Shareholder oppression

What is shareholder oppression?

Shareholder oppression can occur when the majority shareholders in a company misuse their power to oppress the minority shareholders.

In the context of an unlisted proprietary limited company, one of the main reasons that oppression can arise is that there is no ready market for the securities in the company.  There are numerous activities which the majority may engage in to oppress the minority, sometimes referred to as “sharp practice” or “board room tactics” the possibilities are almost infinite.

Statutory relief – Corporations Act 2001 (Cth)

Section 232 of the Corporations Act 2001 (Cth) (Act) sets out the grounds on which a Court may make an order under section 233 if the conduct of the Company’s affairs, an actual or proposed act or omission by or on behalf of a Company or a resolution or proposed resolution 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.

Who can apply for section 233 order?

Section 234 of the Act lists the persons entitled to apply for relief:

  • a shareholder of the Company;
  • a person who has been removed from the register of members because of a selective reduction; or
  • a person who has ceased to be a member of the Company if the application relates to the circumstances in which they ceased to be a member; or
  • a person to whom a share in the Company has been transmitted by will or by operation of law; or
  • a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into the Company’s affairs or matters connected with the Company’s affairs.

Key concepts

The key concept emerging from the cases is the requirement of an object assessment of “fairness” which will depend upon the context including the nature of the Company and its operations.  For example, conduct that is “fair” as between business people might not be considered fair in the context of a family Company.

  • Commercial fairness” in the context of a commercial Company is to be assessed objectively by a commercial bystander.
  • Fairness” in a family Company is to be assessed from the perspective of the reasonable person involved with the type of Company under examination.
    • Lord Cooper in Elder v Elder and Watson (1952) S.C. 49, stated: “The conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a Company is entitled to rely.”
    • In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97, Spigelman CJ observed that the statutory formulation of “oppression” confers a wide-ranging remedial jurisdiction on the court and that jurisdiction should not be confined by technical distinctions.
    • The test propounded by Young J in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 704 suggested that the Court should ask: “… whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair…” Young J’s test has been cited frequently with approval.”

What constitutes oppressive conduct?

While each case will depend on its particular facts and the underlying tests of fairness, there are certain recurrent themes in the cases from which categories of conduct emerge that may be considered oppressive:

  • the improper diversion of business to another entity related to the controller[1];
  • payment of excessive remuneration to a controller or associate;
  • failure to prosecute an action[2];
  • the improper issue of shares;
  • the improper exclusion from participation in management of the Company;
  • denying access to information[3];
  • misuse of Company funds; and
  • oppressive conduct at board meetings.

A few case examples

Conduct consistent with the Company’s constitution can still be unfairly prejudicial.

Sutherland v Nrma [2003] NSWSC 829

In Sutherland v NRMA Ltd the Court ordered NRMA to remove from its constitution a provision which prevented persons aged 71 years or over from nominating as a director.  The provision had been inserted into the constitution at the time to dovetail with a provision in the legislation at the time, placing an age limit on directors of public companies.  At the time the applicant brought the proceeding the relevant legislative provision had been removed.  The Court held the constitutional provision was oppressive to, unfairly prejudicial to or unfairly discriminatory against the applicant.

Conduct appearing to be discriminatory may after examination of the Company’s constitution actually be fair

Wayde And Another v New South Wales Rugby League [1985] HCA 68

In Wade v NSWRL Ltd the board refused a Club’s application to enter the premiership league. While this was discriminatory and prejudicial to the Club, the NSWRL’s constitution gave it the power to determine which clubs ought to be in the premiership competition – the discrimination against the particular Club was an inescapable consequence of the Company doing precisely what it was set up to do.

Contrary to the interests of the members as a whole – is it a separate ground?

This limb of section 232 came into effect in its present form on 13 March 2000.[4]  It is recognised as a separate basis for the Court to intervene from the “oppressive” ground in section 232(e).[5]

Turnbull and Ors v Nrma [2004] NSWSC 577

A special general meeting of NRMA’s members was requisitioned under section 249D of the Act.  Certain members gave NRMA notice of a resolution they proposed to move at the next general meeting.  Both matters arose out of an industrial dispute between NRMA and its members.  The dispute was resolved prior to NRMA calling the special general meeting in response to the section 249D requisition.  On the basis that it would be contrary to the interests of the members as a whole, the Court exercised its power (recognised by Campbell J as an extraordinary power) that: although validly requisitioned, NRMA need not hold the special general meeting; and the validly proposed resolution need not be put at NRMA’s next general meeting.

What remedies are available for the oppressed?

The Court has wide powers under section 233 of the Act to make any order it considers appropriate. If shareholders can prove that the conduct of a Company’s affairs is oppressive, the Court may give relief including orders:

  • that the Company be wound up;
  • that the existing constitution be modified or repealed;
  • regulating the future conduct of the Company’s affairs;
  • for the purchase of the shares of any shareholder by other shareholders or a person to whom a share has been transmitted by will or by operation of law;
  • for the purchase of the shares with an appropriate reduction of the Company’s share capital;
  • that the Company institute or defend legal proceedings or authorise a shareholder to institute or defend legal proceedings in the name of the Company;
  • appointing a new receiver or a receiver and manager;
  • restraining a person from engaging in specified conduct or from doing a specified act; and
  • requiring a person to do a specified act.

How do you determine whether you have an action for oppression?

The categories of oppressive or unfairly prejudicial conduct are not closed.  Bear in mind that it is the underlying principle of “fairness” which is relevant.  Perhaps some matter-of-fact guidance might be: if it “looks, smells, sounds” or “feels” unfair, there is a good chance it is.  Each case will of course turn on its own facts and in the end the remedy may not be for oppression, but something else.

Links and further references

Legislation

Corporations Act 2001 (Cth) s232.

Corporations Act 2001 (Cth) s53.

Useful cases

Turnbull and Ors v Nrma [2004] NSWSC 577

Wayde And Another V New South Wales Rugby League [1985] HCA 68

Ian Allan Byrne v A J Byrne Pty Limited [2012] NSWSC 667

LPD Holdings (Aust) Pty Ltd v Phillips, Hickey and Toigo & Anor [2013] QSC 225

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

Further information

If you need advice on issuing or redeeming redeemable preference please contact us for an obligation free and confidential discussion.

Malcolm Burrows Lawyer BrisbaneMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
Mobile: 0419 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] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324

[2] Although there is some overlap with the statutory derivative action in Part 2F.1A of the Act, an oppression action is not necessarily excluded.

[3] Note that other relief may be available under section 247A of the Act

[4]Law Economic Reform Program Act 1999 (Cth) Schedule 1.

[5] Turnbull & Ors v NRMA [2004] NSWSC 577.

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