Shareholder Oppression Explained

As businesses evolve over time, so do the relationships with shareholders – potentially for the worse. As an unfortunate consequence, shareholders may find themselves sidelined from company management, deprived of their rightful share of profits, or stuck with a stake in a company moving in a direction contrary to their desires without a clear exit strategy. In this article, Litigation and Dispute Resolution Senior Associate Lachlan Boyle and Law Clerk Riley Hickey explore shareholder oppression to give you an insight into what avenues may be available to you should you find yourself in the unfortunate grips of shareholder oppression.

What is Shareholder Oppression?

Shareholder oppression is considered under section 232 of the Corporations Act 2001 (Cth) (‘Act’). It refers to actions taken by the majority shareholders or corporate officers that unfairly prejudice the interests of minority shareholders. Importantly, not all unfair or undesirable conduct towards shareholders will constitute or amount to oppression – it must meet an objective standard (i.e. through the lens of a reasonable, commercial person). In any event, the court has previously determined that conduct reaching the threshold of oppression may include:

(a)       freezing out minority shareholders from decision-making and the participation of the management of the company;
(b)       depriving them of dividends or financial information
(c)       diluting their ownership stake;
(d)       engaging in self-dealing transactions to the detriment of minority interests;
(e)       the sale of assets on commercially unjustifiable terms;
(f)       disproportionate and/or excessive remuneration to majority shareholders;
(g)       failure to prosecute misconduct despite reasonable grounds to do so.

As a general position, the Court will often aim to strike a balance between the interests of the company as a whole and the rights and interests of the minority shareholders who have less control over company decisions. This is to determine whether the majority shareholders, who typically hold more voting power and decision-making authority, have acted so unfairly to prejudice the interests of the minority shareholders.

It is important to note that shareholder oppression is unfairness that goes beyond mere disadvantage. While the distinction between oppressive and non-oppressive conduct is somewhat ambiguous, the following examples are instances that may not give rise to oppressive conduct:

(a)       a minority member being outvoted or be dissatisfied at the way the majority is managing a company’s affairs;
(b)       conservative but proper management, including paying fair and reasonable wages;
(c)        increasing direction remuneration, but refusing to increase dividend payments in a family company;
(d)       the inability of minority shareholders to sell shares;
(e)       amending voting rights in the company constitution in good faith, and in the best interests of the company.

Remedies for Shareholder Oppression 

Section 233 of the Act empowers the Court to issue various orders, such that shareholders that have been subjected to the conduct detailed above may be able to pursue legal action, as follows: .

(a)       Winding up a company;
(b)       Requiring that a company’s constitution be modified or repealed;
(c)       Directing that a company purchase a shareholder’s shares through a reduction in share capital;
(d)       A member’s shares be purchases;
(e)       The company’s affairs be regulated; and/or

Managing Shareholder Relationships

In any commercial context, strained relationships place an unnecessary burden and pressure on all the parties involved, which may result in the parties to the dispute refusing to perform at their best due to the circumstances they have been subjected to. Nonetheless, it’s important to remember that one shareholder’s misconduct doesn’t justify similar behaviour from others. In that regard, a shareholder’s unreasonable conduct may influence their ability to raise an argument of oppression against another and may be denied relief.

Key Takeaways

The deterioration of professional relationships can pose significant challenges, particularly within closely managed companies, where shareholders may also serve as directors, co-founders, or senior executives. If you have been subjected to prejudicial behaviour from others or conduct that may amount to an oppression claim, it is imperative that you seek you must seek legal advice at the earliest available opportunity.

RAMSDEN LAWYERS – HOW WE CAN HELP

Understandably, minority shareholders are concerned about the actions and conduct of the company, and director(s) or majority shareholders must take steps to ensure that their interests are protected. If you are seeking assistance in navigating shareholder oppression, our Litigation and Dispute Resolution Division can assist. Our team has considerable expertise in assisting clients in navigating shareholder oppression and seeking remedies for oppressive conduct.  We are happy to arrange an obligation-free initial consultation to assist you in navigating the relevant legislation for your circumstances.

This article’s content is intended to provide general guidance on the subject matter and must not be relied on as legal advice. You should seek specific advice about your circumstances.