms of a shareholders deed may still be oppressive) a dispute between shareholders is less likely to be litigated if there is a shareholders agreement in place. When drafting such agreements, regard should be had to: purpose for the company’s (continued) incorporation, the existing relationship between shareholders, and the goals of the company.

January 2026

James d’Apice, Principal Lawyer, Gravamen
Alex Silcock, Senior Associate, Gravamen

Join James D’Apice when he visits Hobart on 26 February to deliver the following sessions:
A Primer on Shareholder Disputes: Oppression to Winding Up – for details and to book, see here.
Running a Small Firm for Fun and Profit: Early Lessons – for details and to book, see here.