A recent decision involving findings of prejudicial conduct against shareholders is a reminder for all companies of the need to continually ensure compliance with the Companies Act and to act in accordance with directors' duties.

Stillwell v Ice Group (NZ) Ltd [2012] NZCA 136, involved three shareholders in a cabling company. Two had indicated several years earlier that they wished to sell their shares in the company, however, this was never formalised. The shareholders took no further interest in the company from this point forward though and the remaining active shareholder ran the company as if he was a sole shareholder.

A dispute arose when the inactive shareholders discovered that a large contract with the NZ Defence Force had been granted to the company and they wanted some of the profit from that contract. The court found that the active shareholder had acted in an unfair or prejudicial manner by not complying with the Companies Act 1993 requirements of holding an annual shareholders meeting and preparing annual reports and also by not following up the sale of the shares. The court held that had he complied with these requirements the sale of the shares from the two inactive shareholders would have been completed.  

However, having found that the shareholders had been prejudiced, the relief was limited. The court ordered the active shareholder to purchase the inactive shareholders' shares at the fair value for those shares at the time that the sale of the shares was originally suggested (but never completed). The inactive shareholders were not entitled to any of the value the NZ Defence Force contract had brought to the company. While relief was ultimately limited, this case emphasises the importance of formalities under the Companies Act, even in smaller companies, as in this case there was never any intention to act in a prejudicial manner but simply a failure to formally complete the sale of the shares and a failure to comply with Companies Act requirements.