In my previous article (see here), I highlighted the importance of having a Shareholders’ Agreement when you are in business with others, but not all Shareholders’ Agreements are created equal.
The recent Court of Appeal decision in Dold v Murphy  NZCA 313 gives 4 million reasons for ensuring that you have a well thought-out and tailored Shareholders’ Agreement in place that suits your particular business arrangements and covers the issues that are likely to arise between shareholders, both now, and in the future.
We discuss this cautionary tale below.
The case centred on the sale of Cruise Whitsundays Pty Limited – a Queensland-based tourism company. The two majority shareholders (Mr Dold and Mr Jacobs) held 46.9% each and the minority shareholder (Mr Murphy) held the remaining 6.2%. The shareholders received an “exceptionally lucrative” offer of AUD 110 million for all of the shares in the company. As this was far more than they expected and significantly exceeded their own valuation of the company, they were keen to sell. At the urging of Mr Murphy, an even higher price of AUD112 million was negotiated, subject to a Memorandum of Understanding being signed within five days.
However, Mr Murphy then immediately advised that he would not participate in the sale unless the majority shareholders agreed to pay him an additional AUD5 million from their share of the sale proceeds (a demand that he later reduced to AUD4 million). Faced with the choice of Mr Murphy’s ultimatum and potentially losing the deal, the majority shareholders agreed to pay Mr Murphy in order for the transaction to proceed.
Mr Dold subsequently sued Mr Murphy to recover his portion of the AUD4 million premium paid to Mr Murphy. He argued that Mr Murphy’s demand was unlawful, either being in breach of the Shareholders’ Agreement, in breach of his fiduciary duties or economic duress. He was unsuccessful in the High Court and appealed to the Court of Appeal.
Breach of Shareholders’ Agreement?
The Shareholders’ Agreement contained a number of broad-brush obligations, including to maximise shareholder returns and to manage the company’s operations so as to facilitate a sale of the business within five to ten years. It also prevented shareholders from conducting their affairs in a manner inconsistent with the main operating objectives of the company and included the duty to ensure that all business opportunities were referred to the company in the first instance. Critically however, the Shareholders’ Agreement did not include drag-along rights, which allow the majority shareholders to force minority shareholders to sell their shares (usually on same terms and at the same price acceptable to the majority).
Mr Dold argued that the relevant provisions of the Shareholders’ Agreement barred a minority shareholder from seeking a premium for the sale of their shares. The Court rejected this argument and ruled that a combination of those broad provisions did not create the equivalent of drag-along rights, particularly given the parties did not expressly include obligations to this effect in the Shareholders’ Agreement. In the Court’s view, “Mr Murphy’s mercenary stance offends courtesy, rather than contract.”
Breach of fiduciary duties?
Mr Dold also argued that Mr Murphy’s demand breached a fiduciary duty owed to him. The Court was unwilling to accept that shareholders inherently owe fiduciary duties to one another. On the contrary, it found that shareholders are entitled to act selfishly in their dealings with each other in the absence of special circumstances.
Further, the Court took the view that the imposition of a fiduciary duty would also have been inconsistent with the terms of the Shareholders’ Agreement, being the fundamental basis of the relationship between the parties. On this, the Court noted that “we think it too long a bow to draw to find a fiduciary relationship from the thin patchwork of mutual obligations provided for in the contract.”
Mr Dold’s argument for economic duress also failed. As a starting point, the Court noted that a lawful act should not normally be converted to an unlawful act via the mechanism of duress. The Court did not regard Mr Murphy’s lawful threat to not enter into a contract as unlawful duress. It concluded that “the opportunistic behaviour of Mr Murphy, withholding his signature at the eleventh hour but in the absence of any overriding obligation to sign, was not unlawful.” As a matter of law, he was entitled to act in his own self-interest, even if his actions were both unexpected and ungenerous.
This decision reiterates that the Courts are reluctant to revise the bargain made between parties and will not read in or reconstruct provisions after the fact. Similarly, as in this case, the Court will not resolve gaps in commercial agreements by applying broader legal concepts and doctrines.
It also serves as a stark reminder that shareholders need to protect themselves against self-interested or opportunistic actions of their fellow shareholders by way of a robust Shareholders’ Agreement. However unfair it may seem, the Courts should not be relied upon to intervene.
Ultimately however, this case emphasises the need for advice and engagement in the drafting process with a view to producing a tailored Shareholders’ Agreement which suits your particular business arrangements and responds to the foreseeable issues that may arise.
If you would like any assistance with your shareholding arrangements, including reviewing and updating an existing Shareholders’ Agreement, please get in touch with Sarah Gibbs from our Business Advice Team or your usual contact at Hesketh Henry for any advice or assistance that you require.
The full decision can be found here.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.