Shareholder oppression remedies – buy-back or wind up?

Two common remedies for shareholder oppression include a buy-out order, where one shareholder is ordered to purchase the oppressed shareholder’s shares, or a winding up order, where the Court forces the company into administration or liquidation.  In the case of Snell v Glatis (No 2) [2020] NSWA 166, the New South Wales Court of Appeal considered the complications involved in a buy-out order following a finding of shareholder oppression, and instead made a winding-up order.  This article considers this case and remedies for shareholder oppression.

Background to the Snell case

In Snell v Glatis (No 2) [2020] NSWA 166, the NSW Court of Appeal had to consider the primary judge’s decision to order a compulsory buy-out after shareholder oppression was found.  S232 of the Corporations Act 2001 (Cth) (Act) provides the grounds on which a Court may make an order under s233 of the Act if the conduct in question is oppressive or contrary to the interests of members as a whole.  The conduct complained of in Snell included that the affairs of four companies under the control of Mr Snell were conducted in an oppressive manner, which were held to be unfairly prejudicial to Mr Glatis.

The buy-out order for the oppressed minority’s shareholdings within a group of companies gave rise to numerous complications.  The order included a buy-back price of $66 million and the defendant was unable to raise the funds to comply.  The Court of Appeal considered a previous judgement which followed the following principles:

• oppression can be cured by the oppressor being ordered to acquire the oppressed shareholder’s shares at a fair value;
• the buy-back order should be designed to place the company in a good position and avoid conflict;
• winding up should be considered as a last resort in comparison to a buy-out order; and
• winding up a company that is operating and profitable is an extreme step, requiring a solid case to be made.

It was held to be impractical for Mr Snell to comply with the buy-out order.  Their Honours found that the primary judge erred in exercising a discretion to make a buy-out order and instead made an order to wind up the company.  The aim of this was to secure the respondent’s share of the value of the relevant corporate group and prevent further ongoing oppression.

What is a buy-out order?

A share buy-back is an offer to a shareholder of a company to sell their shares back to the company.  A buy-back order is often made where there is a finding of shareholder oppression, with the point of the order being to return to a minority shareholder the value of their shareholding.

Winding up as a remedy to shareholder oppression

As seen in Snell, if a share buy-back order cannot be met or is impractical, winding up may be a preferable option to the Court.  An order to wind up the company essentially forces it into liquidation.  Under s461(f) of the Act the Court may order the winding up of a company if it is  being conducted in a manner that is oppressive or unfairly prejudicial to, or discriminatory against a member or in a manner that is contrary to the interests of members as a whole.

Takeaways

The purpose of remedies for disputes involving shareholder oppression is to actually ensure that the oppression cannot occur in future.  An alternative remedy to a buy-back order includes an order to wind up the company, however the Court of Appeal confirmed in Snell that this should be used as a last resort, and that relief will be considered on a case-by-case basis.  The history and structure of the company are also  relevant considerations.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Snell v Glatis (No 2) [2020] NSWCA 166

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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.

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