We regularly see clients who are having trouble getting on with co-owners of the company they are invested in, whether their involvement be as co-directors or just shareholders. In some cases, it becomes apparent that the treatment of shareholders by the directors or majority shareholders amounts to oppression. The test for oppression is an objective test of unfairness, where the court must assess whether, on the balance of probabilities, would the objective commercial bystander be satisfied that the affairs of the company were conducted unfairly. Shareholders who own up to 50% of the shares in a company can seek relief from oppressive behaviour under section 232 of the Corporations Act 2001.
The court may make an order under section 233 of the Corporations Act if there are resolutions, acts, conduct or omissions which are either contrary to the interests of shareholders as a whole, or if the acts are oppressive or unfairly prejudicial or discriminatory to a member or members.
Section 233 gives the court broad discretion and a range of remedies, including:
- That the company be wound up;
- An order regulating the conduct of the company’s affairs in future;
- A buy out by one shareholder of another’s shares;
- The appointment of a receiver; or
- An order restraining a person from engaging in specific conduct or from doing a specified act.
It should be noted that winding up is the last resort and not an order the court will make before exploring options to keep the company going. The aim of any order is to end the oppression. The nature of the remedy will depend on the view taken by the court as to the type of oppression.
Classic examples of oppression include the following:
- Exclusion from management or preventing minority shareholders from participating in management;
- Failure to share information, typically financial information such that a minority shareholder is unable to assess the financial status of the company;
- Misconduct such as stealing a business opportunity or company funds;
- Failure to pay dividends in certain circumstances.
The Supreme Court of Victoria have a new program to deal with oppression cases, which where appropriate requires parties to mediate early on. The program has been very successful in streamlining oppression cases. Under this new program, 63% of cases settle in mediation before going to hearing. The program works well because it requires the parties to communicate and negotiate at an early stage of litigation, before mounting costs can make parties less likely to compromise.
In the early stages of proceedings, the Plaintiff is required to keep their affidavit in support of their application for orders to just three pages, setting out clearly the facts which they believe amount to oppression. Parties should be prepared to state an estimate of the value of the shares where possible.
Once the application is on foot, a first mention date will be set before an Associate Judge, where the following orders are likely to be made:
- That the Defendant is to file an affidavit responding to the Plaintiff’s allegations;
- A formal valuation of the company is to be obtained;
- Access to documents and inspection of the company’s books and records must be provided to the party being denied access;
- Mediation between the parties is likely to be ordered, once the first set of orders are complied with.
In valuing the shares, it is important to assess what the value of the shares would have been had the oppressive conduct not taken place, as set out in the case of Rankine v Rankine.
Parties are often emotional in oppression cases as they may feel that they have been victimised by the larger shareholder/s or managing director/s, and they are often struggling for control of key decisions made by the company. It is however important at all times to remember that the outcome needs to make sense financially given the whole point of investing in a company is usually to make a profit. As such it is necessary to be pragmatic in negotiating a settlement.
If you are having difficulties involving other shareholders and believe that your interests are being unfairly disadvantaged, we recommend you contact us to learn about your options. Often we find these matters are able to be resolved by negotiation without resort to litigation, however in the event litigation is required we have found the new oppression program in the Supreme Court to lead to much earlier resolutions of disputes than was previously the case.
We also find many companies are set up and run without Shareholder Agreements being in place. Shareholder Agreements are vital, as they provide a clear avenue for how the company will be run, and how disputes are to be resolved.
Should you have any queries in regard to shareholder disputes or wish to obtain a Shareholders’ Agreement, please contact Matthies Lawyers to gain a clear understanding of your options.
Matthies Lawyers | Level 3, 44 Caroline Street, South Yarra 3141
T: +61 3 8692 2517