Dividend Deprivation and shareholder oppression?

Quick summary of dividend deprivation

Dividend deprivation refers to the situation where those who control a company retain profits without a legitimate commercial reason, unnecessarily reducing dividends and intentionally denying shareholders a return on their investment (Dividend Deprivation).  Not paying dividends is not inherently oppressive.  A minority shareholder must show that the decision not to pay dividends was commercially unfair to them.

——— The test

Can dividend deprivation amount to shareholder oppression?

Not paying dividends is not inherently oppressive.

Not paying dividends is not inherently oppressive.  Directors may keep profits for a variety of legitimate reasons and Courts are unlikely to question a reasonable business judgment.  A minority shareholder must show that the decision not to pay dividends was commercially unfair to them.  The following two (2) cases contrast where a minority shareholder succeeded in arguing Dividend Deprivation as a form of shareholder oppression with a case where they were unsuccessful.

In short, a minority shareholder must show that the decision not to pay dividends was commercially unfair to them.

——— Roberts v Walter Developments

What happened in Roberts v Walter Developments?

It is an example of how Dividend Deprivation can be oppressive.

The case of Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882 (Roberts) in the Supreme Court of Western Australia is an example of how Dividend Deprivation can be oppressive.  In 1967, Mr John Roberts, Russell Roberts and two (2) associates incorporated a company called Walter Developments Pty Ltd (Walter Developments) for the purpose of purchasing commercial land in Morley.^[1]  From 1987, Russell Roberts effectively controlled seventy-five per cent (75%) of shares on issue, Mr John Roberts held twenty per cent (20%) and Mr John O'Halloran held the remaining five per cent (5%).^[2]

Justice Wheeler found that Walter Developments had been formed as a "quasi-partnership", on the understanding that all of the original investors would share in its management.^[3]

The relationship broke down in 1986 after a falling out between Mr John Roberts and Mr Russell Roberts, and Mr John Roberts then took a very limited role in the company.^[4]  In 1990, Mr John Roberts petitioned to wind up Walter Developments, and in 1992 Justice White found that its affairs had been conducted oppressively.^[5]  From 1991, Mr John Roberts was no longer a director and had been excluded from its management.^[6]

Walter Developments made profits in each year from 1986 to 1989, and between 1986 and 1991 it received a substantial rent from the Coolabah Tavern.^[7]  Despite this, it did not pay a dividend for the years 1986 to 1989 or for 1993.^[8]  Justice Wheeler accepted that a mere failure to pay dividends, even where they are able to be paid, does not of itself constitute oppression, but held that Dividend Deprivation is capable of being oppressive in certain circumstances.^[9]  The factors to be taken into account by the Court in matters involving Dividend Deprivation include the history of the company, the extent of its financial needs and the reasonable expectations of its members.^[10]

In short, Justice Wheeler accepted that a mere failure to pay dividends does not of itself constitute oppression, but held that Dividend Deprivation is capable of being oppressive in certain circumstances.

——— The dividend decisions

Which decisions not to pay dividends were oppressive in Roberts?

The failure to pay a dividend for 1986 to 1989 and 1993 was unfairly prejudicial to Mr John Roberts.  The decisions not to pay dividends in 1990, 1991 and 1992 were reasonable.

Justice Wheeler found that the decisions not to pay dividends in 1990, 1991 and 1992 were reasonable, given a large depreciation allowance and difficult trading conditions.^[11]  However, the Court decided other years differently.  For 1986 to 1989, the company made a profit each year and was able to pay dividends.^[12]  Over that period it was also receiving a substantial rent from the Coolabah Tavern, rather than merely holding land that was growing in value.^[13]  Meanwhile the shareholders' circumstances had changed.  They had originally been concerned mainly with the capital growth of the Morley land, but after 1986 John Roberts no longer took part in the business, did not want the company to expand and had the greatest need of any shareholder for an income from it.^[14]  For 1993, the directors retained profits of $107,515 in case the company redeveloped its land.^[15]  That was a departure from past practice, as the company had always funded its developments by borrowing and shareholder advances rather than retained profits.  The redevelopment was no more than a possibility, and the decision was contrary to John Roberts' wishes.^[16]  For those reasons, Justice Wheeler held that the failure to pay a dividend for 1986 to 1989 and 1993 was unfairly prejudicial to Mr John Roberts.^[17]

The table brings the years and the reasons in Roberts together.

In short, Justice Wheeler held that the failure to pay a dividend for 1986 to 1989 and 1993 was unfairly prejudicial to Mr John Roberts, but that the decisions not to pay dividends in 1990, 1991 and 1992 were reasonable.

——— Remuneration and the test

Why did the directors' conduct in Roberts amount to oppression?

The directors came under a duty to take account of Mr John Roberts' position as a minority shareholder in decisions about dividends and directors' remuneration, and failed to do so.

Justice Wheeler considered directors' remuneration together with the failure to pay dividends, as this reduced the amount available for distribution to shareholders.^[18]  Mr Russell Roberts was managing director of both Walter Developments and a related company, Fascine Developments Ltd, in which Mr John Roberts' interest had been reduced to a negligible proportion.^[19]  In 1993, the directors disregarded a remuneration consultant's report on the managing director's salary, and did not reconsider how that salary was apportioned between the two (2) companies.^[20]  Justice Wheeler found that this showed a lack of consideration of John Roberts' interests and a disposition to act solely upon Russell Roberts' view of what was appropriate.^[21]

Justice Wheeler held that conduct is "oppressive" or "unfairly discriminatory against" a member if it is taken without bona fide consideration of that member's interests and is objectively detrimental to them.^[22]  When Mr John Roberts withdrew from active involvement, the relationship changed from a quasi-partnership to one of majority and minority, and the directors came under a duty to take account of Mr John Roberts' position as a minority shareholder in decisions about dividends and directors' remuneration.^[23]  Mr Russell Roberts and Mr John O'Halloran failed to do so, and Justice Wheeler found that no board acting reasonably could have reached the decisions that they did.^[24]

Mr John Roberts had at times been unreasonable and difficult to deal with, but that did not prevent relief being ordered by the Court.^[25]  Justice Wheeler considered that winding up a successful company would be an extreme step, and indicated that the appropriate remedy was for John Roberts' shares to be bought out, leaving the parties to agree to final orders.^[26]

The practical lesson from Roberts is that once a shareholder steps back from the business and the relationship between the parties changes the director(s) must consider that shareholder's position when deciding dividends and remuneration.  Decisions to retain profits need to be based on genuine need, and things such as independent advice on remuneration should not be disregarded.  For a minority shareholder, objecting to the retention of profits on the record matters.  In Roberts, the directors kept retaining profits despite years of complaints, contrary to the minority's known wishes.

In short, no board acting reasonably could have reached the decisions that the directors did, and the appropriate remedy was for John Roberts' shares to be bought out.

——— Hylepin v Doshay

Why did the dividend deprivation claim fail in Hylepin v Doshay?

Justice O'Bryan found nothing unfair in the strategy of retaining profits, and no evidence that dividends had been withheld to prejudice Hylepin.

The case of Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370 (Hylepin v Doshay) shows how a complaint about Dividend Deprivation can fail.  Doshay Pty Ltd (Doshay) did not pay a dividend to its shareholders between June 1989 and November 2018.  By 30 June 2018 its retained profits had grown to $8,635,176.82.^[27]  Hylepin Pty Ltd (Hylepin), which held fifteen per cent (15%) of the shares on issue, did not receive a return on its investment for almost thirty (30) years.^[28]  Its next dividend, $300,000, was paid in November 2018, after it had started proceedings claiming that the failure to pay dividends was oppressive.^[29]

Justice O'Bryan rejected the claim for oppression based on Dividend Deprivation.  After the FY1988 dividend, Doshay's director and general manager, Mr John So, proposed to the shareholders that profits be retained to fund Doshay's working capital and other investments.^[30]  No shareholder objected, and Hylepin did not complain until 2016.^[31]  Justice O'Bryan found nothing unfair in that strategy, and no evidence that dividends had been withheld to prejudice Hylepin.^[32]

In short, an informal policy, proposed decades earlier which was never challenged, was enough to make the board's decision fair.

——— Comparing the cases

Why did one claim succeed and the other fail?

Whether to pay a dividend is ordinarily a matter for the directors, and Courts are reluctant to interfere with a decision to retain profits that has a commercial rationale.

The contrast between the two (2) cases of Roberts and Hylepin v Doshay illustrates the difficulty in pleading shareholder oppression in Dividend Deprivation matters.  Whether to pay a dividend is ordinarily a matter for the directors, and Courts are reluctant to interfere with a decision to retain profits that has a commercial rationale.

In Hylepin v Doshay, nothing in Doshay's constitution or any shareholders' agreement (Governing Documents) required a dividend to be paid, and an informal policy, proposed decades earlier which was never challenged, was enough to make the board's decision fair.  In Roberts, the profits were available, the minority shareholder was no longer part of the business, needed an income, and those in control gave no real consideration to that position.  Unless the Governing Documents impose an obligation to pay a dividend, a minority shareholder whose return is deferred indefinitely must show, as John Roberts did, that the decision to retain profits was made without regard to the interests of the minority shareholders.

The table brings the two (2) cases together.

In short, unless the Governing Documents impose an obligation to pay a dividend, a minority shareholder must show that the decision to retain profits was made without regard to the interests of the minority shareholders.

Frequently asked questions about dividend deprivation

Key takeaways about dividend deprivation

• Not paying dividends is not inherently oppressive, and Courts are unlikely to question a reasonable business judgment.
• A minority shareholder must show that the decision not to pay dividends was commercially unfair to them.
• The factors to be taken into account by the Court include the history of the company, the extent of its financial needs and the reasonable expectations of its members.
• In Roberts, the directors failed to take account of Mr John Roberts' position as a minority shareholder in decisions about dividends and directors' remuneration.
• In Hylepin v Doshay, an informal policy, proposed decades earlier which was never challenged, was enough to make the board's decision fair.
• For a minority shareholder, objecting to the retention of profits on the record matters.

Need advice about dividends and shareholder oppression? Call Dundas Lawyers on 07 3221 0013 or submit an enquiry online.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370

Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882

Shum Yip Properties v Chatswood Investment and Development [2002] NSWSC 13