Disagreements between shareholders are not uncommon. A difference of opinion about the management or direction of a company does not, however, necessarily mean that one shareholder has been treated unlawfully.
The position may be different where those controlling the company use their position in a way that is unfairly prejudicial to another shareholder, unfairly discriminates against them or is contrary to the interests of the members as a whole.
Australian corporations law provides remedies for shareholders in these circumstances. Commonly referred to as shareholder oppression, these provisions give the Court broad powers to intervene where the requirements of the Corporations Act 2001 (Cth) are satisfied.
For shareholders in privately owned companies, oppression can be particularly significant. The shareholder’s investment, employment, income and involvement in the management of the business may all be connected. Being excluded from the company can therefore have consequences extending well beyond the value of the shares themselves.
What is shareholder oppression?
Section 232 of the Corporations Act 2001 provides that the Court may make an order 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 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.
The legislation therefore addresses a broader concept than conduct that might ordinarily be described as deliberately oppressive. The question is whether the conduct falls within the statutory test.
Importantly, a shareholder does not need to establish that those responsible intended to cause harm. The circumstances and effect of the conduct will be relevant to determining whether the statutory requirements have been met. (Federal Register of Legislation)
What conduct can amount to shareholder oppression?
Whether conduct is oppressive will depend on the circumstances of the particular company and the relationship between its shareholders.
Issues can arise where, for example, a shareholder is excluded from management despite having a legitimate expectation of participating in the business, company funds or opportunities are diverted for the benefit of particular shareholders, shares are issued in circumstances that unfairly dilute another shareholder’s interest, or financial benefits are directed to those controlling the company at the expense of other members.
The payment or withholding of dividends, remuneration paid to directors or shareholders, access to company information and changes to the management of the business can also become relevant.
None of these circumstances automatically establishes oppression. The conduct needs to be considered in context, including the company’s constitution, any shareholders agreement, the history of the business and the arrangements or understandings between the parties.
This is particularly important in closely held companies. The formal legal rights attached to the shares may not tell the whole story about how the parties intended the business to operate.
Is being excluded from the business shareholder oppression?
Exclusion from management is a common issue in shareholder disputes, particularly where shareholders are also directors or employees of the company.
Whether that exclusion amounts to oppression is not determined simply by asking whether a shareholder has been removed from a management role.
The circumstances in which the company was established, the shareholder’s historical involvement in the business, any agreements between the parties and the reasons for the exclusion may all be relevant.
For example, the position of an investor who has never participated in the management of a company may be quite different from that of a shareholder who established and operated the business alongside another shareholder on the understanding that both would remain involved.
A careful assessment of the broader commercial relationship is therefore usually required.
Can majority shareholders make decisions that disadvantage a minority shareholder?
Holding a majority of the shares in a company ordinarily provides significant voting power. That does not mean that majority shareholders have an unrestricted ability to use that power in a way that unfairly prejudices minority shareholders.
At the same time, the oppression provisions are not designed to prevent a majority shareholder from making legitimate commercial decisions merely because a minority shareholder disagrees with them.
A company may need to make decisions that adversely affect one shareholder or that are unpopular with some members. The existence of a disadvantage does not, by itself, establish oppression.
The distinction between a legitimate exercise of commercial decision-making and conduct that is oppressive or unfairly prejudicial can be one of the central issues in a shareholder dispute.
Who can bring a shareholder oppression claim?
Section 234 of the Corporations Act identifies who may apply for an order under the oppression provisions.
This includes a member of the company, including a member who brings an application concerning conduct affecting another member. In certain circumstances, a former member, a person to whom shares have been transmitted by will or operation of law, or another person considered appropriate by ASIC may also be able to apply.
An oppression claim is therefore not confined simply to a minority shareholder challenging a majority shareholder, even though that is a common context in which these disputes arise.
Whether a person is entitled to bring a particular application should be considered against their circumstances and the requirements of the legislation. (Federal Register of Legislation)
What can the Court do if shareholder oppression is established?
The Court has broad powers under section 233 of the Corporations Act.
Rather than prescribing one remedy for every case, the legislation allows the Court to make an order it considers appropriate in relation to the company.
Those powers include orders regulating the future conduct of the company’s affairs, requiring a person to do or refrain from doing a particular act, modifying or repealing the company’s constitution, authorising proceedings to be brought in the company’s name and requiring the purchase of shares.
The Court also has power to order that the company be wound up. However, winding up has significant consequences for the company and its stakeholders, and the availability of other remedies means it is not the inevitable outcome of an oppression claim. (Federal Register of Legislation)
The breadth of these powers is important because shareholder disputes can arise in very different circumstances. An appropriate remedy in one company may be entirely unsuitable in another.
Can the Court order one shareholder to buy another shareholder’s shares?
Yes. An order requiring shares to be purchased is one of the remedies available under section 233.
In practical terms, a buy-out can provide a way of separating shareholders whose relationship has broken down while allowing the underlying business to continue.
The difficult issue is often not simply whether a shareholder should exit, but the terms upon which that exit should occur.
The value of the shares can become a substantial issue. Questions may arise about the appropriate valuation date, the financial information to be relied upon, the effect of the disputed conduct on the value of the company and the appropriate valuation methodology.
Where the value of the shareholding is contested, expert valuation evidence may be required.
What should you do if you believe you are being oppressed as a shareholder?
Before deciding on a course of action, it is important to understand both the conduct complained of and the legal and commercial context in which it has occurred.
Relevant material may include the company’s constitution, shareholders agreement, financial statements, board and shareholder minutes, correspondence between the parties and records relating to the decisions in dispute.
It is also important to consider the outcome being sought.
For some shareholders, the objective is to remain involved in the company and address the conduct causing the dispute. For others, the relationship has deteriorated to the point where an appropriately structured exit is the more realistic outcome.
That distinction can materially affect the strategy adopted.
Does a shareholder oppression dispute have to go to court?
Not necessarily.
The existence of a potential oppression claim can form part of negotiations between shareholders without proceedings ultimately being required.
Where the parties have a sound understanding of their respective legal positions, it may be possible to negotiate changes to the company’s governance arrangements, resolve particular financial issues or agree upon the purchase of one shareholder’s interest.
Mediation may also provide an opportunity to reach a commercial resolution.
However, there are circumstances where court intervention may be necessary, particularly if the conduct is continuing, company assets or the value of the business may be at risk, or there is no realistic prospect of a negotiated outcome.
The appropriate approach will depend on both the strength of the legal position and what the shareholder ultimately wants to achieve.
Why early advice can be important
Shareholder oppression disputes can become significantly more difficult once the relationship between the parties has completely broken down.
Obtaining advice early can assist in identifying the legal significance of the conduct, the information that should be obtained or preserved and the options available before further decisions are made within the company.
It can also help distinguish between conduct that may satisfy the oppression provisions and a difficult commercial disagreement that should be approached in another way.
That distinction matters. Commencing proceedings without first understanding the legal and commercial position can increase the cost and disruption of the dispute. Equally, failing to act where a shareholder’s position or company assets are genuinely at risk can limit the options available later.
Advice on shareholder oppression and shareholder disputes
Shareholder oppression matters often involve more than the interpretation of the Corporations Act. The history of the business, the relationship between the shareholders, the company’s financial position and the commercial consequences of any proposed resolution can all be significant.
Mazzeo Lawyers advises shareholders, directors and business owners in shareholder and partnership disputes, including disputes involving allegations of oppressive or unfairly prejudicial conduct.
Our approach is to understand the legal position alongside the commercial outcome the client is seeking. Where a dispute can be resolved through negotiation or mediation, that option should be properly considered. Where court intervention is required to protect a client’s position, the available remedies and litigation strategy need to be assessed carefully.
If you are concerned about the conduct of another shareholder or the management of a company in which you hold an interest, obtaining advice early can help clarify your position and the appropriate next step.
