Which of the following shareholder remedies is best when there is a breach of duty by the directors?

You are here:

Transcript of video about disputes about between officeholders and/or members of small proprietary companies, presented by Phoebe, ASIC's Misconduct and Breach Reporting team, uploaded 6 May 2014. 

What do these disputes involve?

Usually these disputes involve disagreements between shareholders and business partners about the ownership, management or control of a company. The rules which govern how a company operates are contained in a document called the constitution. The constitution acts as a contract between the company, its directors and its members (who are commonly referred to as shareholders). If someone breaches the rules of a company’s constitution, the other company directors or shareholders can take the dispute to court to have it resolved.

There are also other remedies which may be more suitable to your circumstances.

What are my options?

The best way to resolve these disputes is to know your rights and to communicate with the other parties involved. We recommend you seek legal advice to discuss the matter or resolve it through mediation. If you are unsure about how to access legal advice, contact the Law Society in your state or territory.

You can check what company officeholders are obliged to do under the law - and what members’ rights are - on the ASIC website under the - 'For companies' - tab.

What is ASIC's role here?

Disputes between small proprietary company directors and/or shareholders are often about a party's legal rights under the company's constitution. These disputes do not usually affect consumers or investors in the broader community. For this reason, our role in helping you resolve this kind of dispute is limited to recommending you seek legal advice. That legal advice will help clarify the issues involved in your problem and assist you in reaching a resolution. It might include considering options such as mediation, private court action or accessing some of the remedies available to shareholders under the Corporations Act. ASIC does not give legal advice. While we can take action where there has been a breach of the Corporations Act, we exercise our discretion in deciding whether to investigate a report of a potential breach.

For more information see Information Sheet 162 Disputes between officeholders and/or members of small proprietary companies.

You are here:

If you own shares in a proprietary company (i.e. one that has ‘P/L’ or ‘Pty Ltd’ at the end of its name) you have certain rights, including the right to get information about the operation of the company and the right to request the company hold meetings of members (subject to certain conditions). If the company fails to provide this information or if it doesn’t hold general meetings, it can lead to a dispute between the company (and its directors) and members.

Disputes about your rights as a company shareholder can involve:

• accessing the company register
• lack of general meetings
• the company acting contrary to the interests of its members
• company members bringing legal action against the directors.

A company’s constitution sets out the obligations and rights of the company, its officeholders (including directors) and members. In that way, the constitution works like a contract. A breach of contract is not a criminal matter. The contract is enforceable through private action taken by the parties to the contract (in this case, the constitution) with disputes being resolved either between the parties involved or, failing that, by the court.

The law also grants rights to members – for example, the right to inspect the company register free of charge and obtain copies of it and, in certain circumstances, the right to request directors hold a meeting of members of the company.

What you should do

If you would like to resolve a dispute about your rights, there are a number of options available to you.

Contact the company

Write to the company outlining your concerns and ask for the information that you are entitled to as a member. The following actions may be open to you:

• Members with at least 5% of the votes in a small proprietary company may give the company a written direction to prepare a financial report and directors’ report and send them to all members.
• Members with at least 5% of the votes, or the support of 100 members who are entitled to vote, may give the company notice of a resolution they propose to move at a general meeting.
• A member can ask the company to distribute a statement to all members. That statement must be about a matter that can be considered at a general meeting.
• Directors of the company must call and hold a general meeting if requested by members with at least 5% of the votes that may be cast at the meeting. The request must be in writing, signed by the members making the request and state any proposed resolutions.

The directors must call the meeting within 21 days after the request is given to the company, and the company must hold the meeting no later than two months after the request is given.

Seek legal advice

If you have contacted the company to try to resolve the matter and remain dissatisfied with their response, you can also talk to a legal adviser about what you should do next to enforce your rights as a member.

If you are unsure about how to access legal advice, contact the Law Society in your state or territory.

Apply for a court order

In some serious cases, if members feel that the directors are not performing their duty to the company, they can start legal action on behalf of the company. To do this you need to contact the court.

A court can also make orders requiring the company to act in accordance with its constitution, or to prevent a company from acting in a way that prejudices the members.

You should always get legal advice before you start an action in court.

ASIC and disputes about your rights as a company shareholder (member)

ASIC does not get involved in disputes about the running of proprietary companies.

These disputes generally relate to private legal rights of individuals and do not affect consumers or investors in the broader community. For this reason, our role in helping you resolve a dispute is limited to suggesting the best course of action to address your concerns.

Failure by the directors of a proprietary company to comply with a request from members with 5% of the votes is not an offence, but it is something that a court can order a company to comply with. ASIC cannot prosecute the company or its directors for failing to comply with such requests, given it is not an offence.

Where can I get more information?

• For information about ASIC’s role and the laws we manage.
• For information about accessing company information, see Information Sheet 186 Disputes about access to company information (INFO 186).

Download this information sheet as a PDF (112KB)

This is Information Sheet 188 (INFO 188), issued in December 2013. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

A common problem encountered in our practice is when disputes arise between the owners of a small business. Where such a business is operated through a small proprietary company, typically with only a few directors, an owner with a substantial shareholding may nonetheless find himself marginalised and excluded by other directors in decision-making, denied company information and even restricted in trying to exit the business and sell his shares to a third party.  

Remedies that may be available to a shareholder in this situation include:

Oppressive conduct

A shareholder (and in some circumstances an ex-shareholder) can apply to the Court where the company's affairs are being conducted in a manner contrary to the interests of the shareholders as a whole, or oppressive to or unfairly prejudicial towards a certain shareholder or shareholders[1]. An order may also be sought in respect of an oppressive resolution or other act or omission (whether proposed or actual)[2]. 

The Court can make a wide range of orders to remedy the oppressive conduct, including winding up the company, modifying or repealing the company constitution, requiring the company to institute or discontinue legal proceedings, or requiring a person to do, or not to do, a certain act[3].   

Breach of directors' duties

Directors are subject to a number of obligations, both under the common law and the Corporations Act 2001 (Cth) ("the Act"). These include the common law duty to act with due care, skill and diligence[4], and the statutory duties to act in good faith in the company's best interests and for a proper purpose, to avoid conflicts of interest and to not use one's position to obtain a personal advantage[5].

These duties are owed to the company, so it is incumbent on the company itself bring proceedings against the infringing director. ASIC will not normally intervene in respect of a breach of duties by a director of a small proprietary company. 

Where the infringing director(s) have effective control of the company, a former or current shareholder (or officer of the company) may apply to the Court for leave to bring proceedings on behalf of the company under Part 2F.1 of the Act. The Court must grant the application if it is satisfied that the applicant is acting in good faith, there is a serious question to be tried, it is in the best interests of the company for leave to be granted, and it is probable that the company will not otherwise bring the proceedings or conduct them properly[6]. Once leave is granted, the applicant can then seek compensation from the infringing director(s) for the damage suffered by the company as a result of their conduct.

Other remedies

There are also a number of obligations and prohibitions in the Corporations Act 2001 (Cth) that deal with specific issues, such as access to information. If a shareholder (who is also a director) is denied access to information by other directors, they may be guilty of an offence and he or she may also be able to apply for compensation for any damage suffered[7]. Moreover, even if the shareholder is not a director, he or she may still apply to the Court to inspect the books of the company[8]. 

Finally, apparent misconduct by other directors may also be in breach of either the company constitution or any shareholders' agreements. The constitution governs the operation of a company and prescribes a variety of matters ranging from the conduct of directors' and members' meetings, appointment and removal of directors, and transfer of shares, whereas shareholders' agreements supplement the constitution by providing for additional matters such as dispute resolution. Both of these documents operate (among other things) as a contract between each shareholder and the company and between a shareholder and each other shareholder, so any non-compliance may entitle an injured party or parties to sue for breach of contract. 

[1] Corporations Act 2001 (Cth) s. 232

[4] e.g. Daniels v Anderson (1995) 37 NSWLR 438

[5] Corporations Act 2001 (Cth) ss. 180-183