In a significant decision released last week, the Court of Appeal affirmed the right of minority shareholders to advance their own interests at the expense of other shareholders.1
The decision contains important guidance on the duties that shareholders owe one another and demonstrates the importance of having an appropriate shareholders' agreement in place.
Roger Dold was formerly a shareholder in a Queensland-based tourism company, Cruise Whitsundays Pty Ltd. Mr Dold owned 46.9% of the shares in the company. The remaining shares were owned by Chris Jacobs (also 46.9%) and Peter Murphy (6.2%), with a shareholders' agreement between the three.
In mid-2016, the shareholders received an offer of AU$110 million for their shares in the company, which significantly exceeded their own valuation of the company. At Mr Murphy's urging, the shareholders and their advisors successfully negotiated an increase in the offer to AU$112 million, subject to a memorandum of understanding being signed within five days. However, Mr Murphy then advised that he would refuse to participate in the sale unless the majority shareholders agreed to pay him an additional AU$5 million from their shares of the sale proceeds (a demand that he later reduced to AU$4 million). Forced to choose between Mr Murphy's ultimatum and the loss of a highly lucrative offer, the majority shareholders agreed to pay Mr Murphy.
Mr Dold subsequently commenced proceedings seeking to recover his portion of the AU$4 million premium paid to Mr Murphy. He was unsuccessful in the High Court, and appealed to the Court of Appeal.
Breach of shareholders' agreement?
The Court of Appeal first considered whether Mr Murphy had breached the shareholders' agreement. The agreement included a number of broad-brush obligations, including duties to maximise shareholder returns and to ensure the company's operations were managed so as to facilitate a sale of the business. Crucially, however, the shareholders' agreement did not include drag-along rights, which could have compelled Mr Murphy to sell his shares in circumstances such as these.
The Court of Appeal ruled that the broad obligations in the shareholders' agreement did not create the equivalent of drag-along rights, particularly given that the parties had failed to include any express provisions to that effect. While acknowledging that Mr Murphy's demands would be considered offensive by many, the Court concluded that Mr Murphy's demand did not breach the shareholders' agreement.
Breach of fiduciary duty and duress?
Mr Dold also argued that Mr Murphy's demand was unlawful on the basis of fiduciary duty and economic duress. However, the Court of Appeal was unwilling to extend these doctrines to fill in the gaps left by the shareholders' agreement. The Court held that, in the absence of special circumstances, shareholders do not owe fiduciary duties to one another.2 The imposition of a fiduciary duty would also have been inconsistent with the terms of the shareholders' agreement.
The claim for economic duress also failed. The Court did not consider it appropriate to regard Mr Murphy's otherwise lawful demands as unlawful duress. The Court found that it was not for the courts to judge whether a lawful commercial or economic threat, including a threat not to enter into a contract of sale, was so disproportionate to a person's legitimate commercial interests so as to become illegitimate.
What does this mean for shareholders?
The Court of Appeal's decision in this case is an important reassertion of the principle that the courts will not remake the parties' bargain, however unfair it may seem. Likewise, the Court refused to fill the gaps in the shareholders' agreement with equitable and tortious doctrines.
Shareholders seeking to safeguard against self-interested behaviour by fellow shareholders should ensure their interests are protected by a robust shareholders' agreement. In the absence of such an agreement, broader legal concepts such as fiduciary duties and duress may not provide the necessary degree of protection.
If you have any questions on the matters raised in this article, please get in touch with the contacts listed or your usual
Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.