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Shareholder agreements – the intersection of international arbitration agreements and local company law

Published on January 24, 2017 by Selwyn Black

As first published by The Primerus Paradigm in Spring 2017.

When drafting or enforcing a shareholder agreement, a cross border investor will need to be mindful of the local company law and local commercial arbitration provisions.

As in the recent Australian example of WDR Delaware Corporation v Hydrox Holdings Pty Ltd; In the Matter of Hydrox Holdings Pty Ltd [2016] FCA 1164 (Masters Case), local company laws can confer remedies on shareholders that may intersect with their shareholders agreement and its referrals to commercial arbitration.

In this article we look at the key shareholder protection rights under Australian company law, and review the Masters Case which involved a subsidiary of Lowe’s home improvement of the USA, and Woolworths of Australia. The Court in the Masters Case ultimately stayed an application for winding up under local company law, to allow a commercial arbitration to deal with the substantive dispute.

In doing so, the Court looked to international precedents.

Australian company law remedies for shareholders

The two main Australian statutory remedies available to shareholders of a company in dispute are the oppression remedy and the winding up of the company on ‘just and equitable’ grounds.

The oppression remedy can be sought if the conduct of the company’s affairs, its acts or omissions, or any of its resolutions is contrary to the interests of the shareholders as a whole or is oppressive, unfairly prejudicial, or unfairly discriminatory against a shareholder. If such a finding is made, Australian Courts are empowered to make any order it considers appropriate in relation to that company.

The oppression remedy has been interpreted by Australian Courts in a broad manner. The type of conduct which can give rise to an oppression claim is varied and fact dependant but is primarily concerned with unfairness in the treatment of shareholders.

Successful oppression claims include situations in which excessive remuneration is paid to executive shareholders, shares are issued with the dominant purpose of reducing a shareholder’s proportional shareholding, access to books and records are denied, and company assets are sold on uncommercial terms.

Examples of orders that Australian Courts have made pursuant to the oppression remedy include amending the company’s constitution, setting aside company resolutions, requiring the payment of compensation by oppressive directors, and requiring a shareholder acquire another shareholder’s shares.

A separate cause of action exists if a shareholder wishes to wind up the company on “just and equitable” grounds. The phrase “just and equitable” is broadly interpreted and many of the factors that indicate a shareholder is being treated oppressively are relevant in determining whether it is “just and equitable” for a company to be wound up.

It should be noted that in relation to both remedies, the Courts will not readily wind up a solvent company. The Court may be persuaded to do so in more extreme circumstances, for example if there is continued animosity between shareholders or if it is likely that oppressive behaviour will continue in the future.

The Masters Case

Hydrox Holdings Pty Ltd (Hydrox) was a joint venture company set up to carry on the Masters hardware business. Australian publically listed company Woolworths Ltd (Woolworths) owned two thirds of the shares in Hydrox, while US company WDR Delaware Corporation (WDR) (a subsidiary of Lowe’s Companies, Inc (Lowe’s)) owned one third.

Disputes arose in relation to the Masters business.

WDR and Lowe’s commenced proceedings alleging oppressive conduct by Hydrox and sought orders that Hydrox be wound up pursuant to the oppression remedy or alternatively on “just and equitable” grounds.

Woolworths sought that the proceedings be stayed on the basis that the terms of the joint venture agreement between the parties required disputes to be determined by arbitration.

Section 7(2) of the Australian International Arbitration Act 1974 requires proceedings to be stayed and referred to arbitration if they are commenced by a party to an arbitration agreement and the matter is capable of being settled by arbitration.

The central issue in the proceedings was whether the matters raised by WDR and Lowe’s in their proceedings could be resolved by arbitration.

WDR and Lowe’s argued that there was only one matter to be determined by the proceedings, and that was whether Hydrox should be wound up. WDR and Lowe’s argued that this determination could only be made by a Court and not by private arbitration.

The Court rejected this argument and agreed with Woolworths in finding that the proceedings involved several matters to be referred to arbitration (such whether there was a failure to provide information and whether the joint venture agreement had been breached as alleged by WDR and Lowe’s).

The Court stated that whether these matters were arbitrable involved “a consideration of the inherent power of a national legal system to determine what issues are capable of being resolved through arbitration. The issue goes beyond the will or the agreement of the parties. The parties cannot agree to submit to arbitration disputes that are not arbitrable”.

The court noted that matters incapable of being resolved by arbitration shared a “sufficient element of legitimate public interest in the subject matters making the enforceable private resolution of disputes concerning them outside the national court system inappropriate”.

WDR and Lowe’s argued that a claim for a winding up order is not arbitrable on the basis that it affects the legal status of a person, it affects a number of third parties, the creation and winding up of a company legal entity is a matter the subject of governmental authority, and there is a public interest in ensuring that the procedural steps by which a company is liquidated are governed by Court and determined publicly rather than by private arbitration.

Woolworths argued that the question the arbitrator would answer was not whether to wind up Hydrox. The arbitrator would resolve the matters that the Court would have regard to in determining whether to wind up Hydrox, such as whether had actually been a failure to provide information or whether a breach of the joint venture agreement had occurred as alleged by WDR and Lowe’s.

The Court had regard to Australian and international case law on the arbitrability of matters, and was of the view that the matters raised by WDR and Lowe’s could be arbitrated. The matters were in substance contractual disputes and other obligations between private parties. The fact that a winding up order was sought by WDR and Lowe’s did not change the nature of the dispute between the parties that needed to be resolved. While the Court saw no issue in having these matters determined by arbitration, it held that the ultimate decision of whether to wind up Hydrox was only capable of being made by the Court and was not arbitrable.

Conclusion

Local laws can add to or subtract from agreements that are reached between local and foreign parties. It is essential that local expertise be obtained in dealing with any cross-border transactions. The Masters Case is an example in which local Australian shareholder remedies did not overrule the joint venture agreement reached between an Australian company and a United States company.

 

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