Remedying Shareholder Oppression

Corporate Oppression? When is winding up the solution?

Posted on 31 August 2022

Shareholder Oppression. Is winding up the answer?

Corporate structures generally lend themselves to the division of power and ownership via majority and minority interest holders or shareholders. This system naturally aligns with the notion of majority rules which in of itself contains the inherent risk of abuse. Meaning it’s common for disputes to arise when the decision makers of the company are conducting the company in a manner which is prejudicial or oppressive to the interest of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members of the company (i.e. minority shareholders).

Sometimes, this conduct can amount to what the Courts would consider oppressive and whilst shareholders may hold the perception that they have no control of the situation and there is nothing that can be done to remedy the conduct, there are remedies provided for under the Corporations Act 2001 (Cth) (“the Act”) which can grant relief to shareholders who are suffering from oppressive conduct. One of the most notable remedies is the power for Courts to make an order to wind up the company where it is just and equitable to do so.

So what is shareholder oppression?

Under section 232 of the Corporations Act 2001 (Cth) (“the Act”), shareholder oppression or minority oppression generally includes conduct that is:

contrary to the interests of the shareholders as a whole; or
oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder or shareholders.

It is important to note, not all undesirable or unfair conduct amounts to oppression in the eyes of the Court and generally, the Courts will look at the nature of the conduct and not its effect when determining this. When assessing whether conduct amounts to oppressive conduct, the Courts apply an objective test which is based on whether a ‘reasonable person’ would view the conduct as unfair.

Some common examples of conduct which may amount to shareholder oppression are:

Selling the shares held in subsidiary companies at a significant undervalue in the absence of minority shareholder consent.
The Sale of business or company assets on commercially unjustified terms.
Issuing shares to a majority shareholder to further dilute the voting power of minority shareholders.
Denying access to company documents.
Improper diversion of business opportunities to an entity related to the majority shareholders or conducting the affairs of the company to advance the interests of the majority, or to the detriment of the majority.
Failing to prosecute the misconduct of a majority shareholder or director where there are grounds to do so under the Company Constitution.

Merely going against the wishes of the minority shareholders by the exercise of voting power is not in itself oppressive as was found by the Court in John J Starr Real Estate Pty Ltd v Robert R Andrew A’asia Pty Ltd (1991) (Starr), the conduct needs to be oppressive in nature.

What is winding up and is it the answer to shareholder oppression?

So, if the Court finds the conduct to be oppressive, what remedies are available and is winding up the company the answer?

Under section 461(k) of the Act, the Court may make an order for winding up if it is held that it is just and equitable that the company be wound up. Winding up the company is the act of liquidating the assets of the company and ceasing its’ operation which obviously has serious implications for a company which may be otherwise trading solvently.

It is for this reason that case law shows that the just and equitable ground is only available where there is no other option for dealing with the affairs of a company. Effectively, winding up is generally saved as the last resort.

So what other remedies are available?

Under section 233 of the Act, where oppressive conduct has been established the Court can make any order it considers appropriate, including:

Requiring that a company’s constitution be modified or repealed;
Directing that a company purchase a shareholder’s shares through a reduction in share capital;
restraining a person from engaging in specified conduct or from doing a specified act;
Requiring a person do a specified Act;
for the company to institute, prosecute, defend or discontinue specified proceedings.

In fact, the powers and discretion of the Court under section 233 of the Act are so broad that the Court can make almost any order it sees as most effective and equitable for the circumstance. A clear example on this can be found in the case of Spargos Mining NL (1990) Justice Murray of the Supreme Court of Western Australia made an order that a new board be appointed, the company’s articles be amendment, and for the new board to report every three months.

Takeaways

Whilst winding up is a remedy that is generally reserved for circumstances where no other option will be effective, majority shareholders need to be conscious of the consequences of oppressive conduct against minority shareholders and the alternative remedies which are available at law.

That being said, even the most simplistic of corporate structures are susceptible to disputes and “in fighting” which is why we always work with our clients who are setting up their new business or expanding their existing structure to make sure they have to appropriate agreements in place which provide sets out the rights and obligations of all members and mechanisms for dispute resolution.

Breakdowns in professional relationships can be difficult to manage in closely held companies where shareholders often serve as directors, co-founders, senior executives or even related. If you are concerned about the conduct of others or that you may become involved in an oppression claim, please contact us at (07) 5415 0248 to speak to the commercial team at Omnia Legal.

This article provides general information on legal topics for educational purposes only, and should not be considered legal advice or recommendations. While we have taken care to ensure accuracy, Omnia Legal is not responsible for any errors, and makes no guarantees about the accuracy or completeness of the information. Links to third-party websites do not constitute an endorsement, and we are not liable for any damages that may result from using inaccurate or incomplete information. It's always best to seek legal advice for specific situations.

Menu