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Corporate democracy follows general principles similar to those of our democratic governments, and organisational and decision-making rules enforce its legitimacy. However, what happens when these decision-making hierarchies are jeopardised by oppressive conduct from those with the majority voting power? Majority shareholders can sometimes use their influence for their own benefit instead of the company’s benefit. Not only is such conduct illegal, but it can also have the effect of diminishing the value of a shareholding, or damage the company generally. This article considers the circumstances under which a court may make specific orders to remedy minority shareholder oppression. The policy considerations aim to enable the oppressed shareholder to exit the company under such circumstances. 

Oppressive Conduct

The Corporations Act (Section 232) details conduct that constitutes ‘oppressive conduct’. In general, minority oppression 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

Courts assess oppressive conduct by applying an objective test based on whether a ‘reasonable person’ would view the conduct as unfair. Further, the presence of prejudice or discrimination is not enough. There must also be an element of unfairness that goes beyond mere disadvantage.

Conduct Not Considered to Be Oppressive

The Corporations Act specifies the circumstances under which a court may grant an order to remedy oppressive conduct by the majority shareholders. Importantly, the court has also interpreted the legislation to understand instances when the conduct is not oppressive. 

In John J Starr Real Estate Pty Ltd v Robert R Andrew A’asia Pty Ltd (1991) (Starr), the court found that ‘the mere subordination of the wishes of the minority by the exercise of the voting power of the majority is not of itself oppressive’. The Court affirmed that oppression is an action done against a person’s will and not with their consent or mere acquiescence. Similarly, oppression is not merely a shareholder losing confidence in its board of directors’ decision-making capacity. 

Oppressive Conduct by a Minority Shareholder

While it is rare, courts have found that there has been oppressive conduct committed by a minority shareholder with operational control of the company. This is in circumstances where the minority shareholder excludes the majority shareholder from operational decision-making capacity. 

In the recent case of Crow Inn Pty Limited (no.2) [2020] NSWSC, the Supreme Court granted relief under the Corporations Act. The minority shareholder had operational control of the company and obstructed the majority shareholder from removing its share of capital from it. The court made orders to rectify the share register. 

Remedies for an Oppressed Minority Shareholder

Remedies for oppressive conduct are available under Section 233 of the Corporations Act. Under this section, a court has the discretion to grant a range of remedies. Specifically, a court can make any order that it considers appropriate in circumstances where oppressive conduct has occurred.

The power that a court has includes, but is not limited to, making orders for:

  • one or more of the majority shareholders to purchase the minority shareholder’s shares at a price determined by the Court;
  • the Company to purchase the minority shareholder’s shares;
  • a receiver and manager to be appointed, and the Company wound up (potential for a director resignation); 
  • an injunction to be granted against the Company; or 
  • a director or majority shareholder to refrain from a specific act.

Additionally, in the judgment of Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882, the court discussed relevant principles relating to business judgment and oppression. In this case, the court held that conduct engaged by the chairman and majority shareholder was oppressive. Such conduct included:

  • a failure to pay dividends; 
  • a failure to consider the minority shareholder’s request that the remuneration of the majority shareholder as director be reduced; and 
  • refusal to give the minority shareholder access to company records.

Winding Up as a Last Resort

A court can order to wind up a company if it finds there to be oppressive conduct against minority shareholders. However, the legislation provides that it will not do so if this will prejudice the oppressed shareholder or where there is another remedy available. 

Buy-Out Remedies Ordered by the Court

Given the reluctance of courts to compulsorily wind up a company, it is more common to order one party to buy out the other. However, in such instances, it falls upon the court to determine the value of the shares being bought. In this situation, the law provides little guidance. 

One common approach used by courts to determine ‘market value’ is to consider the amount that a prudent purchaser would have been willing to give for the shares sooner rather than fail to obtain them. This is often known as involving a ‘not too anxious buyer, and not too anxious seller’. 

Additionally, other methods look beyond fixing a fair price only by reference to ordinary valuation principles. Instead, they are based on the case’s facts and the price that should be paid in the circumstances. Some of these more methodical methodologies for determining fair value include the following:

  • Discounted Cash Flow method: this valuation method determines the value of an investment based on its expected future cash flows.
  • Capitalisation of future maintainable earnings method: this methodology values the investment based on the sustainable profits generated by the business relative to the risk-return expected.

In any case, courts have the discretion to adopt the valuation method it deems fair given the circumstances. Although, either party may appeal this decision if they believe the court’s decision has not provided them with a favourable valuation of their shares. 

Key Takeaways

As a majority shareholder, you should be aware that there can be consequences for oppressive conduct against minority shareholders. Likewise, you should take care when making decisions to ensure that the consequences will not be unfairly prejudicial or discriminatory to minority shareholders. If you would like more information about minority shareholder oppression, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is minority shareholder oppression?

In the operation of companies, majority shareholders can sometimes use their influence for their own benefit instead of the benefit of the company as a whole. This conduct can be deemed as minority shareholder oppression by the courts.

What is oppressive conduct?

Oppressive conduct includes acts that are contrary to the interests of the shareholders as a whole. It also includes acts that are oppressive to, unfairly prejudice, or unfairly discriminate against a shareholder or shareholders.

What is not considered to be oppressive conduct?

The Court has affirmed that oppression is an action done against a person’s will and not with their consent or mere acquiescence. Oppression is not merely a shareholder losing confidence in its board of directors’ decision-making capacity.

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