Why Shareholders’ Agreements Matter: Lessons from Zong v Lin

The New South Wales Court of Appeal decision in Zong v Lin [2022] NSWCA 136 is a clear reminder of why properly drafted shareholders’ agreements are critical—particularly where one party controls the company’s day-to-day operations and finances.

The case involved two business partners, Mr Jason Zong and Ms Hui Lin, who jointly established a company called Australian International Yacht Club Pty Ltd. Before the company began operating, they entered into a Shareholders’ Agreement setting out their respective contributions and responsibilities.

Under that agreement, Ms Lin was required to contribute $500,000 in capital, which she paid in full by December 2018. Mr Zong, on the other hand, was not required to contribute cash. Instead, his contribution was his business expertise, industry connections, and goodwill. The agreement assumed that Mr Zong would use those skills to advance the company’s interests.

What followed, however, was very different.

Rather than applying company funds for legitimate business purposes, Mr Zong engaged in a series of transactions that benefited himself and his family. Most notably, the company purchased a motor cruiser—the Dauphin—from a company owned by Mr Zong’s wife. The purchase price was significantly higher than the boat’s market value. Mr Zong also transferred substantial amounts of money from the company’s bank account to himself, to his wife, and to solicitors acting for him personally.

These transactions severely depleted the company’s funds. As a result, the yacht club business never commenced operations, and Ms Lin’s $500,000 investment was effectively lost.

Ms Lin commenced court proceedings on two fronts. First, she brought a statutory derivative action on behalf of the company, alleging breaches of directors’ duties. Second, she brought a personal claim asserting that Mr Zong’s conduct was oppressive to her as a shareholder.

At trial, the court found that Mr Zong had breached his fiduciary duties as a director by misusing company funds and prioritising his own interests over those of the company. His conduct was also found to be oppressive within the meaning of section 232 of the Corporations Act 2001 (Cth).

The court made strong orders in response. Mr Zong was required to compensate the company for its losses, was removed as a director, and was ordered to transfer his shares to Ms Lin without receiving any compensation. Mr Zong appealed, arguing that the boat had been correctly valued, that payments to his solicitors were justified, and that it was unfair for him to lose his shares without payment.

The Court of Appeal rejected all of these arguments and dismissed the appeal in full.

This case highlights the real power of a well-drafted shareholders’ agreement. It provides a legally binding framework for governance, decision-making, and accountability. Just as importantly, it shows that courts will step in where one party abuses their position and undermines the agreed commercial arrangement.

For business owners, the message is clear: a shareholders’ agreement is not just a formality—it is a key tool for protecting investments, managing risk, and ensuring fairness within a company.

For more information on shareholder’s agreements reach out to our Commercial Team today on 8525 2700 or click here to request an appointment,

Article by Joanna Kourgialis
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