Shareholder oppression occurs where controlling company shareholders or directors subject minority shareholders to commercially unfair conduct in the management of a company’s affairs. It is particularly relevant to Pty Ltd companies, where minority shareholders may have no practical market for their shares and cannot use their voting power to prevent controllers from acting against their interests.
The remedy for shareholder oppression is governed principally by Part 2F.1 of the Corporations Act 2001 (Cth).
Section 232 of this Part gives the Court power to intervene where:
- the conduct of a company’s affairs;
- an actual or proposed act or omission by or on behalf of the company; or
- a resolution or proposed resolution of members or a class of members,
is either contrary to the interests of members as a whole, or oppressive, unfairly prejudicial, or unfairly discriminatory against one or more members. The prejudice may affect a person in their capacity as a shareholder or in another capacity, such as director or employee.
The governing standard to which a Court will refer is objective commercial unfairness. The question is whether, in the company’s particular commercial context, the conduct represents an unfair departure from reasonable standards of fair dealing. It is unnecessary to prove dishonesty, bad faith, or a deliberate intention to oppress.
Otherwise, lawful conduct may nevertheless be oppressive because of its practical effect. However, mere disagreement with management, being outvoted, or suffering commercial disadvantage does not, without more persuasive factual evidence, amount to oppression.
What are some examples of Shareholder Oppression?
Common examples of shareholder oppression include:
- excluding a shareholder from management where there was a legitimate expectation of participation;
- withholding dividends while controllers extract profits through excessive salaries or benefits;
- diverting company assets, customers, or business opportunities to related entities;
- issuing shares for the purpose of diluting another shareholder’s voting power;
- denying access to financial or corporate information;
- misusing company funds or entering unfair related-party transactions; and
- improperly using compulsory acquisition, drag-along or transfer provisions.
These matters are assessed cumulatively and in context. For example, failure to declare dividends is not ordinarily oppressive by itself. It may become oppressive where the company is profitable, the minority receives no economic return, and controllers continue receiving excessive remuneration. Similarly, removing a shareholder from employment may constitute oppression in a closely held “quasi-partnership” company where participation in management formed part of the parties’ underlying understanding.
Under s 234 of the Corporations Act, applications may be brought by current members, certain former members whose complaint concerns the circumstances in which they ceased membership, persons to whom shares have been transmitted by will or operation of law, and persons whom the Australian Securities and Investment Commission (ASIC) considers appropriate. There is no minimum shareholding that a shareholder must have to be an eligible complainant.
What can be done to stop Shareholder Oppression?
Available Remedies to those being Oppressed
Section 233 of the Corporations Act gives the Court broad power to make any order it considers appropriate to remedy the oppression. Orders obtained are usually remedial (fix the problem) rather than punitive (awarding penalties) and are tailored to end the unfairness.
The most common remedy is a compulsory share purchase. The Court may require the controllers, another member, or sometimes the company to purchase the oppressed shareholder’s shares. The price is determined according to fair value rather than necessarily open-market value. Courts commonly reject a minority discount where applying one would reward the oppressor and may adjust the valuation to remove any reduction in value caused by the oppressive conduct.
Other remedies may include the Court making orders to:
- wind up the company;
- modify or repeal its constitution;
- regulate the future conduct of its affairs;
- restrain oppressive conduct or require a specified act;
- appoint a receiver or receiver and manager;
- authorise proceedings in the company’s name; or
- require the company to commence, defend, or discontinue proceedings.[^2]
Winding up is generally a last resort where a viable business can instead be preserved through a buyout or governance orders.
Urgent interlocutory (before full court consideration) injunctions may also restrain asset transfers, improper share issues or other conduct pending final determination.
Depending on the facts, oppression proceedings may be combined with claims for breach of directors’ duties, contractual relief, a statutory derivative action (actions brought on behalf of the company), or an application to wind up the company on just and equitable grounds under s 461(1)(k) of the Corporations Act.
For an obligation free discussion please call
Jim Wilson- senior solicitor
Owner, Better Business Lawyers- Gold Coast/Tweed
M: 0415 645121
E: jim@bblawyers.biz