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You and a mate have come up with a brilliant idea that you reckon will be a great business venture. So, you set up a company – you both own 50% of the company as shareholders and are appointed as directors. You know each other well and want to get the business up and running as soon as possible. There might be a temptation to think that a Shareholders Agreement is just a formality, but in 2025 it’s more important than ever to have one in place.
Even if your interests and goals align at the moment, circumstances can change over time. Maybe one of you might need to focus on family commitments, or you start to feel that one of you is contributing significantly more time and effort. Such shifts can lead to disagreements down the track, which is why having a detailed Shareholders Agreement is crucial for avoiding costly disputes later.
Shareholders Agreements are an essential contract that can save your business a great deal of time, effort, and money. They clearly outline how decisions are to be made, what happens if a shareholder decides to exit the company, and provide a blueprint for dispute resolution. For more insight into the benefits and structure of these agreements, find out what a Shareholders Agreement is here.
Key Terms
Understanding the key terminology relating to shareholder disputes is useful when considering your options. For additional context on related business obligations, you might also explore our piece on Regulations Affecting Your Corporation.
A shareholder is an owner of a company who exercises control and has voting rights, including the power to elect directors.
Conversely, a director is responsible for managing the daily operations of the company. In small businesses, it’s common for one person to simultaneously act as both shareholder and director. For more on director roles and responsibilities, check out our guidance on New Company Director Duties.
It is also important to understand the distinction between your company’s Constitution and a Shareholders Agreement:
- A Company Constitution sets the operating rules for the company, including the powers and duties of directors, meeting procedures, and voting arrangements.
- A Shareholders Agreement focuses on defining the relationships between shareholders and directors, detailing capital management, dividend policies, and dispute resolution mechanisms.
To learn more about how these documents differ and why each is essential, you can read about the differences between a Company Constitution and a Shareholders Agreement here.
Resolving Shareholder Disputes
So, what happens if a dispute arises between shareholders in 2025? Let’s explore the dynamics both for 50/50 shareholders and for minority shareholders in today’s business landscape.
Resolving Disputes Between 50/50 Shareholders
If you and your friend don’t see eye to eye on a critical business decision, the ideal outcome is to negotiate a solution that preserves both the business and your friendship. However, if your Company Constitution or Shareholders Agreement does not detail a clear dispute resolution process, you may face significant challenges.
You may be surprised to learn that you generally cannot force a shareholder to sell their shares simply because there’s been a disagreement. That’s why it’s crucial to have predetermined resolution mechanisms set out in your legal documents.
Explore Negotiation
If both parties are willing to compromise, negotiation is generally the preferred method for resolving disputes. It tends to be quicker and more cost-effective than litigation. For more tips on safeguarding your business interests during negotiations, check out our resource on protecting your business information.
The outcome of negotiations will depend on your situation, so it’s wise to carefully consider both your best and worst-case scenarios before entering discussions.
If neither shareholder wishes to continue operating the business together, there are two main options:
1. Splitting the business’ assets
2. Selling shares (this may involve one shareholder selling to the other, transferring shares to a third party, or arranging for a company buy-back)
Splitting The Business’ Assets In A Shareholder Dispute
Negotiating to split the business assets can be a viable option if you plan to reuse any valuable resources in future ventures. For instance, if your company has developed key intellectual property, you might want to retain ownership for future projects.
Selling Shares In A Shareholder Dispute
If one shareholder prefers to continue running the business, the other may consider selling their shares-whether to the remaining shareholder, to an external buyer, or through a company buy-back. In such cases, it’s advisable to have an independent valuation carried out to prevent disputes over share value. For further guidance on share transactions, see our article on Share Sale vs Asset Sale.
Additionally, some Company Constitutions allow the remaining shareholder to veto the transfer of shares to a proposed new party. It’s important to review your Constitution carefully for any relevant clauses. For more on company structures and shareholder rights, you might explore our guide on business names and structures.
The company may also opt to buy back shares from a departing shareholder – provided that the buy-back does not impair the company’s ability to pay its creditors and complies with the procedures outlined under s 257A of the Corporations Act 2001 (as amended up to 2025). For further details, take a look at our comprehensive guide on share buy-backs.
Court Proceedings
When negotiation fails, you might consider taking the dispute to court. However, legal proceedings should be viewed as a last resort because they can be expensive, time-consuming, and the court’s remedies may be limited. Moreover, litigation can exacerbate tensions and potentially dissolve long-standing relationships.
Court action is typically reserved for cases involving breaches of statutory duties, winding up applications under ‘just and equitable’ grounds, or demonstrable oppressive conduct. For a deeper look into director duties that could be in breach, read more about them here.
Some common grounds for initiating court proceedings include:
1. Breach of a Director’s Duty
Directors are legally required to act with due care and diligence, to work in good faith, and not to misuse their position or information. Failing to meet these duties can form the basis of a legal claim.
2. Applying to Wind Up the Company
Under section 461 of the Corporations Act, a court may order the winding up of a solvent company if it is found to be ‘just and equitable’ to do so. Such orders remain rare and are typically considered only when the deadlock between shareholders is irretrievable, potentially impacting employees and other stakeholders.
3. Oppressive Conduct
This issue is explored further in the next section, particularly in relation to minority shareholder rights.
Resolving Minority Shareholder Disputes
If you are a minority shareholder, it is important to be aware of the concept of oppression and what actions might be deemed oppressive conduct under part 2F.1 of the Act in 2025. Oppression generally refers to conduct that is unfairly prejudicial or discriminatory against minority shareholders.
Under section 232 of the Act, the court may grant an order if:
| The Court may make an order under section 233 if: (a) the conduct of a company’s affairs; or (b) an actual or proposed act or omission by or on behalf of the company; or (c) a resolution, or a proposed resolution, of members or a class of members; is either (d) contrary to the interests of the members as a whole, or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. |
Oppressive conduct might arise from a single action or a pattern of behaviour that shows a lack of fair dealing. For further reading on complex dispute issues, you may wish to check out our article on Convertible Notes and Alternative Financing, which touches on broader shareholder challenges.
Some examples of oppressive conduct include:
- Denying a minority shareholder access to key information about the company’s operations
- Unfair allocation of, or restrictions on, dividend payments
- Misuse of company funds for personal purposes
- Preventing other directors from exercising their responsibilities
It is important to note that oppression is not a tactic that can be used simply to further one’s own agenda during normal disagreements. Instead, it applies when there is a significant imbalance that unduly harms the interests of the minority shareholder.
Talk To A Lawyer
Preventing shareholder disputes through well-crafted legal documents is generally much more effective-and far cheaper-than trying to fix problems after they arise. In today’s fast-moving business world of 2025, having robust dispute resolution processes in place is essential.
If you’d like to discuss how best to set up your dispute resolution processes or need assistance drafting your legal agreements, our friendly team of expert lawyers is here to help. You might also be interested in our services around contractor agreements and contract reviews which can offer additional peace of mind.
It’s also a good idea to check that your other legal documents-such as your Company Constitution and Shareholders Agreement-are up to date and reflect current 2025 legislation. Properly drafted documents will help save you and your business unnecessary headaches if a dispute does emerge.
If you’re not sure about the legal requirements involved in starting and running a company in 2025, get in touch with us! You can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat. For more articles to keep you informed, don’t miss our updated guides in Business Set Up and on Intellectual Property. Making well-informed decisions today can safeguard your business well into the future.
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