Equal ownership and shareholder oppression risks

When a company with two (2) or more directors who are equal shareholders with equal voting rights have a dispute, it often leaves the company in a deadlock.  It is common in these situations for one (1) director to attempt to assert that the other director has engaged in oppressive conduct under section 232 of the Corporations Act 2001 (Cth) (Act).  This article discusses shareholder oppression when both directors own equal share portions.

Section 232 of the Corporations Act 2001 (Cth)

Section 232 establishes grounds upon which, if the Court is satisfied exist, will enable the Court to make any of the numerous orders available under section 233 of the Act.  These orders typically aim to relieve the oppressed party of loss or damage.  Section 232 has generally been applied in situations where the oppression arises as a result of majority power or control (i.e. a majority shareholder oppressing a minority shareholder).^[1]  It is not clear, however, that this is a precursor to the Courts.  It may be the case that Courts will make an order under section 233 where the provision’s prerequisites are established notwithstanding that the parties involved maintain equal ownership and control in the company.  So, how have the Courts applied section 232 in 50/50 or equal ownership situations where there is no majority or minority owner?

Recap on statutory shareholder oppression

Oppressive conduct is broadly defined in section 232 of the 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.”

Some examples of potentially oppressive conduct may include:

• dominating and controlling meetings;
• payment of excessive remuneration to a controller, director or associate;
• denying access to information; and
• misuse of company funds.

Historical difficulty in proving oppression in equal ownership situations

Both Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 and Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104 involved companies that were equally owned between two directors.

In both cases the question as to whether the provision in section 232 applied to 50/50 companies was not considered.  There was, however, some brief commentary that ‘there were conceptual difficulties in applying the oppression, etc principles in s 232 of the Corporations Act 2001 (Cth) to a 50/50 company’.^[2]

Patterson v Humfrey [2014] WASC 446

Breaking away from the apparent conceptual difficulties, the WA Supreme Court found in Patterson v Humfrey [2014] WASC 446 (Patterson) at [53] that there was no reason why oppression under section 232 could not be applied in an equal ownership situation.

Facts of the case

Mr Patterson (Plaintiff) and Mr Humfrey (Defendant) were equal owners and the only directors of the company Skybow Holdings Pty Ltd (Skybow).  After differences arose in 2012, the Plaintiff initiated proceedings under section 232 of the Act on the grounds that due to the conduct of the Defendant, Skybow’s business was being conducted in an oppressive, or alternatively unfair and discriminatory manner to the interests of the Plaintiff.

The allegedly oppressive conduct included the Defendant:

• making unauthorised loans to their own personal company;
• paying unauthorised management fees to their own personal company;
• failing to keep proper records for Skybow; and
• misleading the plaintiffs to divert an opportunity from Skybow to their own personal company.

Decision

Le Miere J held at [53]-[54] that there was no reason in principle why a 50% shareholder should be denied relief under the Act section 232:

“A member who does not control a majority of votes may seek the court’s intervention… when relief is withheld to majority shareholders it is because they were capable of acting, or causing the company to act, in such a way as to remove or overcome the alleged oppression.  What confers that power is the majority of votes…

Furthermore, Mr Humfrey exercised de facto control of Skybow… [the Defendant] has declined to permit [the Plaintiff] to be a co‑signatory to Skybow’s bank accounts.  No directors meeting can take place and no resolution can be made by Skybow without [the Defendant]’s concurrence.  [the Plaintiff] is powerless to actively participate in the affairs of Skybow or to take any action to recover loans, management fees and other payments… it is open to the court to grant relief to the Plaintiffs under s 233 of the [Act] notwithstanding that they hold 50% of the shares of Skybow.”

After examining the case, the Court found that the Defendant’s conduct was oppressive, unfairly prejudicial to and unfairly discriminatory against the Plaintiff as a shareholder.

The current principle for 50/50 companies

The approach taken in Patterson was further reinforced in the case of Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133 (Munstermann), where it was stated at [22] that:

“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…”

In Munstermann it was found that one (1) of the directors of a 50/50 company had engaged in oppressive conduct which included bullying, attempting to increase his own salary and reducing the salary of the other director, refusing to authorise financial statements and budgets and then resigning his directorship.

Support found in general principles of a derivative action under section 232 of the Act

The above case law suggests the Courts have explicitly accepted that a majority or equal owner may be the subject of oppressive, unfair or prejudicial conduct.  Unfortunately, these decisions are persuasive, not binding, and it may be the case that an appellate Court or the High Court will displace these decisions.  In such circumstances, regard would likely be had to the general principles surrounding shareholder oppression.  It appears that these general principles, however, are supportive of the decisions in Munstermann and Patterson.  Some of the most supportive general principles include:

• ‘commercial unfairness’ involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play. Section 232 will capture unfair dealings intended to elicit some disadvantage, disability or burden on a shareholder;^[3]
• whether an act is unfair will be judged in the eyes of a ‘commercial bystander’;^[4]
• an act need only be oppressive, unfairly prejudicial or discriminator as opposed to all three elements of subsection 232(e); and^[5]
• oppressive conduct has been described as ‘burdensome, harsh and wrongful’^[6] and involving ‘some overbearing act or attitude on the part of the oppressor.’^[7]

Takeaways

Despite judgment obiter suggesting otherwise, oppressive or unfair acts enlivening section 232 of the Act may be committed by an equal shareholder in a 50/50 company.  What will constitute oppressive conduct is determined on a case-by-case basis and will depend on the circumstances of the matter and the conduct that gave rise to the deadlock.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95

Jayne Elizabeth Beaumont v David Martin Peel & Ors [2018] NSWSC 95

Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, cited in Reid v Baggot Well Pastoral Co Pty Ltd (1993) 12 ACSR 197

Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133

Patterson v Humfrey [2014] WASC 446

Re Jermyn Street Turkish Bath Ltd [1971] 1 WLR 1042

Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279

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

Thomas v H W Thomas Ltd [1984] 1 NZLR 686 cited in ASC v Multiple Sclerosis Society of Tas (1993) 10 ACSR 489

Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104

Further information on a directors dispute or shareholder oppression

If you need advice on shareholder oppression in a 50/50 ownership situations, 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] Wayde v NSW Rugby League [1985] HCA 68.

[2] Campbell v Backoffice Investments Pty Ltd [2008] 66 ACSR 359, 433 (per Young JA); Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104, [321] (per Young JA).

[3] Wayde v New South Wales Rugby League Ltd [1985] HCA 68.

[4] Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692.

[5] Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279, 289; Thomas v H W Thomas Ltd [1984] 1 NZLR 686, 693 cited in ASC v Multiple Sclerosis Society of Tas (1993) 10 ACSR 489, 515.

[6] Scottish Co-operative Wholesale Soc Ltd v Meyer [1959] AC 324.

[7] Re Jermyn Street Turkish Bath Ltd [1971] 1 WLR 1042.

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