What are the early warning signs of shareholder oppression?

Quick summary of the early warning signs

The early warning signs of shareholder oppression include company documents that put control in one person’s hands, one party controlling the advisers, a gradual shift of power through related contracts, exclusion from management, restricted access to information and an inflexible co-owner. Oppression is defined in section 232 of the Corporations Act 2001 (Cth).

——— Definition

What is shareholder oppression?

Shareholder oppression is conduct in a company’s affairs that the Court can remedy under section 232 of the Corporations Act. Section 232 applies where:^[1]

• the conduct of a company’s affairs;
• an actual or proposed act or omission by or on behalf of a company; or
• a resolution, or a proposed resolution, of members or a class of members,

is either contrary to the interests of the members as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in that capacity or in any other capacity.^[2]

The words “in any other capacity” matter in closely held companies, where the same people are often shareholders, directors, beneficial owners and employees. Conduct directed at a member as an employee or director can still be oppressive.

Oppression is also not limited to majority and minority shareholders. Equal shareholders can be oppressed where statutory or contractual controls agreed at the start give one party more power than the other.

In short, oppression is about the unfair use of control, whatever the size of each shareholding.

——— Warning signs

What are the early warning signs of shareholder oppression?

The warning signs we see most often are set out below. None of them proves oppression on its own, but each can signal that control is shifting in a way that may later become unfair.

The categories of conduct that can amount to oppression are not closed, and nor are the warning signs. Many are only obvious with hindsight.

In short, watch for anything that concentrates control, information or relationships in one person’s hands.

——— Structure and advisers

How can a company’s structure set up oppression from the start?

By putting ultimate control in the hands of one person. The constitution, shareholders’ agreement or trust deed agreed at the start can be oppressive from the outset, or can make oppression easy later.

The type of entity matters. The controls that can be built into a unit trust with a corporate trustee can be more complex than those in the constitution of a proprietary company alone. The oppression remedy in section 232 applies to companies, so a unit trust dispute may need a different approach; see our article on whether a unit trust can be wound up using the oppression remedies.

Advisers can also be a warning sign. Where one shareholder or director has the relationship with the accountant or lawyer who sets up the structure, there is an obvious risk of bias. The adviser should be instructed by all the promoters, and each party should consider independent advice. Where one director has sole access to the company’s legal and accounting advisers, that director can frustrate the others or shape the advice the company receives.

In short, the best time to prevent oppression is before you sign the constitution or shareholders’ agreement.

——— Control

How can control shift away from a shareholder over time?

Through related contracts and roles that slowly change the balance of power, even where everyone agreed to them at the start.

• Related contracts: one shareholder’s representative works full time, holds the client relationships or has an employment contract, so their influence grows while the others’ falls.
• Skills transfer: the skills that made you essential are taught to others, until the business can say “we don’t need you anymore”.

Because section 232 protects members “in any other capacity”, the way a shareholder is treated as an employee or contractor can form part of an oppression claim.

In short, if your role is being narrowed or your skills transferred, record what is happening and get advice early.

——— Management and information

Is exclusion from management a sign of oppression?

Yes. Exclusion from management has long been recognised by the courts as a ground for relief, particularly in small companies formed on the understanding that each owner would take part in running the business.^[3]

Exclusion often has a purpose: a member who controls management can profit from their position more freely. The two problems tend to go together.

Restricted access to information is the other side of the same coin. Asymmetry of information is a common theme in oppression matters, and control of information is frequently used as an instrument of oppression. A director has a right of access to the company’s financial records at all reasonable times.^[4] A member can apply to the Court for an order to inspect the company’s books if the member is acting in good faith and the inspection is to be made for a proper purpose.^[5]

In short, if you are being kept out of decisions or information, use your statutory rights and keep a record of every request.

——— Your options

What can you do if you notice the warning signs?

Act early. Raise concerns in writing, use your information rights and get advice before positions harden. If the conduct continues, the Corporations Act gives the Court wide powers.

A member can apply for oppression orders, and section 234 also allows applications by some former members and other persons.^[8]

In short, early action and good records keep your options open, from negotiation through to a buy-out or winding up order.

Frequently asked questions about the warning signs of shareholder oppression

Key takeaways about the warning signs of shareholder oppression

• Section 232 lets the Court intervene where conduct is contrary to the interests of the members as a whole, or oppressive, unfairly prejudicial or unfairly discriminatory against a member.
• Warning signs include control-heavy documents, one-sided advisers, related contracts, skills transfer, exclusion, restricted information and inflexible negotiation.
• The structure and documents agreed at the start can make oppression easy later, so get independent advice before you sign.
• Control can shift over time through related contracts and skills transfer, and section 232 protects members in any other capacity.
• Exclusion from management and restricted access to information often go together; use your rights under sections 290 and 247A.
• Acting early keeps every option open, from negotiation to a buy-out or winding up order.

Need advice about shareholder oppression? Call Dundas Lawyers on 07 3221 0013 or submit an enquiry online.

Links and further references

Legislation

Corporations Act 2001 (Cth) ss 232, 233, 234, 247A, 290, 461

Cases

Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48
BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192
Byrne v A J Byrne Pty Ltd [2012] NSWSC 667
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Hogg v Dymock [1993] WASC 401
Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606
LPD Holdings (Aust) Pty Ltd v Phillips [2013] QSC 225
Re Docklands Chiropractic Clinic Pty Ltd [2020] VSC 364
Turnbull v NRMA [2004] NSWSC 577
Wayde v New South Wales Rugby League Ltd [1985] HCA 68