Feb 28

Minority Shareholders have the right not to be oppressed

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“Remedies for unfairly prejudicial conduct towards shareholders appear in s 994 of the Companies Act 2006 (UK), 3 Part 2F.1 (ss 232-235) of the Corporations Act 2001 (Cth) and s 174 of the Companies Act 1993 (NZ). The remedy dates from 1948, when the original ‘oppression remedy’ was enacted in the UK. (Companies Act 1948(UK) s 210). The provision was enacted both to provide a remedy in situations where no specific duty owed by (or to) the company had been breached, and a personal or derivative action was therefore not available, and in recognition of the fact that the only existing equitable remedy — winding up on just and equitable grounds — was often much too drastic a step, particularly if the company was prospering. (Austin and Ramsay, Ford’s Principles of Corporations law 13th Edt, [11.430])” Berkahn, M “Unfair Prejudice: Who Has it Right, economically Speaking” [2008] JIALawTA 7 Often the context of the dispute involves one shareholder trying to water down (unfairly) the rights of another via capital raising, share buybacks or squeezing them out of management while they give themselves large salaries with no dividends to the minority. Oppressed shareholders get stuck with illiquid shares and no way to control the situation. Often they turn to the court for a compulsory buyout via oppression remedy as a forced exit from an unfair situation where their capital is unfairly locked up.

The following remedies are available to minority shareholders in Australia whose rights have been oppressed by misuse of majority shareholder’s powers.

S 232 Grounds for Court order
The Court may make an order under section 233 if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
Who can apply for order
An application for an order under section 233 in relation to a company may be made by:
(a) a member of the company, even if the application relates to an act or omission that is against:
(i) the member in a capacity other than as a member; or
(ii) another member in their capacity as a member; or
(b) a person who has been removed from the register of members because of a selective reduction; or
(c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or
(d) a person to whom a share in the company has been transmitted by will or by operation of law; or
(e) a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into:
(i) the company’s affairs; or
(ii) matters connected with the company’s affairs.

S 233 Orders the Court can make are VERY wide
(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a) that the company be wound up;
(b) that the company’s existing constitution be modified or repealed;
(c) regulating the conduct of the company’s affairs in the future;
(d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
(e) for the purchase of shares with an appropriate reduction of the company’s share capital (this is the most common remedy when a minority shareholder applicant wants to leave the company; the valuation or buy out price set by the court can be done in a way that takes into account the conduct of the parties. The value of the shares is assessed by establishing what their value would have been but for the oppressive conduct: Rankine v Rankine (1995) 124 FLR 340);
(f) for the company to institute, prosecute, defend or discontinue specified proceedings (is an overlap with Statutory Derivative Action pursuant to section 236 on behalf of the company against directors);
(g) authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h) appointing a receiver or a receiver and manager of any or all of the company’s property (This order is used, for example, where the oppression puts the company’s property in jeopardy: Re Enterprise Gold Mines NL. );
(i) restraining a person from engaging in specified conduct or from doing a specified act;
(j) requiring a person to do a specified act

Whether conduct is unfairly discriminatory is to be assessed against the objective standards of reasonable directors, with such skills as directors should have, operating bona fide and in a manner that reasonable people would think to be fair. The phrase “Oppressive to, unfairly prejudicial to, or unfairly discriminatory against” is concerned with conduct that involves commercial unfairness or, as Black J put it in Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 (Re Ledir Enterprises) at [178], “a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair”.

The mere subordination of the wishes of the minority by the voting power of the majority is not of itself necessarily oppressive; oppression is something done against a person’s will; the acts of oppression must result from overbearing acts or attitude on the part of the oppressor. What the legislation contemplates to be oppressive conduct includes unfairness resulting from the abuse of the majority power or control. A wide definition of the “affairs” of a body corporate is provided for in Corporations Act s 53, which relevantly includes all matters associated with the membership, control, business transactions and dealings of the body corporate together with its internal management.

Unfairness may lie in harm suffered as a result of the conduct of management (such as forcing the sale of shares at less than market value), or any prejudice caused or a lack of reasonable commercial justification for the course taken, or simply in the company’s decision-making processes.
See: William McCausland v Surfing Hardware International Holdings Pty Ltd

It is especially relevant to note that exclusion from management is the hallmark of oppression (See Hog v Dymock (1993)  although it may not be sufficient to establish a breach of s 232 in every case: Joint v Stephens (2007) 62 ACSR 309 and [2007] VSC 145 at [233] per Dodds-Streeton J. Whether oppression is made out will depend on whether an objective commercial bystander would reasonably conclude that the relevant conduct was unfair. As Nourse J acknowledged in Re London School of Electronics, the conduct of the petitioner may “render the conduct on the other side, even if it is prejudicial, not unfair.”   Therefore even though there is no statutory requirement that an applicant in oppression have ‘clean hands’, the remedies of the Court are discretionary and  the conduct of the minority shareholder’s director nominee will be relevant in the court’s exercise of discretion as to whether the conduct complained of is ‘unfair’ given all the circumstances.

Oppression does not necessarily involve commercial unfairness. An action is capable of being “contrary to the interests of the members as a whole” in ways other than by being commercially unfair. Being pointlessly wasteful is one example. Australian Institute of Fitness Pty Limited v Australian Institute of Fitness (Vic/Tas) Pty Limited (No 3) [2015] NSWSC 1639 (6 November 2015)

The mere fact that directors are nominated by a majority shareholder does not mean that every act of theirs will be oppressive against the minority just because they act in accordance with the wishes of the majority shareholder so long as the acts are in the interests of the company as a whole.  Re Broadcasting Station 2GB Pty Ltd  [1964-5] NSWR 1648   However It may be oppressive if directors or majority shareholders conduct the affairs of a company in a way that advances their own interests or the interests of others, to the detriment of a minority shareholder: Re Bright Pine Mills Pty Ltd [1969] VicRp 121; [1969] VR 1002   If directors act in a way to promote their own interest or promote the private interest of others, they (have breached their fiduciary duties and) have not acted in the best interests of the company: Kinsela v Russell Kinsela Pty Ltd (in liq) (at 729).

Directors breach of their fiduciary duties can amount also to oppression: Re Spargos  Mining NL( 1990) 3 ACSR 1; Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136; Re Dalkeith Investments Pty Ltd (1985) 3 ACLC 74.

Combined with or independently of the right to seek redress for Oppression, a shareholder acting in good faith and for a proper purpose can bring a Court application pursuant to Section 247A to inspect the ‘books’ of the company.

“Books” are defined broadly under section 9 of the Corps Act and include any record of information, financial record or any document. Shareholders of long standing with significant minority holdings are more likely to be granted such orders (as opposed to new or token shareholders whose application may be seen as not for a proper purpose but rather specious or contrived).

See for example the recent Federal Court decision of Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16. In that case there was conflict between the two major shareholders and their nominated  directors. The minority ‘Mighty River’ sought inspection of documents  for the purpose of enabling Mighty River to determine the nature and scope of Mesa’s port capacity and access rights with the Port Authority, and the terms upon which third parties are using the port rights and the Boodarie lease, so as to enable Mighty River to make a decision on the exercise of its rights as a shareholder of Mesa.

A person who inspects books on behalf of an applicant is prohibited from disclosing information obtained during the inspection to anyone but ASIC and the applicant:  s 247C.

The relevant principles are to be found in the convenient summary given by Debelle J in Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344; 223 LSJS 97 at[29] and the additional principles identified by Gordon Hanks v Admiralty Resources NL [2011] FCA 891; (2011) 85 ACSR 101 at [32]

Debelle J also said in Acehill at [29] that the section operates to protect a specific or personal right, such as where a shareholder contemplates proceedings under s 233 of the Act (proceedings of the kind foreshadowed in the parties’ 2014 correspondence concerning pre-action discovery) and “where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take”: Intercapital Holdings Ltd v MEH Ltd (1988) 6 ACLC 1068 at 1074–1075.

The procedure under s 247A is not intended to be as wide-ranging as discovery so that the general rule is that inspection will be limited to such documents as evidence the results of board decisions, rather than all board papers leading to decisions, but there may be occasions when it is proper to permit inspection of board papersAcehill at [31] The section can be used if the shareholder has a reasonable suspicion of breach of duty because the courts have held this is a ‘proper purpose’ McNeil v Hearing & Balance [2001] NSWSC 942 @ [17]

Also shareholders have other avenues of redress in this area.

They (or an officer of the company) can, in good faith and in the best interests of the company) apply for leave of the Court to bring an application for statutory derivative orders pursuant to section 236 on behalf of the company against directors (irrespective of whether members resolutions sanctioned the directors alleged breaches of statutory duty). As part of such an application, the Court can order inspection of Books pursuant to section 241.

They can complain to ASIC about director’s breach of statutory duties and depending on resources and public interest the regulator may step in with a pecuniary penalty under s 1317 E of up to $200K payable to ASIC.

One of the few ways they can apply personally to court for orders against a director is by way of an injunction pursuant to section 1324.

The Company can seek a compensation order from the company pursuant to section 1317H .

Where a Court is satisfied that a person has contravened a civil penalty provision, it must make a declaration of the contravention, and may also order payment of a pecuniary penalty, make a compensation order, or a banning order. Note the Court has power also to excuse directors for contravention of a civil penalty provision if they acted honestly and in all the circumstances ought fairly to be excused. Section 1317S

See too Criminal provisions may also apply to some misconduct by directors, controllers and senior management of corporations.

See s 1309 and s 1311 Corporations Act 2001
Section 11.2 in Chapter 2 the Criminal Code extends criminal liability to any person who was directly or indirectly knowingly concerned with an offence.

See Generally our article ‘It’s a crime to be blasé about corporate governance in Australia’

Peter Janssen

Director Principal

Corporate First Lawyers


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