New Zealand's highest court, the Supreme Court, recently issued a judgement in relation to a family farming company that should signal to equity farmers the importance of shareholder agreements in determining disputes and in particular ending relationships efficiently.

Most people are aware, or should be aware, that in the absence of a shareholders agreement it is often difficult to put an end to a joint venture arrangement. Shareholder agreements will contain what are called 'exit mechanisms' to enable shareholders to bring an end to a joint venture by a variety of means depending on the exit method selected. There is no one size fits all and an experienced lawyer is critical to tailoring an appropriate and efficient procedure in place.

In the absence of a shareholders agreement (or subsequent consensus) parties are left to seek remedies through the Courts which is a much more uncertain, time consuming and expensive means of doing so. One of the more common means used to try to do this is to apply to the Court to exercise its jurisdiction under section 174 the Companies Act 1993 (Prejudiced shareholder/oppression). Most often the consequences of a fundamental breakdown are argued to justify a request for an order to liquidate the company or similar.

In Baker v Hodder [2018] NZSC 78 the shares in a family farming company were held 70/30 by the parents (the Hodders) and the daughter and her husband (the Bakers) respectively. The Hodders had provided most of the funding for the farm. The farming business did not prove to be successful. The Hodders sought to sell the farm in order to recover their money and limit their losses. A sale would however be a major transaction (disposition of more than 50% of the company's assets) and therefore it required a special resolution of the shareholders meaning it required the Baker's consent to proceed. For their own reasons the Bakers did not want to consent to the proposed sale.

The Hodders applied to the High Court to force the Bakers to sign the special resolution on the basis that the stalemate was significantly prejudicial to them as, amongst other things, it prevented their debt being repaid. The Hodders were successful in the High Court and the property was sold.

Notwithstanding the sale had occurred, the Bakers appealed eventually to the Supreme Court, where the High Court ruling was overturned. It was held that shareholders exercising their voting rights in relation to major transactions, under normal circumstances, do not have any obligations to the company or to the other shareholders. The Court held that even if the High Court had the power to require the Bakers to sign a special resolution approving the sale, it was inappropriate do so.

The case is a good illustration of the relative uncertainties in relying on the Companies Act default position – something which a well drafted shareholders agreement can avoid.