The Court of Appeal has recently found that it was opportunistic, but not unlawful, when a minority holder of 6.2% of shares refused to sell to a buyer of the whole company and threatened to prevent the deal from going through, unless the two major shareholders gave him an extra A$4 million.
The shareholders would not have been in this position had the shareholders agreement included properly drafted “drag-along” rights allowing the majority to “drag” the minority holder along on such a sale.
The decision is an important reminder that comprehensive and well-drafted shareholder agreements are critical in protecting not only minority interests, but also the majority holders, and can carve a clear and agreed path forward when an exit event (such as a business sale) is contemplated.
In this recent case of Dold v Murphy [2020] CA 313, the two major shareholders held 46.9% each and a minority shareholder held 6.2%. They received an “exceptionally lucrative” offer to buy the company from a private equity fund and were understandably keen to sell. The minority shareholder negotiated an even further increase in the offer amount, but then said he would not sell his interest unless he got an extra A$5 million (later reduced to A$4 million) from the majority shareholders. Given the deal required for a memorandum of understanding to be signed before a fast approaching deadline, the shareholders agreed and the deal went ahead.
The minority shareholder believed he was entitled to the additional money due to the contributions he had made to the company prior to the sale, however the majority holders saw this only as blackmail and being held to ransom.
One of the shareholders took court action to seek to recover his portion of the premium paid to the minority holder. It was argued in court that the demand was unlawful either in breach of the shareholders agreement, in breach of his fiduciary duties or economic duress.
The Court of Appeal dismissed the arguments and found that the minority shareholder’s threat was not to breach a contract, but to not enter one. A threat to not enter a contract is unlikely to be unlawful (all other things being equal) and he was entitled to act in his own self interest.
In this case, no breach of the shareholders agreement was established as although the shareholders agreement contained broad obligations to maximise shareholder returns and to manage the company’s operations to facilitate the sale of the business, this did not equate to a requirement to sell shares. The court also held that in the absence of special circumstances, shareholders do not owe fiduciary duties to each other, and that the commercial threat of not entering the contract, did not amount to economic duress in this case.
This decision highlights not only the need for a shareholders agreement, but to ensure that it is well-drafted and covers the issues that are likely to arise between the parties in the future. Had the parties included “drag along” rights, whereby the majority could require the minority to sell its shares if thresholds were met, then the minority shareholder’s leverage would likely have been lost. The decision confirms that the court will not revise the deal made by the parties nor read provisions into a shareholders agreement that are not there.
This means it is more important than ever for shareholders to ensure they take good advice and enter into a shareholders agreement tailored to their circumstances, and continue to check that it remains fit for purpose as the business grows.
If you would like any assistance with your shareholding arrangements, then please get in touch.
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