A shareholder is an individual, company or institution that partly owns a part of the company via shares. Notwithstanding, this area of law is quite complex, and thus it is not surprising that there have been cases in the court system where a shareholder has been oppressed. This Legal Kitz article will inform you of a number of shareholder oppression cases.
What is an oppression remedy?
An oppression remedy pursuant to section 232 of the Corporation Act 2001 (Cth) is where the members of corporations can seek an oppression remedy if the conduct of the company’s affairs, either actual or proposed, is oppressive or, unfairly prejudicial or, unfairly discriminatory against one member or members of the corporation. The court has stated that oppression has a broad application to circumstances. The most common circumstances are against the actions of directors, appointments, meetings, the protection of minority interests against the dominant force of the majority, access to the financial statements of the company or, the prosecution of gross financial mismanagement. Importantly, the court did not recognise poor management or cautious management, or acts in good faith of the company such as changing the voting rights as grounds for oppressive relief.
What cannot be claimed as an oppressive action?
An example of a non-oppressive case was in Wayde where the board of New South Wales Rugby League, decided to refuse an application that would allow the Wests Rugby League Club to enter the New South Wales professional competition. The club brought proceedings against the board of the NSWRL. They claimed the decision was unfair to the club and its members. However, the court agreed with the directors of the NSWRL, that the decision was not unfair to the club. The court relied on findings that the board of NSWRL, based their decision on the negative consequences of including the club. The board relied on expert rugby league knowledge, that included the fact that the club would increase the amount of games in the season which would mean that they would incur further financial costs to the league but also to each other club. In addition, the board was concerned about the increase in travel time and the amount of injuries of the league’s players that would likely occur due to the increased season. The court decided that because the decision was based on the knowledge of the rugby league expert opinions the decision was not considered to be unfair or oppressive. The board was simply doing what they were constitutionally authorised to do. Justice Brennan emphasised in his judgement that a ‘mere’ prejudice or discrimination is not enough to seek an oppression remedy, there needs to be evidence of an ‘unfair’ prejudice.
How is shareholder oppression determined by the courts?
To determine whether an act is considered to be unfair, the court stated in Jenkins that unfairness needs to be determined objectively. By examining whether reasonable directors that have the same skills would, consider the act to be unfair. Additionally, in Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042, oppressive conduct is where the shareholders in question have the dominant power in the company. This can be defined as when shareholders act or propose to act, using their dominant power to do something that is burdensome, harsh and wrongful to members and does not display the degree of probity that the members are entitled to.
In contrast to Wayde, the case of Re Spargos Mining NL (1990) 3 ACSR 1 in a case where there was minority shareholder oppression, an individual sought an oppressive remedy against the majority of shareholders. David Jenkins, who was a member of the company, was the individual who brought the actions against the board of Spargos, which was part of a large group of companies. Mr. Jenkins notified the court that the board of the directors had made a decision in the best interest of other companies within the group, which harmed the interest of Spargos. The court before deciding the case had to determine whether Mr. Jenkins had standing under the Western Australian legislation to seek an oppression remedy. The court found that Mr Jenkin’s did have standing because he had a personal interest in the company’s affairs, and was therefore able to prosecute the directors for breathing their fiduciary duties. Therefore, an relief against oppression was granted, to protect the interest of Mr. Jenkins, and the court ordered a new board of the directors for Spargos.
Can shareholder oppression be granted against the minority?
In rare cases the court may find against the minority for the majority of shareholders if the conduct in question satisfies the definition of the Act. This occurred, recently in the case of Crow Inn Pty Limited (no.2) [2020] NSWSC, where the court granted relief in favour of the majority. In this case the majority wished to remove their capital on reasonable terms from the company. The minority of the company decide to exclude the majority from the management decisions and obstruct their ability to remove the capital. The Crow Inn share register was adjusted in 2015 when the majority transferred shares to the minority through a shareholder agreement that stipulated specific conditions, which the minority had refused and partially performed their obligations under. The court stated that it was just and equitable for the minority shareholder to return the capital to the majority shareholder. In this case the court granted relief, and ordered the remedy of ratification under section 233, to cease the oppression of the majority member. It was oppressive for the minority to enjoy the benefits of the capital without incurring the burden. Therefore the court granted oppressive relief against the minority in favour of the majority. This case is important, as it clearly illustrates that it is possible for an oppression remedy to be used against the minority, which increases the scope of the legislation and its application in protecting the interests of members of a company.
Legal advice
Shareholder oppression is an extremely confusing area of the law. If you believe that you, as a shareholder are being oppressed, you should seek legal advice. Our highly qualified and experienced team can assist you with any legal concerns or queries. Book here now for a FREE 30-minute consultation.