Break-ups are never easy, but in business, heartbreak is an occupational hazard. In the context of documenting and regulating shareholder relationships, the risk of disputes arising is both foreseeable and alleviable. Given the personal and high-stakes nature of shareholder relationships, tensions can rise and tempers fray, particularly in tight economic times, where business performance declines or strategic visions diverge. It is therefore critical for dispute processes to be well considered and anticipated from the outset of commercial dealings, because once you’re in the thick of it, it’s too late.

Shareholders can mitigate the risks and costs associated with disputes by investing the appropriate legal resources into the drafting of a tailored shareholders’ agreement up front, and before a dispute arises. The terms of the agreement can set out clear mechanisms and processes to resolve an issue promptly, practically, and via pre-agreed pathways.  

The recent High Court decision of Bobnev Jackson Trustee v Robinson [2024] NZHC 3256 is an example of the costly and time-consuming consequences of a shareholder ‘divorce’.

The facts

The dispute in this case arose between the shareholders in Roadworx Infrastructure Ltd (Roadworx). Bobnev-Jackson Trustees Limited (first plaintiff) and Ms Jackson (second plaintiff) between them held 50 per cent of the shares in Roadworx.  Matthew Robinson (first defendant), Angela Robinson (second defendant), and the trustees of the Robinson Family Trust (third defendant) between them held the other 50 per cent (Robinson Interests). 

The litigation arose in 2022 when, following a breakdown of the parties’ relationship, the plaintiffs brought a claim under section 174 of the Companies Act 1993 pursuant to alleged oppressive and unfairly prejudicial conduct, and directed the Robinson Interests to transfer their shares at valuation. The Robinson Interests made a counterclaim seeking similar relief.

The parties agreed early in the 2022 litigation that the Robinson Interests should be sold to the plaintiffs. The Court then made various consent orders which directed the process for determining the fair value of the shares and sale process.

However, the valuation and sale process faced multiple delays due to various complications, and by 2024, the valuation was still ongoing. During this period, the value of the shares had significantly declined, leading to a further dispute between the parties over the appropriate date for the valuation.

The decision

Gordon J ruled in favour of the plaintiffs and ordered that the valuer (appointed under the process set out in the consent orders) would determine the fair market value of Roadworx shares based on financial information up to 31 March 2024. In effect, Gordon J’s judgment confirmed Roadworx’s lower valuation, highlighting the detrimental effects that prolonged shareholder disputes can have on the underlying value of a company.

Outcome

This case underscores the potential for volatility and unpredictability in shareholder relationships, and the significant consequences that can arise when there are no clear mechanisms in place for a swift and orderly resolution. Whilst the Court is a crucial step in the dispute resolution journey where novel and untested scenarios arise, resorting to formal dispute resolution is often a drawn-out, costly, and complex process, and should be treated as a last resort. It is therefore critically important to have well-formulated corporate governance documents which provide the most favourable odds of safeguarding company value and ensuring business continuity during times of conflict.

In the vast majority of cases, and indeed, in this case, an effective and well-functioning shareholders’ agreement could have:

• Clarified the process on share transfers, liquidation, or other alternatives upon reaching a fundamental dispute.
• Significantly expedited the process of valuation and sale, preserving the value of the shares of Roadworx and minimising disruption to the operation of the business.
• Provided the parties with a clear recourse, circumventing the need to raise the matter in a formal dispute resolution process.
• Significantly reduced the associated financial and emotional cost for all concerned.

Prevention

We set out below at a high level, some mechanisms which are commonly included in shareholders’ agreements, and which could have protected the shareholders in this case from the decline in the value of the shares in Roadworx:

• Methodology for calculation of fair value.
• Recourse to appointing an independent expert, and making such independent expert’s decision final and binding on the shareholders.
• Default provisions with a structured waterfall of consequences and resolution pathways.
• Implementation of a Texas shootout clause, whereby shareholders each submit a sealed bid to buyout the other shareholders shares in the company. The bids are then revealed simultaneously and the highest bidder is required to buyout the other shares in the company at the highest bid price.
• Implementation of a Russian roulette clause, whereby one shareholder offers to either buy the shares of the other shareholders or sell its own shares to the other party at a specified price. The recipient shareholder can either accept the offer or buy out the offeror at the same price.
• Call or put options which give shareholders the right to either compel the sale of their shares or require another party to sell their shares, depending on the triggering event.
• A pathway for termination of the shareholders’ agreement with the consequence of the voluntary liquidation of the company.

Of course, the above list of potential drafting mechanisms is not exhaustive, and resolution of disputes at a commercial level is always an option, albeit unenforceable.

The structure and content of shareholders’ agreements will vary significantly depending on the specific circumstances of the parties involved.  This calls for bespoke, carefully considered drafting and sound legal guidance during negotiations, tailored to reflect each party’s commercial risk appetite, company set-up and shareholder relationship dynamics.

Conclusion

The breakdown of shareholder relationships, as seen in Bobnev Jackson Trustee v Robinson, highlights the importance of proactive and strategic legal planning.  A well-drafted shareholders’ agreement is not just a formality – it is a critical tool for preserving value, maintaining operational stability, and providing clarity when relationships are tested.  By anticipating potential disputes and embedding robust mechanisms for resolution, shareholders can avoid costly litigation and protect their commercial interests.

If you are entering into a new business venture or would like to review your existing arrangements, the time is now to implement a shareholders’ agreement, or ensure the one in place is still fit for purpose.  Our Corporate and Commercial Team can help you craft a tailored agreement that reflects your commercial objectives, manages risk, and is aptly customised to fit your shareholder relationships.

For expert advice on drafting or reviewing your shareholders’ agreement, get in touch with Sarah Gibbs or your usual contact at Dentons today. 

This article was written by Sarah Gibbs, Senior Associate and Arlo Doak, Law Graduate in our Corporate and Commercial team.