Shareholder disputes: How to prevent them, and what to do when things turn sour

Preventing disputes: The value of a shareholder's agreement

Many shareholder disputes have the potential to become difficult because there is no shareholders’ agreement in place, or the agreement is poorly drafted or outdated.

A well-drafted shareholders' agreement can be the difference between resolving a dispute promptly and entering time consuming and costly litigation. It should clearly outline:

• rights and obligations of shareholders;
• voting rights and decision-making processes;
• dispute resolution processes (e.g., processes for resolving deadlocks, and arbitration or mediation clauses); and
• exit mechanisms (e.g. buy-sell clauses, drag-along/tag-along rights).

Any company constitution should also be clear, up-to-date, and in alignment with the shareholders’ agreement.

‍What causes shareholder disputes?

Shareholder disputes usually arise from at least one of the following:

• shareholder oppression;
• disagreements over the direction of the company;
• unequal contributions or perceived imbalance;
• lack of dividends or unfair financial arrangements; and
• exit or succession disagreements in family-owned or tightly-held companies.

Oppressive conduct

One of the most common – and serious – grounds for shareholder disputes is oppression. Under section 232 of the Corporations Act 2001 (Cth), a shareholder can apply to the Court for relief where the affairs of the company are being conducted in a way that is contrary to the interests of the shareholders as a whole, or otherwise oppressive or unfair to one or more shareholders.

Oppressive conduct has been described by courts as behaviour which a reasonable director or commercial bystander would not consider to be fair. It can include:

• excluding minority shareholders from decision-making or access to company information;
• diluting minority shareholdings without consent or fair compensation;
• blocking attempts to sell shares or exit the company at fair value;
• misusing company funds; and
• making decisions that harm the company or are not in its best interests.

Options for resolving shareholder disputes

If a shareholder dispute does arise, there are several ways to try to resolve them. These may be specifically set out in the company’s shareholder agreements as part of a dispute resolution process that must be complied with, or alternatively, the parties can mutually agree to pursue them when a dispute arises.

First step: Negotiation

Where appropriate, parties should attempt to resolve disputes internally by having direct discussions or discussions through their lawyers.

Mediation

If negotiations fail, mediation allows the parties to work toward a confidential, cost-effective resolution with the help of a neutral third party. Mediation is generally quicker and less adversarial than litigation.

If the matter does become litigious, a court may order mediation before it proceeds to trial, so it can be wise to attempt it early.

Arbitration

Instead of mediation, or if mediation fails, arbitration may be appropriate. Arbitration is a private process with a binding decision, typically faster than court.

Last resort: Litigation

When informal resolution fails or disputes are complex, court intervention may be necessary, especially in cases of oppressive conduct and breaches of directors’ duties.

Courts have powers to make orders for various remedies, including specific performance, injunctions, damages, and winding up the company on just and equitable grounds.

However, as litigation is generally public record, shareholder disputes carry a risk of reputational and financial harm to the company.

The bottom line

Preventative planning is the cheapest and smartest thing to avoid shareholder disputes and potential harm to companies and shareholders.

To minimise the risk of shareholder disputes arising, companies should:

• implement a comprehensive shareholders’ agreement (and company constitution where applicable) which clearly defines shareholder rights, responsibilities, and processes for resolving disagreements;
• ensure strong corporate governance and compliance with directors’ duties;
• foster transparency and communication through regular board and shareholder meetings;
• clarify shareholder entitlements and obligations, particularly for first-time investors, to manage expectations and avoid misunderstandings;
• maintain consistent records of communications and concerns;
• regularly review shareholders agreements and company constitutions to ensure they remain relevant as the company evolves; and
• seek legal advice early if shareholder concerns emerge.

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How can we help?

Groom Kennedy can help you prevent and manage shareholder disputes by drafting clear agreements, advising on governance obligations, and guiding you through resolution processes when issues arise — so you can protect relationships and keep your organisation on track. If you have concerns about shareholder arrangements or disputes, our team can provide tailored advice to support your next steps.

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Frequently Asked Questions

What types of companies need shareholders' agreements? 
All companies with more than one shareholder should ideally have a shareholders' agreement. A shareholders’ agreement can help clarify rights, responsibilities, and decision-making processes, reducing the risk of disputes later.

What is considered oppressive conduct by shareholders or directors?
Oppressive conduct is behaviour that is unfair or prejudicial to shareholders, such as excluding minority shareholders from decisions, misusing company funds, or blocking share sales without good reason.

Can shareholder disputes be resolved without going to court?
Often, yes. Many disputes are resolved through negotiation or mediation. Arbitration may also be an option. Litigation is generally a last resort when other methods fail.

This article includes general information only and is not specific to your situation. If you require assistance in relation to anything contained within this article, please contact us.

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