Can a ‘commercial purpose’ excuse shareholder oppression?

Quick summary of commercial purpose and oppression

Not automatically, but it can be decisive. Under section 232 of the Corporations Act 2001 (Cth), the test is commercial unfairness, judged objectively. In Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201, a director’s conflicted buyout breached his fiduciary duties but was not oppressive, because a reasonable director could have made the same commercial decision.

——— Background

What was Hylepin v Doshay about?

A minority shareholder challenged six transactions spanning more than 30 years, claiming they were oppressive and breached the managing director’s fiduciary duties.

Hylepin Pty Ltd (Hylepin) bought 45,000 shares in Doshay in 1987 for $1 each, an investment of $45,000. There was evidence that by February 2018 those shares may have been worth about $2,735,000.^[2] John So, Doshay’s managing director and an indirect shareholder, invested in various projects over the years, sometimes through Doshay, sometimes personally and sometimes through related companies.^[3]

In 2016, Hylepin sued under section 232. It was later given leave to bring derivative claims in Doshay’s name for breach of fiduciary duty.^[4] It challenged six transactions:^[5]

• loans to, and shares in, four other Chinese restaurant companies;
• the purchase of two Melbourne properties by Global 2000 Melbourne Pty Ltd (Global 2000), a company John So directed and partly owned through Global Crest Pty Ltd (Global Crest);
• investments in Evaluator Pty Ltd (Evaluator), which bought the Café Puccini business next door to the restaurant;
• a 2004 change to Global 2000’s share register that reduced Doshay’s recorded holding from five shares to four;
• not paying dividends before 9 November 2018, despite retained profits of more than $8 million; and
• the 2019 decision not to exercise the option to renew the restaurant lease.

O’Bryan J dismissed every claim except one: a declaration that Doshay has owned five shares in Global 2000 since 15 June 2000 (Share Declaration).^[6] The Full Court (Markovic, Banks-Smith and Anderson JJ) dismissed Hylepin’s appeal.^[7]

In short, a long-standing minority shareholder challenged decades of management decisions, and lost on almost every point.

——— The test

What is the test for shareholder oppression?

Commercial unfairness, judged objectively. Section 232(e) asks whether conduct is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” a member, which is read as one compound expression.^[8]

The Full Court applied these principles:

• the concern is “commercial unfairness” – a departure from the standards of fair dealing;^[9]
• the question is whether reasonable directors, having in mind the importance of furthering the company’s objects and the burden their decision imposes on a member, would have decided it was unfair to make the decision;^[10]
• unfairness is judged objectively, in the eyes of a commercial bystander;^[11]
• mere prejudice to, or discrimination against, a member is not enough;^[12] and
• mismanagement alone is not oppression, and the Court avoids taking on the management of the company.^[13]

Conduct “contrary to the interests of the members as a whole” under section 232(d) is also judged objectively, against accepted standards of corporate behaviour.^[14]

In short, the question is not whether a decision was wise or conflicted, but whether it was commercially unfair to the members.

——— Duties and oppression

Is a breach of directors’ duties automatically oppression?

No. The elements are different, although they can overlap.^[15]

The key transaction was Doshay’s buyout of Global Crest’s 51% interest in Evaluator in December 2003. Evaluator held the lease of the Café Puccini premises next to the Dragon Boat Restaurant, and had made losses in each of its first three years.^[16] The buyout repaid Global Crest’s loans to Evaluator, and John So held 25% of Global Crest. O’Bryan J found that he breached the conflict and profit rules, but that the claim was out of time.^[17]

The Full Court held that the buyout was still not oppressive. Its commercial purpose mattered:

• the lease protected the restaurant from a competitor next door and gave it extra space;^[18]
• Global Crest could call up its loans at any time, leaving Doshay to choose between Evaluator’s insolvency, with the loss of the lease, and funding the repayment;^[19]
• Evaluator was not worthless despite its losses;^[20] and
• John So’s conduct was not dishonest, fraudulent or concealed.^[21]

A reasonable director, weighing the benefit to Doshay against the risk, could have made the same decision. It was “within the realm of management decision-making”.^[22] The Court accepted, however, that a commercial justification does not rule out a finding of oppression as a matter of principle.^[23]

In short, a conflicted decision can still be a fair one, and fairness is what section 232 tests.

——— The other transactions

Were the other transactions oppressive, alone or together?

No. The Full Court found that none of the other transactions argued on appeal was oppressive, and that together they did not amount to a course of oppressive conduct.^[32]

• Exhibition Street property: Doshay had no right to the investment, but was offered a 50% stake in the joint venture, and its loans earned interest. Nothing suggested Doshay was disadvantaged.^[33]
• 2004 share register change: John So held an “honest but erroneous view” that his share transfer was unintended. Only theoretical prejudice resulted, and the Share Declaration was enough to correct it.^[34]
• Loans to franchised restaurants: loans to two companies running “Dragon Boat” franchises failed but were not uncommercial. A loan is not uncommercial just because it is undocumented, unsecured and interest-free.^[35]
• Lease renewal: not committing to a further 10-year term was a business judgment made after advice, with no certainty that renewal would reduce the rent.^[36]

The dividend complaint was rejected at trial and not pursued on appeal.^[37] It also counted that the transactions were recorded in financial statements provided to shareholders.^[38]

The Court accepted that conduct can be oppressive when viewed as a whole, even if no single act is.^[39] But selectively identifying transactions over many years did not show “a pattern or course of conduct” that was oppressive or unfair.^[40] For a case where the conduct did add up, see our article on cumulative oppression.

In short, failed investments and old decisions made for commercial reasons are not oppression, even when added together.

——— Outcome

What did the Full Court order?

The appeal was dismissed, and Hylepin was ordered to pay the costs of John So and Global 2000.^[41]

Hylepin had sought a buy-out of its shares at fair value, or a winding up.^[43] Doshay made two offers during the proceeding to buy back Hylepin’s shares, both rejected, which O’Bryan J treated as further negating any suggestion of oppression.^[44]

In short, Hylepin kept the declaration it won at trial, but lost the appeal and was ordered to pay costs.

Frequently asked questions about commercial purpose and oppression

Key takeaways about commercial purpose and oppression

• Hylepin, a minority shareholder in Doshay, challenged six transactions spanning more than 30 years and lost on almost every point.
• The test for oppression is commercial unfairness, judged objectively; mere prejudice or mismanagement is not enough.
• A breach of fiduciary duty is not automatically oppression: the conflicted Evaluator buyout had a sound commercial purpose and was not oppressive.
• The other transactions were not oppressive, alone or together.
• The appeal was dismissed with costs; only the declaration about Doshay’s shares in Global 2000 stood.

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Links and further references

Legislation

Corporations Act 2001 (Cth) ss 232, 233, 234, 236, 237

Cases

Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55
Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370
Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201
Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459