Strong relationships are at the core of many start-ups and SMEs. However, as time goes on, and businesses grow, these relationships can sour or shareholders may develop entirely different understandings of the strategic direction a company should go in.
As a result, a shareholder may find themselves excluded from managing the company’s affairs, not receiving their fair share of the company’s profit, or saddled with a stake in a company that is being run contrary to their wishes without a clear path out. In some cases, it may be worth considering an application for remedies related to shareholder oppression under sections 232 and 233 of the Corporations Act 2001 (Cth) (“the Act”).
What is shareholder oppression?
Under section 232 of the Act, shareholder oppression occurs when the conduct or proposed conduct of the company’s affairs, including a resolution or omission, is oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.
Not all unfair or undesirable conduct will amount to oppression. Whether conduct is oppressive or unfairly prejudicial is assessed objectively against the judgement of an objective commercial bystander. As such, the standard is assessed by:
“… reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other”.
Some examples of conduct that has previously been considered by the court to meet this threshold include:
- Improperly excluding a member from participation in management decisions where the company’s constitution gave rise to a reasonable expectation of participation in management decisions;
- Denying the member access to books and records;
- Acting oppressively at board meetings; and
- Failing to take steps to facilitate the exit of a shareholder.
Ultimately, it is the cumulative effect of the parties’ conduct that will be considered, meaning that a number of moderately prejudicial acts can add up overtime to support a claim that shareholder oppression has occurred.
What remedies are available for shareholder oppression?
Under section 233 of the Act, the Court can make any order it considers appropriate, including:
- Winding up a company;
- Requiring that a company’s constitution be modified or repealed;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; and/or
- Requiring a person do a specified act.
An application for oppression remedies can generally be brought by both current and former shareholders.
Two wrongs do not make a right
When relationships deteriorate between shareholders of closely held companies, it is not uncommon for parties on all sides of the dispute to not be performing at their best due to the stress of the situation. However, it is important to keep in might that one shareholder acting prejudicially does not entitle the other shareholders to do likewise.
While there is no requirement that shareholders must approach oppression complaints with ‘clean hands’, one shareholder’s unreasonable conduct could inhibit their argument for oppression against the other as:
- In the context of the first shareholder’s conduct, the second shareholder’s action may not be unfair even if they are prejudicial to the first shareholder;
- If the person that has been excluded from participating in the management of a company is found to be responsible for the breakdown of the relationship between shareholders the excluded shareholder may be denied relief.
Where a relationship is completely irreparable, the court may still determine that it is suitable to wind up a company when there is oppressive conduct on both sides. However, retaliating against oppressive conduct with prejudicial actions can make it more difficult to win an oppression application.
Key Takeaways
- There is a fairly high bar for proving oppressive conduct and not all prejudicial acts will amount to oppression
- Your conduct is relevant whether or not another shareholder or the company as a whole has been acting prejudicially towards you- so try to ensure that you don’t get dragged into tit-for-tat prejudicial behaviour; and
- Breakdowns in professional relationships can be difficult to manage in closely held companies where shareholders often serve as directors, co-founders, or senior executives. If you are concerned about the prejudicial conduct of others or that you may become involved in an oppression claim, please reach out at (07) 3667 9698 to contact us to speak to the team at Rouse Lawyers.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.