Quick summary of cumulative oppression
Yes. Under section 232 of the Corporations Act 2001 (Cth), the Court can look at a course of conduct as a whole, even if no single act is oppressive on its own. In Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533, exclusion from management, withheld information and a stalled exit together amounted to oppression.
Key insights
- The Court can assess a course of conduct cumulatively, even where no single act is oppressive on its own.
- The test is commercial unfairness, judged objectively; motive is relevant but not decisive.
- Conduct can be oppressive even if it is lawful or complies with the company’s constitution.
- In Jolan, removing the minority investor’s nominee directors, withholding information and refusing to pursue an agreed exit were together oppressive.
- The Court ordered Jolan’s shares to be sold to existing shareholders at $1.16 per share, with 90% of its costs on an indemnity basis.
On this page
- Quick summary
- What was Jolan v Essential Investments about?
- When does a course of conduct amount to oppression?
- What conduct was oppressive in Jolan?
- What orders did the Court make?
- Practical tips for minority investors
- Frequently asked questions
- Key takeaways
- Our approach
- Further reading
- Links and further references
In Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533 (Jolan (No 2)), Downes J held that the combined effect of conduct by the majority shareholders of Essential Investments Pty Ltd (Essential Investments) was oppressive to Jolan Pty Ltd (Jolan), a minority investor.[1] The case shows how section 232 of the Corporations Act 2001 (Cth) (Corporations Act) applies where several acts, each perhaps minor on its own, add up to unfair treatment. For an overview of how we help, see our shareholder oppression lawyers page.
——— Background
What was Jolan v Essential Investments about?
A $1 million minority investor in a coffee business was shut out after it tried to sell its shares when the promised exit did not happen.
Jolan, the trustee company used by Mr and Mrs McWilliam to invest, acquired one million shares in Essential Investments at $1 each in July 2016 and has been one of its five largest shareholders since.[2] Essential Investments is the holding company of a coffee business group. The Court found the company was formed to buy the business and achieve an exit in the short term, not to hold it indefinitely.[3]
The shareholders’ agreement backed that up. It gave each of the five largest shareholders the right to appoint a director,[4] and required each shareholder to exercise its powers with the purpose of achieving an “Exit Event” – a share sale, asset sale, merger or public listing – within two (2) years.[5]
No exit was achieved. When Jolan tried to sell its own shares, its relationship with the other shareholders broke down.
In short, Jolan invested on the basis of a short-term exit, and the dispute began when that exit did not come.
——— The test
When does a course of conduct amount to oppression?
When the conduct, viewed as a whole, is commercially unfair to the member. The Court can assess a course of conduct cumulatively, even where no single act would be oppressive on its own.[6]
Downes J applied these principles:
- “oppressive”, “unfairly prejudicial” and “unfairly discriminatory” in section 232 are read as a single compound test;[7]
- the question is commercial unfairness, judged objectively, and motive is relevant but not decisive;[8]
- conduct can be oppressive even if it is lawful or complies with the constitution;[9]
- failing to give a member information it is entitled to can be oppressive;[10] and
- conduct after the proceedings began can be taken into account.[11]
These principles draw on the Full Federal Court’s decision in Hylepin Pty Ltd v Doshay Pty Ltd, which confirmed that a course of conduct can be assessed as a whole.
In short, the Court asks whether the overall pattern is unfair, not just whether each act is.
——— The conduct
What conduct was oppressive in Jolan?
Three kinds of conduct which, taken together, were oppressive:
| Conduct | What happened |
|---|---|
| Exclusion from management | Shareholders repeatedly voted to remove Jolan’s nominee director. Each time, Jolan appointed the other spouse, until the board resolved in June 2021 to bar the appointment[12] |
| Withholding information | Repeated requests for financial information were refused while Jolan was trying to sell its shares, and a prospective buyer walked away. Restrictions were later placed on directors sharing documents[13] |
| No steps towards an exit | The other shareholders refused to consider offers for the company and resolved to defer a sale by 12–18 months, despite the agreement’s exit clause[14] |
Downes J concluded:[15]
“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.”
In short, it was the combination of exclusion, withheld information and a stalled exit that made the conduct oppressive.
——— Relief
What orders did the Court make?
The Court ordered that Jolan’s shares be sold to interested existing shareholders at $1.16 per share, with the sale to be completed by 14 January 2022.[16]
Sale of Jolan’s shares
Jolan and Essential Investments were to take all reasonable steps to complete a sale of Jolan’s shares to interested existing shareholders at $1.16 per share.
Transfer clauses
Clauses 7.1–7.7 and 7.10 of the shareholders’ agreement did not apply to the sale.[17]
Indemnity costs
Essential Investments was ordered to pay 90% of Jolan’s costs on an indemnity basis, because of the way the defence was conducted.[18]
Costs against individuals
No costs order was made against the second to fourth defendants.[19]
In short, the Court gave Jolan the exit it had bargained for, on terms set by the Court.
Being shut out of a company you invested in? Dundas Lawyers advises minority investors and shareholders on oppression claims, information rights and exit strategies. Call 07 3221 0013 or submit an enquiry online.
——— Practical tips
Practical tips for minority investors
Write the exit into the agreement
An obligation to pursue an exit within a set time gave Jolan a clear standard to measure the majority’s conduct against.
Secure a board seat
A right to appoint a director protects access to management and information, and makes its removal easier to challenge.
Ask for information in writing
Written requests, and written refusals, become evidence if the dispute goes to Court.
Keep a timeline
Individually minor acts can add up. A dated record shows the Court the full course of conduct.
See also our article on shareholders’ rights to information.
Frequently asked questions about cumulative oppression
Can several minor acts together be shareholder oppression?
Yes. The Court can assess a course of conduct cumulatively, even where no single act would be oppressive on its own. In Jolan v Essential Investments, exclusion from management, withheld information and a refusal to pursue an agreed exit were together oppressive.
Is removing a shareholder’s nominee director oppressive?
It can be, particularly where a shareholders’ agreement gives the shareholder a right to appoint a director and removals are used to keep it out of management. In Jolan, repeated removals of the minority investor’s nominee directors formed part of the oppressive conduct.
Can refusing to give a shareholder information be oppressive?
Yes. Failing to provide information a member is entitled to, or changing how a company operates so that information stops flowing, can be oppressive, especially where it prevents the minority from having input.
Does conduct have to breach the constitution to be oppressive?
No. Conduct can be oppressive under section 232 of the Corporations Act even if it is lawful and complies with the company’s constitution. The test is commercial unfairness.
Can the Court consider conduct after proceedings start?
Yes. In Jolan, the Court held that events after the proceedings began could be relied on, which mattered because the final bar on Jolan appointing a director came in June 2021.
What remedy did the Court order in Jolan?
The Court ordered that Jolan’s shares be sold to interested existing shareholders at $1.16 per share, and that Essential Investments pay 90% of Jolan’s costs on an indemnity basis.
Key takeaways about cumulative oppression
- Jolan invested $1 million on the basis of a short-term exit, backed by its shareholders’ agreement.
- The Court can assess a course of conduct as a whole; the test is objective commercial unfairness, and lawful conduct can still be oppressive.
- Removing Jolan’s nominee directors, withholding information and refusing to pursue an exit were together oppressive.
- The Court ordered Jolan’s shares to be sold at $1.16 per share, with 90% of its costs on an indemnity basis.
Need advice about shareholder oppression? Call Dundas Lawyers on 07 3221 0013 or submit an enquiry online.
Our approach to cumulative oppression claims
Dundas Lawyers acts for minority investors and shareholders in closely held companies. We build a clear timeline of the conduct, test it against the shareholders’ agreement and the company’s information obligations, and pursue the outcome that matters most to the client, which is often a fair exit.
Further reading
For further reading on cumulative oppression, see the following articles written by the team at Dundas Lawyers.
- Commercial purpose and oppression – the Full Federal Court on assessing a course of conduct as a whole, in Hylepin v Doshay. See: Can a ‘commercial purpose’ excuse shareholder oppression?
- Early warning signs – how to spot oppression before it happens. See: What are the early warning signs of shareholder oppression?
- Information rights – what information shareholders are entitled to. See: Shareholders’ right to information
- Exit and deadlock clauses – how a shareholders’ agreement can provide an exit before a dispute reaches Court. See: Shareholders’ agreements & deadlock clauses
- Remedies for oppression – when the Court orders a buy-out or winding up. See: Shareholder oppression remedies: buy-out or winding up?
Links and further references
Legislation
Corporations Act 2001 (Cth) ss 232, 233
Federal Court of Australia Act 1976 (Cth) s 37N
Cases
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25
Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55
Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370
Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201
Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533
Jolan Pty Ltd v Essential Investments Pty Ltd (No 3) [2021] FCA 1627
Videos
Early warning signs of shareholder oppression
Shareholders’ right to information
Further information
If you need assistance about shareholder oppression or a course of unfair conduct in your company, 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] Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533, [374].
[2] Jolan (No 2) (n 1) [7], [9].
[3] Jolan (No 2) (n 1) [89].
[4] Jolan (No 2) (n 1) [102].
[5] Jolan (No 2) (n 1) [82]–[83], [106].
[6] Jolan (No 2) (n 1) [35].
[7] Jolan (No 2) (n 1) [29].
[8] Jolan (No 2) (n 1) [30]–[33].
[9] Jolan (No 2) (n 1) [34].
[10] Jolan (No 2) (n 1) [36]–[37].
[11] Jolan (No 2) (n 1) [38]–[44].
[12] Jolan (No 2) (n 1) [312].
[13] Jolan (No 2) (n 1) [351].
[14] Jolan (No 2) (n 1) [362].
[15] Jolan (No 2) (n 1) [374].
[16] Jolan Pty Ltd v Essential Investments Pty Ltd (No 3) [2021] FCA 1627, orders 1–2.
[17] Jolan (No 3) (n 16) order 3.
[18] Jolan (No 3) (n 16) order 7, [46]–[62].
[19] Jolan (No 3) (n 16) [63]–[71].
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