Point in time valuation and minority shareholder oppression

Shareholder oppression, or minority shareholder oppression, is generally thought to occur when the majority shareholders misuse their power to oppress or control the minority.  The classes of conduct that give rise to a remedy for shareholder oppression are not closed, nor are they limited to situations involving a clear majority or minority.  The oppression remedy contained at section 233 for a breach of section 232 of the Corporations Act 2001 (Cth) (Corps Act) also apply to equal ownership situations where, for example:

“A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong-arm tactics are used.“^[1]

Minority shareholder oppression principles considered in valuations

In matters involving shareholder oppression and exclusion from management and a buyout remedy, the oppressed will generally no longer have access to full and complete information about the company’s affairs.  This lack of information can leave the minority at the whim of the majority who then control the business operated by the company.

In our article titled “Shareholder oppression – valuation issues” we discussed some of the principles that an expert valuer follows when preparing a report for the Court regarding the price to be paid for the minority interest.  This article goes into more depth by analysing a case that considered the factors that the Court takes into account in determining the date of valuation.

The notion of “fair value”

In oppression matters there can be a significant amount of time from the date when the oppression commenced, regardless of what it was and the date that a valuation is sought.  In fact, several years may have passed.  It’s also possible that the value of the company whose shares are to be valued has risen or fallen because of the control exercised by the majority.  This leaves an important unanswered question – at what precise point in time is the minorities interest to be valued?

It was said by Derrington J in BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192 (BAM Property Group) at 89 that:

“The purpose of granting a remedy between parties in an oppression case is ‘to compensate the oppressed shareholder for the oppression which has taken place’.“

Where the remedy sought is the compulsory acquisition of shares, Derrington J states relevantly at [89]:

“… that object is achieved by the Court having a wide discretion to fix a price that “represents a fair value in all the circumstances“: Smith Martis Cork (145-146 [70]-[72]).  That does not necessitate fixing a price only by reference to ordinary valuation principles: Smith Martis Cork (146 [73]-[78]) and Re Bird Precision Bellows Ltd [1986] 1 Ch 658, 669.  The question is to identify the price which should be paid in the circumstances.“

[Bold is our emphasis]

The notion of the exact point in time for valuation

Derrington J at [90] of BAM Property Group said:

“It can be accepted that, where shares are to be valued as a starting point for determining the price which should be paid, the usual date for valuation is the date of the filing of the proceedings, but that is by no means a universal approach.

The valuation does not value the shares at that date as if nothing but the ordinary course of business had preceded it. That would effectively allow the oppressing party the benefit of the wrongful conduct as, inevitably, that conduct has diminished the value of the oppressed party’s interest in the company before the proceedings are commenced.”

[Bold is our emphasis]

Derrington J then cited the case of Scottish Co-operative Wholesale Society v Meyer [1959] AC 324, per Lord Keith (at 364)and said:

“… the valuation process must negate the effects of the oppressive conduct.  His Lordship said the amount to be determined was:

…what would have been the value of the shares at the commencement of the proceedings had it not been for the effect of the oppressive conduct of which complaint was made.  This is clearly not a matter on which a calculation can be made with mathematical accuracy or by the application of strict accounting principles.”

[Bold is our emphasis]

The concept of “fairness”

In cases involving the price which the majority is ordered to buy the minorities’ interest, the authorities import the notion of fairness.  Discussing the principles of the notion of fair price, Derrington J in BAM Property Group cited at [92] the case of Coombs v Dynasty Pty Ltd [1994] FCA 1193, where it was said by von Doussa (at 102):

“The flavour of the judgments in the company oppression cases is that in looking to the fair value one must look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppression, erring, if there is to be any erring, on the side of the oppressed.”

[Bold is our emphasis]

Therefore, this notion of fairness must consider all the circumstances of the case.

What was the valuation date of minority’s shares in BAM Property Group?

The circumstances considered by the Court in BAM Property Group involved Mr Brett McAlister (Second Plaintiff) being shut out of the business to his detriment, leaving its management to Mr Jay McAlister (Fifth Defendant).  At that point the Second Plaintiff had no control over what had been a “successful business”.  The oppression also commenced prior to the date that the Fifth Defendant established a direct competitor being “Imoda Homes” which competed directly with, and utilised the financial resources of, the company.  

The background circumstances in BAM Property Group and the Second Plaintiff’’s exclusion from management were considered by Derrington J.  It was concluded at [95] that the date at which the interests in the two (2) companies were to be valued was 5 September 2016, being the date that the Second Plaintiff resigned as a director of the group.  As the Second Plaintiff could no longer control “what had until then been a successful enterprise” after resigning, 5 September 2016 was the appropriate valuation date.  This date was well before the proceedings were commenced on 16 September 2017. 

As such, BAM Property Group is an example of circumstances where, given fairness considerations, the usual approach to the valuation date (date of filing of the proceedings) is rejected in favour of another date that more appropriately compensates the oppressed shareholder – the Second Plaintiff – for the oppression suffered.

Takeaways for an oppressed minority when seeking valuation of their interest

The authorities are clear in that they require all the circumstances to be considered by the Court to determine the date on which the minority’s interest is to be valued. 

The minority must be put into the same position as nearly as can be in the case there had been no oppression.  Therefore, evidence must be adduced by an applicant, not only about the circumstance by which they allege to have been oppressed, but their exact financial losses and the ongoing operations of the company.

Links and further references

Legislation – shareholder oppression

Corporations Act 2001 (Cth)

Cases on shareholder oppression

BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192

Dr Shanahan v Jatese Pty Ltd [2019] NSWCA 113

Fitzpatrick v Cheal [2012] NSWSC 261

Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547

Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC 133

Munstermann v Rayward [2017] NSWSC 133

Patterson v Humfrey [2014] WASC 446

Re Dreamscape Networks Ltd; Ex Parte Dreamscape Networks Ltd [2019] WASC 412

Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324

Spencer v Commonwealth (1907) 5 CLR 418

Udaipur Lake Pty Ltd v Michael Sklovsky Pty Ltd [2019] VSC 114

Need advice about a directors dispute or a minority shareholder oppression matter?

If you need advice about adducing evidence and valuing a minority shareholder’s interest in a shareholder oppression matter, contact us for a confidential and obligation-free 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] Derrington J at [46] of BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192, where the settled principles of shareholder oppression were adopted from Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC 133 and Munstermann v Rayward [2017] NSWSC 133 at [22] per Stevenson J.

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