Cancellation of shares held to be oppressive

Shareholder oppression occurs when those who control a company use their power in a way that unfairly harms or takes advantage of other (usually minority) shareholders.  The Federal Court case of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920 (Vitruvian Investments) involved a shareholder oppression dispute between Mr Walid Sharif (Mr Sharif/Plaintiff) and Mr Jonathan Gregory (Mr Gregory/Second Defendant), the sole director of Vitruvian Investments Pty Ltd ACN 630 548 846 (Vitruvian/First Defendant).  This article focusses on the allegations of shareholder oppression.

Background to oppression in Vitruvian Investments

Mr Sharif alleged shareholder oppression pursuant to section 232 of the Corporations Act 2001 (Cth) (Corporations Act) at [22] on the following four (4) grounds:

• his exclusion from the management of Vitruvian;
• the cancellation in 2020 of his shares in Vitruvian, which at the time totalled fifteen (15) percent (%) of its issued capital;
• the formulation and implementation of a plan to dilute his shareholding by not allowing him to participate in future capital raisings; and
• a share issue on 14 July 2020 ostensibly involving a conversion of loans to equity.

Vitruvian argued that the shares had been cancelled because Mr Sharif had misrepresented his qualifications.  They claimed that the agreement giving rise to the share entitlement was void under section 243 of the Australian Consumer Law^[1].  Because, at [13], Mr Sharif had claimed that he had a Bachelor’s degree in electrical engineering when he had only undertaken part of this course.

The statute on shareholder oppression

Under section 232 of the Corporations Act, oppression occurs: 

“… 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 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.”

In determining whether the conduct was oppressive, Colvin J referred to the case of Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55 which stated that ‘unfairness’ can be determined by objectively assessing the conduct.  The question will be whether a commercial bystander would reasonably agree that the conduct is unfair based on the defendant’s motives.  This was established in the case of RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756.

Vitruvian’s conduct and the “intention to oppress”

Mr Sharif’s exclusion from management

In the case of Campbell v Backoffice Investments Pty Ltd [2009] HCA 25, the High Court established that “wrongful exclusion from management of a company may be a form of oppression”.  Colvin J determined that the exclusion of that Mr Sharif from management was not oppressive, as stated at paragraph [251]:

“In short, there is no basis in the evidence to support a conclusion that the removal of Mr Sharif as CEO was ‘wrongful’ in some way having regard to the circumstances that pertained to Vitruvian and his appointment as CEO. At all times there was the possibility that Mr Gregory as the director of the company could resolve to remove Mr Sharif as CEO. No submission was advanced as to why it would be unfair for that to occur. Further, save for matters concerned with the issue of further shares in Vitruvian (which are advanced as a separate basis for the oppression claim) there is no respect in which it is said that the affairs of Vitruvian were managed in a manner that involved an exclusion of Mr Sharif. For example, there is no evidence of any requests for information made by Mr Sharif that were refused or any respect in which he sought to provide input into the decisions being made concerning the management of the affairs of the company that were refused”.

[Bold is our emphasis]

Share cancellation, the plan to dilute and the conversion of loan to equity

Section 256B of the Corporations Act allows a company to:

“reduce its share capital in a manner that is fair and reasonable, does not materially prejudice creditors and has been approved under s 256C”. 

Section 256C of the Corporations Act requires the reduction to be approved by shareholders in a general meeting and by special resolution.  Although Vitruvian did not comply with section 256C, the law allowed for a selective buy-back procedure, meaning adherence was not necessary.  Nonetheless, because there was no commercial reason which could justify the selective cancellation of Sharif’s shares, Colvin J at [259] held that the cancellation was oppressive and that Gregory was acting in his own interests in formulating a plan to dilute Sharif’s shareholding.  Colvin J said at [264]:

“For those reasons, it was not the formulation of the plan to dilute that was oppressive. Rather, it was the action taken to implement the plan which involved the cancellation of the shares of Mr Sharif before any capital raising was undertaken with the consequence that Mr Sharif was unable to participate. Therefore, even if he was subsequently able to establish that he should be reinstated to the register his interest in the company would have been substantially diluted by intervening events. It was this aspect of the conduct that made it unfair in the relevant sense especially as Mr Sharif was a 15% shareholder who had invested a substantial amount of time and effort into Vitruvian on the basis that it was a start-up”. 

[Bold is our emphasis]

The intention to oppress will be a significant consideration in determining if oppressive conduct occurred. That said, the existence of an unfair intention isn’t enough on its own to prove oppression — the resulting actions must also be objectively unfair.

The decision regarding the minority shareholder oppression

Colvin J ultimately found that the cancellation of shares was oppressive, rejecting Vitruvian’s claim that it was justified by Mr Sharif’s alleged misrepresentation about his qualifications.  The Court did not accept the argument that Mr Sharif’s exclusion from management was oppressive.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Corporations Act 2001 (Cth)

Cases

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55

RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756

Sharif v Vitruvian Investments Pty Ltd [2023] FCA 426 (4 May 2023) – interlocutory – leave to amend statement of claim

Vitruvian Investments Pty Ltd v Sharif [2023] FCA 471 (15 May 2023) – Interlocutory discovery

Sharif v Vitruvian Investments Pty Ltd (No 2) [2023] FCA 619 (9 June 2023) – Costs

Sharif v Vitruvian Investments Pty Ltd (No 3) [2023] FCA 920

Sharif v Vitruvian Investments Pty Ltd (No 4) [2023] FCA 1172 (29 September 2023) – Orders

Sharif v Vitruvian Investments Pty Ltd (No 5) [2024] FCA 134 (28 February 2024) – Costs

Further information about shareholder oppression

If you need to work with a lawyer in a shareholder oppression matter, please contact me for a confidential and obligation free and initial discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Schedule 2, Competition and Consumer Act 2010 (Cth).

---

Related insights about shareholder oppression