What are Shareholders’ options if a Director has breached their duties?

22 May, 2024 | Nathan Tetzlaff

The day-to-day decisions of a company are in the hands of its director(s), who are required to act in the best interests of the shareholders and the company. But what happens if a shareholder alleges that a director has breached their duties?

Shareholders have a range of rights if a director has breached their duties. These include:

• derivative actions (stepping into the shoes of the company);
• a personal action against the director(s);
• seeking an order requiring the director to take or cease a particular action;
• a personal action against the company itself; or
• liquidation of the company.

If there are a number of shareholders with the same interests, the court can appoint a shareholder to represent them in court.

Derivative Actions

Ordinarily the director(s) would be in control of any litigation, however a “derivative action” is where the court gives a shareholder permission to bring a proceeding in the name of the company, or to intervene in a court case in which the company is already a part, instead of the director(s) being in control.

Courts will permit derivative actions only where they are satisfied that the company does not intend to bring or diligently continue to defend the case, or it is not in the interests of the company that the conduct of the case should be left to the director.

In making its decision the court will take into account the likelihood of the case succeeding, the costs of the case in relation to the relief sought, any action already taken by the company to obtain relief, along with the interests of the company in the case.

Personal Action Against Directors

Directors owe shareholders a range of duties directly:

• to properly supervise the company’s share register;
• to disclose the directors’ interests (to prevent conflicts of interest);
• to disclose share dealings; and
• other duties (such as not to inappropriately discriminate in relation to the authorisation of dividends as between one shareholder and another).

A shareholder may sue a director for a breach of a duty owed to them as a shareholder, to seek compensation for any loss suffered as a result.

Seeking an Order

There are certain duties that are not owed by a director to a shareholder, only to the company.
These duties include:

• the duty of directors to act in good faith and in the best interests of the company;
• to exercise the powers for a proper purpose;
• not to recklessly trade;
• not to agree to the company incurring certain obligations;
• adhering to the duty of care imposed on directors by the Companies Act; and
• Use of company information.

Where these are breached, the shareholder is entitled to apply for an order requiring a director to take any action that is required under the constitution of the company, or under the relevant law.

The order would only apply to the particular matters in dispute. This could be a good option where the shareholder doesn’t object to the director’s performance generally, except in relation to certain specific decisions the director has made.

Personal Action Against a Company

It may be more advantageous for a shareholder to sue the company rather than the director or directors. Examples include:

• A shareholder can sue a company for breach of duty owed to them as a shareholder. An example might be a failure to send disclosure documents required under the law relating to reorganisation of the company.
• A shareholder can seek relief against a company where they can show that conduct in relation to the company has been oppressive, unfairly discriminatory or unfairly prejudicial.

The usual remedy where there is oppression is an order that the company or the majority shareholder purchase the shareholder’s shares.

Liquidation

Shareholders, including minority shareholders, can take the extreme step of commencing liquidation proceedings, if the court if satisfied that it is just and equitable to do so.

This could include situations where:

• A shareholder has been expelled from office or excluded from participation in management, contrary to the understanding on which the company was formed;
• If there has been a justifiable loss of confidence in the ability of the management of the company to carry out its business in a proper manner;
• If there is deadlock in the management of the company; or
• The company is unable to carry out the business for which it was formed.

Shareholder disputes can range from a disagreement about a specific decision or action, all the way up to a fundamental disagreement that paralyses a company. We can offer advice about options for resolving a shareholder dispute that are as efficient as possible and have the greatest likelihood of success.