Blocking the majority in a major transaction – all the more reason to have a shareholders’ agreement

A recent case heard before the Supreme Court, Baker v Hodder [2018] NZSC 78 has questioned the relief available to majority shareholders where minority shareholders refuse to approve a major transaction. The case raises significant questions about the relationship and consequently, the interaction between sections 129 and 174 of the Companies Act 1993 (Act). The case is a timely reminder of the importance of a well-drafted Shareholders’ Agreement which provides clear and concise exit and dispute resolution provisions.

The Bakers v the Hodders

The facts of the case are the culmination of a failed family farming company. The Hodders owned 70% of the shares in a company which owned a farm known as Heron Creek. The Hodders’ daughter and son-in-law owned the remaining 30% of the shares in the company (the Bakers). After some financial difficulties, the Bakers and the Hodders discussed selling Heron Creek. An offer to purchase Heron Creek was conditionally accepted by the Hodders. At this point, the conditional sale was subject to special resolution of shareholders approving the sale as a “major transaction” pursuant to section 129 of the Act.  The Bakers refused to consent to the major transaction and the Hodders eventually took action against the Bakers in the High Court, claiming that the refusal by the Bakers to approve the major transaction meant that the company’s affairs were being conducted in a manner which was oppressive and/or unfairly prejudicial pursuant to section 174 of the Act.

Sections 129 and 174 of the Act

Under section 129, a company may not enter a major transaction (which includes a transaction constituting the disposal of over half of its assets) unless it is approved by special resolution (75% of shareholders) or is contingent on that approval.

Under section 174, a shareholder may apply to the court for relief where the shareholder considers that the company’s affairs are being conducted in a manner which is oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholder.

The outcome

The High Court concluded that the refusal to agree to the special resolution was unfairly prejudicial to the Hodders and made an order requiring the Bakers to sign the special resolution (which they did), and following which Heron Creek was sold. The Court of Appeal refused to hear the appeal given Heron Creek had been sold and therefore determined the appeal was a moot point. The Supreme Court, however, determined that the Court of Appeal should have heard the appeal and after considering the case, quashed and overturned the decisions in the High Court and the Court of Appeal.

The Supreme Court noted that the situations in which the powers of section 174 could be relied on by a court are limited and “the power to make an order under that section would need to be exercised with great caution”.  The Court should not usurp the position of shareholders in making such an order.

Importantly, shareholders voting in relation to a major transaction are not obligated to act in accordance with the interests of the company or other shareholders and in the absence of agreement to the contrary, can act in their own self-interest.

The importance of a shareholders’ agreement

The case is a good reminder of the assistance that a comprehensive shareholders’ agreement can be for a company and its shareholders if they end up in dispute. A well drafted shareholders’ agreement could have set out mechanisms and processes for the Bakers and Hodders to work through in the event of this fundamental disagreement.

Some key provisions which we recommend being included in a shareholders’ agreement to combat these situations are set out below. This is not an exhaustive list and the specific terms and provisions will vary depending on individual situations.

  • Dispute Resolution: a process to escalate disputes through nominated representatives and mediation (and potentially to arbitration);
  • Deadlock/Fundamental Dispute and Buy-Out: a process to enable the exit of shareholder(s) at a fair value where shareholders are at a stalemate and resolution cannot be achieved or they disagree as to the future of the company;
  • Minority Buy-Out: either forced or voluntary buy-out of a minority shareholder’s shares in certain situations;
  • Shareholders’ Interests: a shareholders agreement may direct the shareholders to act in the company’s best interests as opposed to their own interest; and
  • Death or Disability: what is to happen in the event that a shareholder dies or is permanently disabled.

If there had been these types of arrangements in the above case, then a shareholder may have been able to invoke a buy/sell process whereby one shareholder would have been bought out and the other could take the company forward as it saw fit, avoiding what was no doubt an emotional and costly court process.

Conclusion

Having a shareholders’ agreement which sets out each of the parties’ rights and obligations from the outset can save time and money in the event of a shareholder dispute.  Once the dispute arises, it is generally too late to put these mechanisms in place as the parties are already at odds.

If you would like assistance with updating your current shareholders’ agreement, preparing one if you do not have one, or you would just like to talk through your options further, then one of our team would be happy to help.

Business Law team

If you need any assistance, do not hesitate to get in touch with the Business Law team at Lane Neave.

Gerard DaleClaire EvansGraeme CrombieEvelyn JonesAnna RyanJoelle Grace,  Peter OrpinEllen SewellMatt TolanCarlo WanKristina SutherlandJacob NuttWhitney MooreAlex StoneBen Cooper, Lisa Catto

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