TAX Alert – Disputes between shareholders – how a trusted adviser can help

13 August 2015


When shareholders of a company fall into dispute and wish to end their joint investment in that company, it can be a complex process to reach an agreement on the splitting of the company’s assets.  The trust that formerly characterised the relationship between the shareholders often breaks down.  Emotions can be high.  The extent of the assets that are to be divided is likely to be uncertain and there may need to be a forensic valuation of the assets before they can be divided. 

Often, a trusted adviser such as the company’s accountant will be asked how the shareholders go about dividing the company’s assets and bringing the shareholders’ business association in the company to an end.

This can create the potential for a perceived conflict of interest for the adviser where shareholders are asking for information from the adviser but not communicating with each other.  This can be a minefield for the adviser to navigate through when they want to maintain their relationship with all parties. 

When do shareholders end up in dispute?

In our experience, companies where shareholders end up in dispute and then in Court often have similar characteristics.  The companies often:

  • have between 2 to 4 shareholders.
  • have equal shareholdings with no single party having a dominant shareholding or voting power.
  • may have had the shareholdings passed down from previous generations of shareholders, for example from father to daughter.
  • do not hold any formal shareholder or director meetings, or hold them very infrequently.
  • do not pay frequent dividends, or any dividends at all (despite being in a position to do so).
  • have relatively illiquid assets, such as property.  Such assets are also not usually valued at market rates, for example a property that is tenanted by the company for a peppercorn rent.
  • exclude one or more shareholders and directors from the management and control of the company, to their detriment.
  • have one shareholder that has control over information such as bank accounts, significant contracts and financial information that they withhold from the other shareholder.
  • have shareholders whose interests have started to diverge – e.g. one wants to sell the company to a third party, and the other wants to retain the company and continue to manage it.

If the adviser knows that a client company has those characteristics, they can be alert to a dispute that may arise.

The adviser can then consider, if asked by the shareholders, how the shareholders can try and resolve their differences.  There are a number of ways to do so without the shareholders (yet) proceeding to Court.  To start with, the shareholders may not even themselves be clear that they wish to end their business relationship.  This is however often the only way to bring a resolution to disputes that have been continuing for some time.

Some options to suggest

Some possible options for the adviser to suggest to the shareholders are:

  • Internal valuation: for the trusted adviser to provide, at the request of the company, sufficient financial information for the shareholders to try and agree a value for the company and to divide the assets between shareholders.
  • External valuation: for the parties to appoint an independent valuer to value the company and enable the parties to divide the assets equally.
  • Mediation/alternative dispute resolution: for the shareholders to appoint an appropriate third party mediator to try and resolve the dispute.
  • Appoint lawyers: to advise the shareholders to appoint lawyers, particularly if the company’s affairs are very complex or the parties’ positions are seemingly intractable.

What happens if the dispute goes to Court?

If the shareholders are destined to go to Court, there are a number of possible causes of action that may be brought by the shareholders, and various potential outcomes of those claims.

  • Initially, an application may be made under s247A of the Corporations Act 2001 for a shareholder to inspect the books and records of the company, where the applicant shareholder can show that it is making the application in good faith and for a proper purpose.  Such an application is usually made where one shareholder feels they have been starved of information.  The books and records may be kept by the company’s accountant, and the accountant will need to be clear as to whether he is legally obliged to produce those documents following provision of a Court order.
  • A claim may be brought under s233 of the Corporations Act 2001, where a shareholder who claims that the conduct of the company’s affairs, or any act of the company, is either contrary to the shareholders’ interests, oppressive, unfairly prejudicial or discriminatory, can seek a wide range of orders from the Court.  Those orders include:

o    that the company be wound up

o    that the conduct of the company’s affairs be regulated in the future

o    that one shareholder buy the other’s shares

o    restraining or requiring a person to do a specified thing.

  • The shareholders may also seek for the company to be wound up, under s461 of the Corporations Act 2001, where the Court considers that it is ‘just and equitable’ that such an order be made.  A Court may be tempted to exercise this remedy where it cannot see that the company can continue to operate effectively while the shareholders are in dispute, and the Court cannot see a way to fairly resolve the dispute.  This is even the case where the company is solvent (not insolvent, which is usually when orders are made to wind a company up).  While this is an extreme step to take where the company is solvent and successful, such an order may be made where shareholders of a closely held company are in dispute and appear unwilling or unable to reach a satisfactory resolution of the matter themselves (such as one party purchasing the other’s shareholding).

    It should be noted that while it is a powerful threat for shareholders to seek to wind up the company under s461 when the shareholders are in dispute, it may have a detrimental effect on the business.  This is because ASIC needs to be notified and the winding up application then becomes a matter of public record when anyone does an ASIC search on the company.  As winding up applications are usually made when the company is claimed to be insolvent, creditors and customers may become nervous that such an application has been made (even if the company is solvent).  The parties also need to consider whether such an application would cause the company to be in breach of any of the company’s loan covenants or financial instruments.

    Further, the effect of a winding up order being made will be that a liquidator is appointed and the control of the company will be ceded to a third party, almost always with an extensive loss of value of the company.

What does the adviser need to be aware of in a split of assets?

If the adviser is to provide advice to the company or the shareholders about a split of assets, there are many tax-related issues for consideration.

Those issues include:

  • Assessing the company’s actual and contingent liabilities in order to come to an accurate valuation of the company’s assets, including ATO liabilities.
  • Retaining sufficient amounts in the company after distribution of assets for contingencies.
  • The tax effectiveness of any distribution, including the nature of the entity that the distribution will be paid to.
  • If there are any amounts paid, lent, or forgiven by the company, whether they will be treated as ‘dividends’ for income tax purposes under Division 7A of Part III the Income Tax Assessment Act 1936 (ITAA 36). 
  • Tax payable on any transfer of shares or real property and how the payment should be apportioned between shareholders.  This could include consideration of how the market value substitution rule would apply and the availability of any CGT concessions such as small business CGT concessions.  Potential traps include:

o    CGT event K6 (which imposes CGT on the transfer of pre-CGT shares if the market value of the post-CGT property of the company is 75% or more of the net value of the company).

o    Division 149 of the Income Tax Assessment Act 1997 (ITAA 97) (i.e. converting pre-CGT assets of the company to post-CGT assets).  Broadly, this could happen when, for example, there are two pre-CGT shareholders, and one of them transfers their shares in the company.     

o    Application of the value shifting rules (e.g. in relation to the issue of further shares).

o    If the company is going to buy back an existing shareholder’s shares, the application of the deemed dividend share buy back rules. 

  • The availability of tax losses of the company and whether these tax losses could be used after the change in shareholding.  This could involve consideration of the application of the continuity of ownership test rules and the same business test rules. 
  • Duty (both transfer duty and landholder duty) payable on share transfers.
  • Release of any guarantees given by the vacating shareholder.
  • If a delayed payment plan is agreed, the parties need to consider the possibility that the company will not pay all the staged payments and that the company will be ‘phoenixed’.
  • If there are multiple shareholdings to be resolved, the split of any payment for the shares between each company and the subsequent effect on CGT payable.


As a trusted adviser, the accountant may often be the first port of call for shareholders who are in dispute.  In order to navigate through these disputes, it is useful for the accountant to have a basic understanding of the legal process that shareholder disputes usually follow, and the accounting and taxation issues that may arise.  Armed with this information, the adviser can impartially help their clients to move through the dispute and can remain a trusted adviser.

Written by:
Sonya Parsons | Senior Associate | +61 2 8248 3409 |
Yat To Lee | Senior Associate | +61 2 9020 5742 |
Philip de Haan  | Partner | +61 2 9020 5703 |
Adam Pope  | Partner | +61 2 8248 3402 |