Oppression Claims by Minority Shareholders

Companies are, more often than not, controlled by a single shareholder or a group of shareholders. Those shareholders who hold the majority of shares are able to elect directors of their choosing and also control the company’s activities. Therefore, the shareholders who hold a minority of the votes, may have little, if any, control and/or influence over the direction and development of a company.

As a result, the courts and Parliament have identified this as an issue and sought to provide protection to minority shareholders and by virtue of enacting section 232 of the Corporations Act 2001 (Cth) (the Act), members (which includes shareholders) are able to seek numerous remedies under section 233 of the Act. This article will examine the processes and identify the issues for members who may be subject to oppressive conduct and their recourse where oppressive conduct is made out.

Who Can Bring An Oppression Claim?

Section 234 of the Act sets out who may apply for an order under section 232 of the Act. Those people are:

• a member of the company, even in circumstances where the application relates to an act or omission that is against the member, it may also relate to an act or omission that lies against another member in their capacity as a member^[1];
• a person who has been removed from the register of members because of a selective reduction^[2];
• a person who has ceased to be a member of the company, if the application relates to the circumstance in which they ceased to be a member^[3];
• a person to whom a share in the company has been transmitted by will or by operation of law^[4];
• a person whom ASIC thinks is appropriate, having regard to investigations it is conducting or has conducted into the company’s affairs or matters connected with the company’s affairs.^[5]

There is authority which suggests that a member must be registered in order to apply under section 232 of the Act for an order. However, this issue is still unclear and must be assessed in relation to the matters of the individual case. For example, in Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87 a purchaser of shares was not registered as a member before it initiated proceedings (under the predecessor of section 232 of the CA) and it was found that a transferee under a contract for the sale of shares in a company should not generally be treated as a member before the contract is completed and prior to the purchaser’s name being recorded on the share register as the holder of the shares.^[6]

In circumstances where a member’s name has been removed from the register, remedies under section 232 of the Act are also available for those members.^[7]

What Requirements Must a Court Consider to Make an Order For Oppression?

In order for a members’ oppression claim to succeed, it must be proven that the company’s affairs were conducted in a manner that was in all the circumstances oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.^[8] However, something more than just a dissatisfied shareholder is required to establish a claim under section 232 of the Act. Oppression connotes a lack of probity and fair dealing.^[9] It needs to be somewhat ‘burdensome, harsh and wrongful’.^[10] Yet a claim need not demonstrate that the conduct was illegal.^[11]

The conduct complained of must be in relation to the affairs of the company, which includes, amongst other things^[12]:

• the promotion, formation, membership, control, business, trading, transactions and dealings, property, liabilities, profits and other income, receipts, losses, outgoings and expenditure; and
• internal management and proceedings of the body.

Therefore, when determining what is oppressive or unfair, the Courts will look to the interests of the majority and minority shareholders and in particular identify the company’s background and the reasonable expectations of its shareholders.^[13] This is somewhat a balancing exercise undertaken by the Courts.

Oppressive or Unfair Conduct

Some examples that have triggered minority protection remedies include:

• excluding a minority shareholder from involvement in the affairs of the company;^[14]
• denial of information; and/or^[15]
• the diversion of a legitimate corporate opportunity to themselves or associates.^[16]

In Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153, the Lagerlow family owned 60% of the shares and the Bradfield family owned the remaining 40% of the shares in a company that both families controlled. There were three directors of the company, two (2) of whom were of the Lagerlow family and the other of the Bradfield family. The Bradfield family’s director had resigned and the Bradfield shareholders (the minority shareholding group) made an application pursuant to section 232 of the Act making the allegations that the Bradfield director was forced to resign and was not included in the management of the company.

In this matter, the Court found that the allegations under section 232 of the Act have been made out and that the exclusion from the management of the company is an example of oppressive or unfair conduct. It also acknowledged that the company operated as a quasi-partnership between the two families. Therefore, where a company is a quasi-partnership, it may be oppressive or unfair to exclude one of the investors (such as the Bradfield director) from the day-to-day management of the company’s affairs.

Remedies

In circumstances where oppressive or unfair conduct can be established, then the Court, in exercising its discretion, may grant a remedy appropriate to the circumstances pursuant to section 233 of the Act. The objects of section 233 of the Act are to compensate the injured party or parties and, of course, bring the conduct that is causing the oppression or unfair conduct to an end.^[17] Some examples of the orders that may be appropriate for a court to make are as follows (see section 233 of the Act generally for a list of remedies):

• the company be wound up^[18];
• the constitution of the company be modified or repealed^[19];
• the purchase of shares of any member by other members or a person to whom a share has been transmitted by Will or by operation of law^[20]; or
• appointing a receiver or a receiver and manager.^[21]

It is accepted that the most common remedy a plaintiff will seek is an order that either the company or a member (generally the majority shareholders) buy the oppressed members’ shares. Whilst this remedy is most common, the Courts often are met with arguments as to what value is to be ascribed to the shares and/or how the value of the shares will be determined. It is accepted that the Court has a wide discretion in making this determination.

In some circumstances, the Court has ordered that the majority shareholders are to purchase the shares at a price that would be reflective of the value of the shares in the event that the oppressive conduct had not occurred.^[22]

The case law regarding the valuation of shares in the context of a ‘buy-out order’ makes it clear that the usual date at which the valuation should be made is the date of the buy-out order. That is, the present day, and not the date that the alleged oppression began.

In Profinance Trust SA v Gladstone [2002] 1 BCLC 141, the Court held:

“… The starting point should in our view be the general proposition stated by Nourse J in In re London School of Electronics Ltd [1986] Ch 211, 224: ‘Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased.’ That is, as Nourse J said, subject to the overriding requirement that the valuation should be fair on the facts of the particular case.

The general trend of authority over the last 15 years appears to us to support that as the starting point, while recognising that there are many cases in which fairness (to one side or the other) requires the Court to take another date. …” (emphasis added).

In Dynasty Pty Ltd v Coombs (1995) 59 FCR 122, the Full Court of the Federal Court approved of the statement of Justice Nourse in Re London School of Electronics Ltd [1985] 3 WLR 474 at 484, and held that, if there were such a thing as a general rule, it should be the date of the order rather than the date of presentation of the petition or the occurrence of the acts of oppression. That statement was subsequently followed by Justice Young of the NSW Supreme Court in Short v Crawley (No 30) [2007] NSWSC 1322.

The Court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out.^[23]

Only in special circumstances should an earlier date, such as the date that the alleged oppression began, be used.

As foreshadowed above, the Courts will be reluctant to order the winding up of a company, particularly one that is solvent. However, there have been circumstances where the Court has ordered the winding up of a company. In particular in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 the High Court of Australia found that it would be inappropriate to make an order for the buy-out of shares when the company is already in provisional liquidation and, therefore, no other order aside from the winding up of the company would be appropriate.

Conclusion

Minority shareholders should not remain idle to actions of the majority shareholders, in numerous circumstances where the majority shareholders may be acting unfairly or oppressively. The minority shareholders should take steps to ensure that the company is operated appropriately and that the interests of the minority shareholders (which are just as important) are protected at all times.