Shareholders of a company may disagree on the general conduct of the company or the conduct in a particular situation. In such a situation, majority shareholders may ignore or exclude the views of the minority shareholders. The law can intervene with the internal management of the company if there is shareholder oppression of the minority shareholders by the majority shareholders.
A minority shareholder can seek relief for shareholder oppression under Part 2F.1 of the Corporations Act 2001 (Cth) (‘the Act’) against a private or a public company.
Relief for shareholder oppression
A person must satisfy section 234 and section 232 of the Act to bring a claim for shareholder oppression. Then, they can seek an order under section 233 of the Act, subject to the Court’s discretion.
Section 234
Section 234 of the Act provides what parties may seek an order from a court. A shareholder who was oppressed by other shareholders can appropriately bring a claim, as per s234(a)(i). In addition, a shareholder may bring a claim where the oppressive action is against another shareholder, under section 234(a)(ii). However, if the person is not a shareholder, they must demonstrate that they ceased to be a shareholder due to “selective reduction” (section 234(b)). Alternatively, the person can demonstrate that the “application relates to the circumstances in which they ceased to be a member” (section 234(c)).
Section 232
Section 232 of the Act sets out the grounds for a court order. The conduct in question must be the conduct of the company or on behalf of the company, or a proposed or implemented resolution by the company (section 232 (a)-(c)). Then, section 232 would be satisfied if the action is “contrary to the interests of the members as a whole” (section 232(d)). Otherwise, the action should be “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” the shareholder (section 232(e)).
Section 233
After section 232 and 234 are met, the orders that a person may seek are set out in section 233(1)(a)-(j). They include: winding up the company (section 233(1)(a)); modifying the company’s constitution (section 233(1)(b)); or, appointing a receiver (section 233(1)(h)). In addition, the court can order a person to do a specified act under section 233(1)(j) or otherwise restrain the person from doing a specified act under s 233(1)(i). Commonly, courts grant a compulsory buy-out of the minority shareholder’s interest.
Examples of Shareholder Oppression
A merely dissatisfied or neglected shareholder cannot seek relief under the Act. Instead, the conduct must be “oppressive”, “unfairly prejudicial” or “unfairly discriminatory” under section 232(e). This is an objective test. As a result, court may give regard to a reasonable director’s response, duties of a director or to objective standards of good corporate behaviour. The court will also weigh the person’s interest against the interest of the whole company.
Courts have recognised some actions as being “oppressive”. This includes where a majority shareholder excludes a minority shareholder from being involved in the company by compulsorily acquiring their interest as in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97. There is also “oppressive” or “unfair” conduct where a majority shareholder benefits at the cost of others or the company. This may occur where the shareholder redirects business opportunities to themselves, takes an excessive bonus or salary instead of paying dividend, or acquires shares within the company simply to outvote other shareholders. Similarly, general bad faith behaviour by a majority shareholder can also be oppressive. This includes behaviour such as dominating meetings, denying information to the minority shareholder, altering the company constitution or consciously ignoring a minority shareholder’s views.
Conclusion
An oppressed minority shareholder of a company can seek relief under the Act. First, the person must satisfy sections 232 and 234 of the Act. Then, based on the court’s discretion, the person can seek an order under section 233. However, the conduct in question must be more than a mere disagreement. There must be conduct that is oppressive or unfair. For directors and majority shareholders, the relief under section 232 highlights the importance of being cautious in their actions. Bad faith conduct or breach of duties will likely allow minority shareholders to have their interest bought out. In extreme cases, the court is able to wind up the company as well.
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