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Another stark reminder about Shareholders’ Agreements

by Stephen on August 10th, 2020

At the end of July, the Court of Appeal re-affirmed that, in the absence of specific protection in a Shareholders’ Agreement, minority shareholders the ability to advance their own interests over those of other shareholders.

The Court’s decision in Dold v Murphy involved the former shareholders of Queensland-based tourism company, Cruise Whitsundays Pty Limited.  The stakeholders in Cruise Whitsundays were Roger Dold and Chris Jacobs (46.9% each) and Peter Murphy (6.2%).  A Shareholders’ Agreement was in place – which included some notable gaps.

In mid-2016, the shareholders received an offer of A$110million for all of the shares in the Cruise Whitsunday – an amount which greatly exceeded their own valuation of the business.  Mr Murphy’s was then instrumental in negotiating the buyer up another A$2 million – subject to a MoU being signed within 5 days.  However, Mr Murphy then advised the other shareholders that he wouldn’t agree to a sale unless they agreed to pay him an additional A$5 million from their shares of the sale proceeds.  (This demand was later reduced to A$4 million).

Faced with ultimatum and the possible loss of the sale, the other two shareholders agreed to pay Mr Murphy. However, Mr Dold subsequently sought to recover his share of the A$4 million premium.

Impact of the Shareholders’ Agreement

Whilst the first issue for the Court of Appeal was framed as a claim for breach of fiduciary duty, the Court of Appeal preferred to start with the agreement the parties made, and then look to whether contractual obligations ought to be supplemented by fiduciary ones.

As foreshadowed above, the Shareholders’ Agreement did not include drag-along rights, which might have otherwise been used to compel Mr Murphy to sell his shares.

Instead, the Shareholders’ Agreement included a number of (usual) overarching obligations, including duties to maximise shareholder returns and to ensure the company’s operations were managed so as to facilitate a sale of the business.  It also specified that a sale or all or substantially all of the company’s business required the unanimous approval of shareholders.

The Court of Appeal ruled that those broad-brush obligations in the Shareholders’ Agreement did not create the equivalent of drag-along rights, particularly given that the parties had failed to include any express provisions to that effect.  The starting point, at least in contract, must be one of shareholder autonomy.  No drag-along was bargained for, and there was no compelling argument that such an obligation is implied, or that it had been intended but omitted (requiring rectification).

While appearing to acknowledge that Mr Murphy’s demands might be opportunistic, the Court concluded that Mr Murphy’s demand did not breach the Shareholders’ Agreement.

Breach of fiduciary duty

Mr Dold also argued that Mr Murphy’s demand was unlawful on the basis of fiduciary duty.  Specifically:

  • The Court held that there were no special circumstances here to imply that the shareholders owed fiduciary duties to one another.
  • The imposition of a fiduciary duty would also have been inconsistent with the terms of the Shareholders’ Agreement – which it described as a thin patchwork of mutual obligations provided for in the contract.
  • It would be quite exceptional to impose fiduciary duties on a minority shareholder.  With certain statutory exceptions (most notably relief against oppression under section 174 of the Companies Act) —shareholders are entitled to act selfishly in their dealings with one another.  The intra-shareholder relationship is not inherently fiduciary – perhaps except where there is a “special facts fiduciary relationship” – such as that found by the Court of Appeal in Coleman v Myers (1977).
  • The facts did not support an assumption of fiduciary responsibilities, separate from the Shareholders’ Agreement (such as some form of collateral agreement or understanding).  This included Mr Murphy’s appointment as sellers’ representative (a month after his demand had been made).

Economic duress

The claim for economic duress also failed. The Court 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.  At law, he was entitled to act in his own self-interest, even if his actions were both unexpected and ungenerous.  In doing so, they cited academic support for the view that the Courts should be reluctant to recognise lawful economic or commercial threats as disproportionate to commercial goals (and thus illegitimate).  In any event, Mr Murphy genuinely believed that he was entitled to a reward for his extra time and effort.


The Court of Appeal’s decision another stark reminder of the need for shareholders to protect themselves against opportunistic actions by their fellow shareholders – through the use of a robust Shareholders’ Agreement.  In the absence of a suitable agreement – the Courts have again shown that they will not protect commercial parties or plug the gaps in a Shareholders’ Agreement (with findings of some form of duty) – even in the face of opportunistic behaviour.

From a commercial lawyer’s standpoint, tag-along / drag-along rights, designed to ensure that a minority shareholder is neither stranded by the sale by a majority, nor able to hold up a sales process supported by the majority – should be regarded as ‘must haves’ (or a default setting).

The default setting for tag and drag thresholds is often 50% for tag along (because control of the company is transferred by the outgoing shareholders at this point) and 75% for drag along.  Drag along has the greatest value, because it allows the majority to compel the sale of the company as a whole. 75% is often the starting point for drag along because it aligns with the major transaction approval threshold.

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