PROTECTING THE MINORITY - PREVENTING SHAREHOLDER OPPRESSION UNDER THE CORPORATIONS ACT

20 July 2020

Oppressive Conduct Prohibitions & the Corporations Act

The oppressive conduct regime of the Corporations Act 2001 (Cth) (“the Act”) seeks to ensure the protection of minority shareholders from unfairly prejudicial and discriminatory conduct in the management and operation of company affairs. Contained within sections 232 and 233 of the Act, the prohibitions tie intimately with central tenets of corporate governance, including that directors should act reasonably and in good faith, in the best interests of the company and its members.

Statutory provisions

Section 232 of the Act allows the Court make an order for a remedy under section 233 if:

1.       The conduct of the company’s affairs; or

2.       An actual or proposed act or omission by or on behalf of the company; or

3.       A resolution, or proposed resolution, of members or a class of members of the company

is either:

a.       Contrary to the interests of the members as a whole; or

b.       Oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or another capacity.

Oppressive Conduct

The Act contains no uniform definition of what constitutes oppressive conduct. Examples have been established through the common law, and typically involve a lack of fair dealing; something burdensome, harsh or wrongful, inequitable or unjust; or exhibited commercial unfairness (see, for example, Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) ACSR 672 [89]). The most commonly applied test is whether the decision made by the director is one that no board of directors, acting reasonably, would have made (Wayde v New South Wales Rugby League Ltd 180 CLR 459). The full context of the relevant conduct should be examined, rather than viewing the conduct in isolation. However, objectively the court looks at the result of the conduct by the majority members or directors, not their intentions.

Examples of oppressive conduct have included where majority members/directors:

• Engaged in unfair conduct, which reasonable directors would not have thought fair;

• Run the company in their own interests, ignoring the interests of minority shareholders;

• Improperly issue shares to themselves to out-vote other shareholders;

• Amend the company constitution to force the minority to sell some or all of their shares at less than fair value;

• Vote to approve the sale of company assets to themselves at below-market;

• Make unilateral decisions to pay excessive salaries to themselves at the expense of paying dividends to shareholders;

• Exclude a minority shareholder from involvement in the management decisions of the company;

• Issued shares to themselves, with the objective of becoming majority members and diluting other members;

• Excluded members from the business or management;

• Failed to act in the best interests of the company.

Relief

Section 233 provides the Court wide-ranging power to make “any order that it considers appropriate”, which may include (but are not limited to):

• Winding-up of the company;

• Modifying or repealing the company’s constitution;

• Regulating the future conduct of company affairs;

• Purchase of any shares by any member or person to whom a share in the company has been transmitted;

• Purchase of shares with an appropriate reduction of the company’s share capital;

• For the company to institute, prosecute, defend or discontinue proceedings;

• Appointing a receiver and manager of any or all of the company’s property;

• Restraining a person from engaging in specified conduct;

• Requiring a person to do a specified act.

Evidently, section 233 allows significant discretion for the Court to analyse the relevant conduct, determine whether minority oppression has occurred and enforce various potential remedies. Indeed, the High Court has openly recognised that the power given to the court is to be read broadly. In practice, however, the court rarely makes extreme or novel orders and will only order a company to be wound up as a matter of last resort, typically looking to restore the minority shareholder to the position they would have been in, but for the conduct occurring. This frequently sees orders that a defendant company “buy-out” the minority shares for fair value, as determined by an independent valuer.

KKP Comment

Ultimately, the Act’s prohibition on oppressive conduct against minority shareholders is, in many ways, incomplete, and recent judicial decisions have highlighted tensions in the current regime. In any case, this area of law remains complex and reinforces the need for a conservative approach to corporate governance requirements, the provision of sound advice and implementation of preventative measures to avoid litigation.

The team at Kerr & Kerr Partners are experts in commercial and corporate advice, strategy and disputes. Please contact us immediately on enquiries@kerrpartners.com.au or (03) 9600 2234 for solutions to your legal problems.