Shareholder oppression – a taxonomy of corporate wrongs

Shareholder oppression (Oppression) is the business battleground where equity holders fight for their share of the business’ equity value.  Unfortunately, it is all too common.  Oppressive conduct (Conduct) is broadly defined in section 232 of the Corporations Act 2001 (Cth) (Act) as when:

“(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.”

Therefore, determining the classes of conduct that the Court has held to be oppressive are not limited.  That said, the Court has determined several corporate classes of corporate actions to be oppressive.  While each case will depend on its particular facts and the underlying tests of fairness, there are certain recurrent themes in the case law from which categories of Conduct emerge.  These include:

• appointing additional directors;^[1]
• dominating and controlling meetings;^[2]
• when the directors entering a lucrative contract in their own names despite passing a shareholder resolution declaring the company’s lack of interest in said deal detriments the minority;^[3]
• the alienation of a director or other controller from management decisions being contrary to the company’s constitution – 50% shareholders can be oppressed;^[4]
• the improper diversion of business to another entity related to the controller;^[5]
• payment of excessive remuneration to a controller, director or associate;^[6]
• altering the company’s constitution to allow a compulsory acquisition of the minority’s interests by the majority;^[7]
• implied drag along provisions in the shareholders agreement to allow compulsory acquisition of the minority’s shares;^[8]
• shareholders setting up a new company to compete with and divert business from the original business;^[9]
• ignoring the minority’s interests;^[10]
• failure to prosecute an action;^[11]
• denying access to information;^[12]
• misuse of company funds;^[13]
• using company money for the benefits of only some shareholders and directors;^[14]
• improper diversion of business;^[15]
• unfairly restricting dividends when the situation calls for review of dividend policies;^[16] and
• making a share issue with the dominant purpose of reducing a shareholder’s proportional stake in the company.^[17]

What the Court does not consider oppressive

Oppression does not stretch so far as to include a shareholder’s resentment or unhappiness towards decisions that were the majority goes about the management of the company’s affairs.  The Court will not accept instances where the majority uses their power in a way that is “bona fide for the benefit of the company as a whole”.^[18]  The recent Federal Court case of Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370 (Hylepin) considers the meaning of “oppressive to, unfairly prejudicial to, or unfairly discriminatory against,” per subsection 232(e) of the Act.  O’Bryan J found at [24], by quoting In the Matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332 per Black J at [178], that it is a term requiring:

“…commercial unfairness… [or] 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…”

O’Bryan J in Hylepin at [24] references Brennan J at [6] in Wayde & Anor v. N.S.W. Rugby League Ltd [1985] HCA 68 (Wayde) which provides that commercial unfairness is to be judged by objectively considering:

“…whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.”

O’Bryan J at [24] also references the Federal Court case of Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55 where the Full Court at [9] also provides a definition for the commercial unfairness test being:

“…objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.”

Additionally, Richardson J at [617] in the case of Thomas v. H.W. Thomas Ltd (1984) 2 ACLC 610 (Thomas) quotes Lord Wilberforce at page 379 in Ebrahimi v. Westbourne Galleries Ltd (1973) AC 360 to explain fairness as something that:

“…typically may include one, or probably more, of the following elements:

• an association formed or continued on the basis of a personal relationship, involving mutual confidence —his element will often be found where a pre-existing partnership has been converted into a limited company;
• an agreement, or understanding, that all, or some (for there may be `sleeping’ members), of the shareholders shall participate in the conduct of the business; and
• (iii) restriction upon the transfer of the members’ interest in the company — so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”

 Additionally, Richardson J at [618] in Thomas provides:

“[f]airness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the [company’s] policies…”

Finally, O’Bryan J in Hylepin at [26] references Barret J at [41]-[44] in Goozee v Graphic [2002] NSWSC 640 to help define the test for “contrary to the interests of the members as a whole” per section 232(d) of the Act as objectively considering:

“…whether the conduct adheres to ‘accepted standards of corporate behaviour’ or is in accordance with how reasonable directors would act in attending to the affairs of the company…”

Some examples of when the Court has not found Conduct to be oppressive:

• in the case of a family company, increasing directors’ remuneration but not doing the same for dividends;^[19]
• poor management;^[20]
• proper management despite it being cautious, for example, paying employees wages that the Court considered as fair;^[21]
• when a director/s advances in good faith one of the objects of their nominating parent company but unavoidably impedes another shareholder;^[22]
• when ongoing competition was a common contemplation and assumption based off terms of the shareholders’ deed;^[23]
• amending voting rights when done in good faith and was in the best interests of the company;^[24]
• shareholders expectations not being fulfilled when they are not legitimate or there has been some good reason for such expectation to be extinguished;^[25]
• when the order sought is solely based on breach of contract and estoppel does not apply;^[26]
• when the plaintiff’s case gives rise to them being estopped;^[27]
• minority shareholders being locked in due to bona fide interests of the company;^[28] and
• excluding a sports team from competing when done in good faith for the benefit of the competition as a whole.^[29]

What remedy will the Courts prefer?

The Court has a broad discretion as to remedy.[30]  Per Mason ACJ, Wilson, Deane and Dawson JJ at [17] in Wayde, in an oppression case, the Court is aims “to avoid an unwarranted assumption of the responsibility for management of the company”.  Young J in Fexuto Pty Limited v Bosnjak Holdings Pty Limited Matter No 3799/97 [1998] NSWSC 413 (Fexuto) provides a framework for assessing damages.  At paragraphs 459-62, Young J notes that the Court should consider:

• the least intrusive possible remedy;^[31]
• whether remedy orders can be made for regulation of the company’s affairs into the future;^[32]
• in circumstances where future company regulation is not possible, could there be a buy-out by one faction of another;^[33]
• whether the remedy removes the actual oppression in question rather than amounts to general peace in the company;^[34]
• how much the minority, in an attempt to free their otherwise inaccessible capital, “baited” the majority to act in the allegedly oppressive manner;
• if the wrong doer is a fiduciary and the business being carried on is a part of the trust property, then should a constructive trust remedy be ordered;^[35] and
• if the wrong doer is a fiduciary and the business being carried on is a part of the trust property but the business’ establishment was aided by confidential information or some other type of springboard, whether an injunction or an account of profits order should be made.^[36]

Takeaways

The Court recognises that, while Oppression has a broad scope, it typically arises in scenarios where among other things, additional directors are appointed, meetings are dominated or controlled, a director is alienated, excessive remuneration is paid, the minority’s interests are ignored, access to information is denied, or company funds are misused.  The Court does not see, among other things, poor management, proper but cautious management, or amending voting rights in good faith as being excessive.  The Court will look at a wide variety of factors, including the facts of each case, when determining the remedy and will aim for the one that is the least intrusive and fixes the relevant oppression rather than promoting a general peace in the company.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
Ananda Marga Pracaraka Samgha Ltd v Tomar (No 6) [2013] FCA 284
Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55
Cook v Deeks [1916] UKPC 10
Donaldson v Natural Springs Australia Limited [2015] FCA 498
Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97
Fexuto Pty Limited v Bosnjak Holdings Pty Limited Matter No 3799/97 [1998] NSWSC 413
Goozee v Graphic [2002] NSWSC 640
Hannes & Ors v M J H Ply Limited & Ors (1992) 7 ACSR 8
Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370
In the Matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332
Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136
Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349
Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452
Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342
Netbush Pty Ltd v Fascine Developments Pty Ltd [2005] WASC 73
O’Neill and Another v. Phillips and Others [1999] 1 WLR 1092
Re D G Brims and Sons Pty Ltd (1995) 16 ASCR 559
Re Enterprise Gold Mines NL (1991) 3 ACSR 531
Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193
Re H R Harmer Ltd [1959] 1 WLR 62
Re Spargos Mining NL (1990) 3 ACSR 1
Sanford v Sanford Courier Service Pty Ltd (1987) 5 ACLC 394
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
Seager v Copydex Ltd [1967] 1 WLR 923
Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors [2001] WASC 8
Shirim Pty Limited v Fesena Pty Limited [2000] NSWSC 878
Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153
Thomas v HW Thomas Ltd (1984) 2 ACLC 610
Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488
Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152
United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157
Wayde & Anor v. N.S.W. Rugby League Ltd [1985] HCA 68
William McCausland v Surfing Hardware International Holdings Pty Ltd (No. 2) [2014] NSWSC 163
Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174
Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349

Further information on shareholder oppression

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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] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.
[2] Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC.
[3] Hannes & Ors v M J H Ply Limited & Ors (1992) 7 ACSR 8.
[4] Cook v Deeks [1916] UKPC 10.
[5] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.
[6] Sanford v Sanford Courier Service Pty Ltd (1987) 5 ACLC 394.
[7] Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413.
[8] William McCausland v Surfing Hardware International Holdings Pty Ltd (No. 2) [2014] NSWSC 163.
[9] See Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55.
[10] Re Spargos Mining NL (1990) 3 ACSR 1.
[11] Although there is some overlap with the statutory derivative action in Part 2F.1A of the Act, an oppression action is not necessarily excluded.[12] Note that other relief may be available under section 247A of the Act.
[13] Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452.
[14] Re D G Brims and Sons Pty Ltd (1995) 16 ASCR 559.
[15] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.
[16] Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors [2001] WASC 8.
[17] Netbush Pty Ltd v Fascine Developments Pty Ltd [2005] WASC 73.
[18] Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136, 562 (Rowland J) citing Ngurli Ltd v McCann (1953) 90 CLR 425, 438 (Williams ACJ, Fullagher and Kitto JJ).
[19] Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692.
[20] Shirim Pty Limited v Fesena Pty Limited [2000] NSWSC 878, [71] (Master McLaughlin); Donaldson v Natural Springs Australia Limited [2015] FCA 498, [250] (Beach J); Ananda Marga Pracaraka Samgha Ltd v Tomar (No 6) [2013] FCA 284, [417] (Dodds-Streeton J); Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152, [41] (Austin J).
[21] Thomas v HW Thomas Ltd (1984) 2 ACLC 610.
[22] Wayde & Anor v. N.S.W. Rugby League Ltd [1985] HCA 68; Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174, 178–9; Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349, [130] (Beach, Kyrou and Hargrave JJA).
[23] Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349, [150] (Beach, Kyrou and Hargrave JJA).
[24] Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.
[25] Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152, [145] (Austin J); Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97, [85]-[86], [175] (Spiegelman CJ, Priestley and Fitzgerald JJA); Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342, [96] (Barrett J).
[26] Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349, [130] (Beach, Kyrou and Hargrave JJA); O’Neill and Another v. Phillips and Others [1999] 1 WLR 1092, 1098-102 (Lord Hoffman); Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152, [54]-[108] (Austin J).
[27] Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v Tomanovic [2010] NSWSC 152, [161] (Austin J).
[28] Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193.
[29] Wayde v New South Wales Rugby League [1985] HCA 68.
[30] Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153.
[31] See also Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, 475.
[32] Re Enterprise Gold Mines NL (1991) 3 ACSR 531, 539.
[33] See also Re Enterprise Gold Mines NL (1991) 3 ACSR 531, 539.
[34] See also Re H R Harmer Ltd [1959] 1 WLR 62, 68.
[35] See also Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488.
[36] See also Seager v Copydex Ltd [1967] 1 WLR 923; See also United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157, 230-1.

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