Shareholders Agreements - Reap what you sow – Dukesons Business Law – Company Lawyer – Contract Lawyer - Business Lawyer

September 2020

This Blog isn't legal advice – if you need legal advice on any business law or commercial law issue, please contact me. I'm business lawyer (commercial lawyer) in Auckland who provides advice on a wide range of business law issues including company law and contract law.

A recent case illustrates the point that the effectiveness or usefulness of a Shareholders Agreement will depend on the time and effort that’s put into it. That’s a point that I’ve made in several blogs on my website about Shareholders Agreements and in seminars that I’ve given to lawyers. In the case, the majority shareholders were more or less held to ransom by minority shareholders, which the court held was legitimate in the circumstances.

There are many issues that should be considered when entering into a Shareholders Agreement. Often, there’s more than one way to deal with an issue. Clients are often unwilling to invest time and money to ensure that their Shareholders Agreement will meet their needs. In that case, they can’t complain if they run into difficulties that could’ve been prevented.

In Dold v Murphy [2020] NZCA 313, the majority shareholders had a buyer who wanted to buy all of the shares in the company but a minority shareholder (6.2% of the shares) wouldn’t agree to sell their shares unless they were paid a premium. Ultimately, the majority bought out the minority shareholder at a premium and then one of the majority shareholders sued the minority shareholder to recover the premium.

Allegations that the minority shareholder had breached various provisions of the Shareholders Agreement, had owed and breached fiduciary obligations to the other shareholders, and had exerted unlawful economic distress on the other shareholders all failed.

The Shareholders Agreement could have given drag along rights to the majority, but didn’t.

As noted above, there are many issues that should at least be considered when preparing a Shareholders Agreement. The lawyer’s role is to inform their client about the issues. The parties need to know what the issues are and what options there are for dealing with them – how else can they decide what will work for them in their contract? A standard template (as in, “just fill in the gaps”) won’t cut the mustard.

Ultimately, as in many things, you get what you pay for. A lazy agreement may not be much better than having no agreement at all.

Please contact me if you want to have a Shareholders Agreement prepared or reviewed or you have any issues in relation to an existing Shareholders Agreement.

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