all aboard? : a warning for managing minority shareholders



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The recent NZ Court of Appeal case of Dold v Murphy [2020] CA 313 illustrates how important good governance arrangements are where minority shareholders are involved, and the dangers of taking those minority shareholders for granted. 

the take-aways

  • Governance arrangements should be top of mind if minority shareholders might be joining your share register.  If you’re setting up an employee share option plan (ESOP) or share purchase plan, spend some time making sure your constitution and/or your shareholders’ agreement includes drag-along rights on terms that make sense for your company, so the minority can’t hold up an exit.  A little governance housekeeping upfront could pay very real dividends in the future.
  • Beware the disgruntled minority.  Particularly if they drafted your shareholders’ agreement.


Mr Dold, Mr Murphy and Mr Jacobs owned Cruise Whitsundays Pty Ltd, a tourism company based in Australia.  Mr Dold and Mr Jacobs each had a 46.9% stake, and Mr Murphy’s stake was 6.2%.  The group received a lucrative offer to buy 100% of the shares in Cruise Whitsundays.  Mr Murphy, feeling under-appreciated and underpaid for the work he had put into Cruise Whitsundays, gave the other 2 shareholders an eleventh-hour ultimatum – agree to pay Mr Murphy a further AUD 4 million between them from their sale proceeds, or Mr Murphy would refuse to sign the deal.

The majority shareholders felt they were being held to ransom, but ultimately agreed.  The deal completed and proceeds were distributed to the 3 shareholders by the end of October 2016.  By December 2016, Mr Dold had commenced proceedings against Mr Murphy, claiming (among other things) breach of the Cruise Whitsundays shareholders’ agreement, breach of fiduciary duty, and economic duress.  Mr Dold was unsuccessful on all counts.

governance arrangements

The Cruise Whitsundays shareholders’ agreement (written by Mr Murphy – a nice detail) contained no drag-along or similar rights.  Briefly, drag-along rights allow a selling majority bloc of shareholders to compel minority shareholders to sell their shares to a third party buyer on the same terms.  You’ll find an example of drag-along rights in our template constitution.

In the absence of any drag-along rights, the Court found there was nothing in the shareholders’ agreement to bar a minority shareholder seeking a premium for the sale of his or her shares, noting the “unusual but happy position” a minority shareholder might find themselves in, in that case – “of being able to command a premium for his or her shares – either from the third party purchaser, or from other shareholders anxious to see a complete takeover (on the basis that the whole was more valuable than the sum of the individual parts)”.

The Court didn’t exactly applaud Mr Murphy’s actions – describing them, variously, as “mercenary”,“offend[ing] courtesy”, and “both unexpected and ungenerous”.  But it did confirm his right to take them, and generally his entitlement to act in his own self-interest.

next steps

Keen to ensure your governance arrangements will assist with a smooth exit?  We can review your existing constitution and shareholders’ agreement (if you’ve got them), and help you put some in place if you haven’t. Get in touch with us to discuss further.

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