shareholder oppression

Shareholder oppression – the importance of evidence

by

reviewed by

Malcolm Burrows

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6–8 minutes

The recent Federal Court case of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920 (Vitruvian Investments) involved allegations of shareholder oppression by Mr Walid Sharif (Mr Sharif/Plaintiff) against Mr Jonathan Gregory (Mr Gregory/Second Defendant), the sole director of Vitruvian Investments Pty Ltd ACN 630 548 846 (Vitruvian/First Defendant). 

Conduct giving rise to the allegations of oppression

The case included other allegations in relation to the conduct of the parties however for the purpose of this article we note the four (4) aspects or components to the oppression which were pressed by the Plaintiff (but will only consider the exclusion from management ground) as follows:

  1. the exclusion of Mr Sharif from the management of Vitruvian;
  2. the cancellation of Mr Sharif’s shares without his consent and without complying with the statutory procedure for a selective reduction of capital;
  3. the formulation and implementation of the plan to dilute his shareholding by not allowing him to participate in future capital raisings; and
  4. the issuing of shares that occurred on 14 July 2020 (which was sought to be justified on the basis that it involved a conversion of loans to equity).

Wrongful exclusion from management as a ground of oppression

In applying the case law on shareholder oppression in the context of allegations of wrongful exclusion from management, Colvin J cited the case of Campbell v Backoffice Investments Pty Ltd [2009] HCA 25, where the High Court said at para 175 that “wrongful exclusion from management of a company may be a form of oppression”.[1]

The evidence of oppression based on Mr Sharif’s exclusion from management

Colvin J at paragraph 250 discussed the facts that were in evidence in support of the allegation that Mr Sharif’s exclusion from management was oppressive, noting:

  • that the parties had considered entering into a shareholders’ agreement and that two (2) versions had been proposed with the version proposed by Mr Gregory recognising Mr Sharif as the CEO;
  • there was no suggestion as to the terms on which Mr Sharif had been engaged to work for Vitruvian Investments or whether the basis on which he had been issued shares included being involved in the ongoing management of the company;
  • there was a ‘suggestion’ just prior to Mr Sharif being removed as CEO that him being appointed a Director would be the ‘next step’ – however it could not be concluded from this that his shareholding in the company had been acquired based on some form of “common expectation he would have an ongoing management role’’[2].

In short there was a paucity of evidence to support the allegation that Mr Sharif’s exclusion from management was oppressive.

Mr Sharif’s exclusion from management was not oppressive

It was said by Colvin J at 251 that:

“In short, there is no basis in the evidence to support a conclusion that the removal of Mr Sharif as CEO was ‘wrongful’ in some way having regard to the circumstances that pertained to Vitruvian and his appointment as CEO”.

Mr Gregory as the director of the company could resolve to remove Mr Sharif as CEO at any time. 

“No submission was advanced as to why it would be unfair for that to occur”.

It would seem that there was very little in the evidence to support the allegation that the affairs of Vitruvian were managed in a manner that involved ‘an exclusion of Mr Sharif’.   

“For example, there is no evidence of any requests for information made by Mr Sharif that were refused or any respect in which he sought to provide input into the decisions being made concerning the management of the affairs of the company that were refused”.[3]

For the reasons above, which seemingly included a paucity of evidence being led in support of Mr Sharif’s allegations, Colvin J concluded at para 253 that the ‘exclusion of Mr Sharif from the management of Vitruvian Investments was not oppressive’.

What other circumstances could exist to support Mr Sharif’s claim that his exclusion was oppressive?

Having had the benefit of reading this case and dealing with dozens of shareholder oppression matters, it seems odd that Mr Sharif did not adduce any other evidence that would go towards his argument that his exclusion from management was oppressive.  This is despite the fact that he was cross-examined[4] and must have had the opportunity to submit evidence in chief.

Whilst we do not have the benefit of considering all the material or reading the transcripts, it seems that Mr Sharif was ‘working at Vitruvian Investments‘.[5]  See also para 8, where Mr Sharif alleged that the way that Vitruvian Investments raised capital was a “breach of an implied term of an agreement that was made when Mr Sharif agreed to commence working at Vitruvian”.[6]

It would also seem possible that Mr Sharif had an expectation of ongoing work at Vitruvian Investments and that perhaps one of the reasons he had accepted the role was on this basis.  The decision also does not refer to Mr Sharif as being an employee or a contractor; however, it was said at paragraph 24 that:

 “the Defendants abandoned that claim that Mr Sharif breached his agreement and that his performance of the work fell short of what might reasonably have been expected’’.

Despite this decision not discussing Mr Sharif’s remuneration, reference is made to his financial capacity to buy shares from funds held jointly with his wife,[7] with the Defendants submitting that he ‘did not have the financial capacity to participate in the capital raisings that occurred’.

The inference from this was that Mr Sharif was issued his shares for little or nominal consideration and that perhaps he was relying on some form of remuneration from Vitruvian Investments to survive.

The importance of substantiating allegations with credible evidence

The material gleaned from the decision and the generally observed actions of early stage participants in start-ups could lead to a conclusion that perhaps Mr Sharif had an expectation of ongoing involvement as an employee or contractor to Vitruvian Investments.  Yet no evidence was led as to this expectation and no submissions made on this point either.

This is seemingly quite common in disputes involving start-ups, where it’s usual for those involved to put in ‘more than just the nine to five,’ with the expectation of future reward.

Perhaps because the focus of the case involved the successful allegations of shareholder oppression caused by the share cancellation, the Plaintiff may have neglected to lead significant evidence as to why his exclusion from management was oppressive.  Alternatively perhaps this evidence did not exist.

In the final analysis it did not matter as Mr Sharif was ‘substantially successful in the substantive proceedings[8] and the loss on this ground had little effect on the question of legal costs determined by separate proceedings.

Links

Legislation

Competition and Consumer Act 2010 (Cth)

Corporations Act 2001 (Cth)

Cases

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

Sharif v Vitruvian Investments Pty Ltd [2023] FCA 426 (4 May 2023) – interlocutory – leave to amend statement of claim

Vitruvian Investments Pty Ltd v Sharif [2023] FCA 471 (15 May 2023) – Interlocutory discovery

Sharif v Vitruvian Investments Pty Ltd (No 2) [2023] FCA 619 (9 June 2023) – Costs

Sharif v Vitruvian Investments Pty Ltd (No 3) [2023] FCA 920

Further information about shareholder oppression

If you need advice on how to navigate a shareholder oppression matter, please contact us for a confidential and obligation-free discussion:

[1] Para 249 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[2] Para 249 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[3] Para 251 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[4] Para 252 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[5] Para 3 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[6] Para 8 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[7] Para 20 of Sharif v Vitruvian Investments PL (No 3) [2023] FCA 920

[8] Sharif v Vitruvian Investments Pty Ltd (No 5) [2024] FCA 134 (28 February 2024) – Costs


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