Shareholder oppression – combined effect adds up

Threats of oppression can arise from numerous circumstances, such as disagreements between partners or other situations which leave a minority shareholder feeling they have been treated poorly. The case of Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533 is interesting on its face, primarily because there was a shareholders’ agreement as one of its governing documents and it was the combinations of actions which were ultimately held to be oppressive. It was also one of the first decisions of newly appointed Queensland-based Federal Court judge, Justice Kylie Downes.

Facts of the case

Jolan Pty Ltd (Jolan) was incorporated in 2016 and was a minority shareholder of Essential Investments Pty Ltd (Essential Investments), a holding company for three (3) subsidiaries including Essential Brands Group Pty Ltd, Essential Coffee Pty Ltd and Essential Coffee (NZ) Limited. The directors of Jolan were Mr and Mrs McWilliam. Jolan subsequently invested AUD $1 million into Essential Investments, becoming one of their five (5) largest shareholders.

Mr and Mrs McWilliam made the decision to invest on their belief that it was a short-term investment, and that the company would achieve an exit event via a business sale or Initial Public offering (IPO) within two (2) years. During this time there was only a single campaign to sell Essential Investments, which was unsuccessful. On realising that Essential Investments was not going to achieve the exit event, Jolan tried to sell its shares, which led to a breakdown in relationship between the directors and the other shareholders.

Mr and Mrs McWilliams were subsequently targeted by an ongoing campaign which saw them prevented from participating in the company’s management and face frustrated efforts to sell their shares.

The law on shareholder oppression

Section 232 of the Corporations Act 2001 (Cth) (Act) gives the Court power to make an order under section 233 to remedy actions where the conduct of a company’s affairs has been unfairly prejudicial, discriminatory or oppressive against a member. Orders that can be made by a Court under section 233 of the Act include:

that the company be wound up;
the constitution be modified or repealed;
regulation of the conduct of the company’s affairs in the future; and
the purchase of any shares by any member.

The key factor for the Court to consider in determining whether conduct has breached section 232, is whether there has been a departure from normal fair dealing standards, or whether a decision imposes a disadvantage, burden or disability on a member and therefore exhibits commercial unfairness toward a shareholder.^[1] The Court will perform an objective assessment on the alleged conduct, with regard to the context in which it occurred and the overall effect.

Acts of oppression complained of in Jolan

In Jolan, the Court found that it was the combined effect of conduct which was held to be oppressive, unfairly discriminatory or unfairly prejudicial, resulting in a breach of section 232 of the Act. The actions of oppression complained of were:

exclusion by management at [312];
failure to provide information at [351]; and
failure by shareholders to exercise powers to attempt to achieve an exit event at [362].

Exclusion from management by removing directors

Jolan had the right to participate in the management of Essential Investments pursuant to a shareholders’ agreement, however after Jolan took steps to sell its shares, a series of general meetings were held and Essential Investments’ shareholders voted to remove either Mr or Mrs McWilliams as a director. Each time one of the spouses were removed, Jolan would instantly appoint the other spouse as its nominated director of Essential Investments; this was followed by another general meeting where another resolution was passed to remove that director.

This conduct continued to occur from November 2020 to June 2021, when Essential Investments’ directors passed a resolution which barred Jolan from appointing one of the McWilliam spouses as a company director. Jolan had no director appointed to the Board and no further involvement in Essential Investments’ management.

Failure to provide information

The directors and majority shareholders of Essential Investments were found to have engaged in two (2) types of conduct, intended to deprive Jolan access to company information:

when Jolan attempted to sell its shares in 2020, the directors refused Mr McWilliam’s repeated requests for certain financial information about the company, which resulted in a prospective purchaser walking away from the sale; and
Jolan’s ability to access company information diminished over time through Essential Investment imposing restrictions over directors distributing documents to third parties, which included Jolan.

Failure to take steps to achieve the exit event

The Court accepted that Mr and Mrs McWilliam’s investment in Essential Investment was due to a belief that it would be short term because the company would achieve an exit event within two (2) years. Despite the shareholders’ agreement imposing obligations that each shareholder would exercise powers with a purpose to achieving the exit event, Jolan was the only shareholder to take steps to achieve a sale of Essential Investments. The remaining shareholders refused to consider offers to purchase the company and then passed a resolution deferring a possible sale for 12-18 months.

It was held at [374] that:

“The combined effect of the totality of the conduct of the affairs of the Company, as described above, has been oppressive to, unfairly prejudicial to or unfairly discriminatory against Jolan in its capacity as a member of the Company within the meaning of s 232 of the Act.”

As a remedy, the Court ordered the complete sale of the shares owned by Jolan in Essential Investments to any existing shareholder of the company at a price of $1.16 per share, as soon as practical. Essential Investments was also ordered to pay 90% of Jolan’s costs of and incidental to the proceedings on an indemnity basis.

Key takeaways on the combined or cumulative effect of oppression

Jolan shows that whilst the Court considered each individual action was unfair toward Jolan, it was the combined effect of that conduct that ultimately resulted in a finding of a breach of section 232 of the Act. This decision highlights the importance of understanding all interactions with members of a company; whilst some conduct may appear minor and not in itself oppressive, the Court will consider the entire course of conduct, context and impact of such to determine if the cumulative effect amounts to oppressive conduct.

Links and further references

Link to case on the Federal Court Website:

https://www.comcourts.gov.au/file/Federal/P/QUD101/2021/actions

Further information about shareholder oppression

If you need advice on shareholder oppression, contact us for a confidential and obligation-free discussion:

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au

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] Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30.