Minority shareholders in Australia are generally beholden to the majority shareholders. However, in some cases, minority shareholders of private companies do have recourse available to them. In this blog article, we look at the ‘minority shareholder oppression remedy’ available in section 232 of the Corporations Act 2001 (Cth), and the orders available to the Court in enforcing that remedy.
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Where shareholders or controllers of Australian private proprietary companies act to the detriment of other shareholders, what can those other shareholders do? Of course, if the disadvantaged shareholders are in the majority, they can usually respond with ease. For example, if majority shareholders believe that the directors have acted to their detriment they can vote to replace them. But for minority shareholders it is not so easy — any action they take could be trumped by the majority shareholders.
In this article, we take a detailed look at a statutory remedy in the Corporations Act 2001 (Cth) that allows minority shareholders to take action against majority shareholders in certain limited circumstances. This remedy is sometimes known as either ‘shareholder oppression’, ‘minority shareholder oppression’, or the ‘oppressive conduct’ remedy.
Historical background to minority shareholder oppression
In Australia, members who have a majority shareholding in a proprietary company have significant freedom in how they conduct themselves: For example, they have every right to protect their position by creating veto rights and super-majority requirements, and amend the company constitution accordingly. Majority shareholders have no fiduciary obligations to minority shareholders.
This ‘tyranny of the majority’ was exacerbated by the 19th century case Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, and the line of cases which resulted from it. In that case, two shareholders sued five directors of a company for misappropriation of funds. They sued on behalf of all shareholders that were not the defendants.
The lawsuit was dismissed on the grounds that the individual members, or groups of members were not “proper plaintiffs” for such a proceeding, and only the body corporate itself had such standing.
While the courts in the UK and Australia (as well as other jurisdictions) developed exceptions to this ‘rule in Foss v Harbottle’, in the interests of fairness to shareholders, a more expansive remedy was introduced by legislators in the form of the oppressive conduct remedy available in the Corporations Act 2001 (Cth)
What are the requirements of the oppressive conduct remedy?
Part 2F.1 of the Corporations Act 2001 (Cth) sets out the minority oppression remedy for members and former members of corporations in Australia (that means the shareholders and former shareholders in private limited proprietary companies)
Section 232 of that Part allows eligible individuals to apply for relief from the court where the conduct of a company’s affairs, an act or proposed act or omission on behalf of the company, or a resolution/proposed resolution of the company meets one of the following conditions:
- It is contrary to the interests of the members as a whole; or
- It is oppressive, unfairly prejudicial to, or unfairly discriminatory against, one or more members.
The first thing we should note from this definition is that it there is no remedy available simply because an individual member, or minority group of members, was disadvantaged in some way by the actions of the company or other members. The action must either hurt members as a whole, or meet the high bar for poor conduct against individual members. Court decisions confirm that the court will not lightly conclude that shareholder behaviour was oppressive, prejudicial or unfairly discriminatory.
What are some examples of oppressive conduct?
To determine which conduct might meet the ‘oppressive’ threshold, we need to look at past decisions. Some examples that have come up include:
- Excessive remuneration for directors. In Sanford v Sanford Courier Services Pty Ltd 5 ACLC 394, the Supreme Court of New South Wales found that high salaries and other payments made by the couple who controlled a business, to themselves, constituted oppressive against another shareholder. This other shareholder was an equal shareholder, but no longer a director so not directly involved in the running of the company. It is worth noting, that directors paying themselves excessive salaries can also lead to action from liquidators for “unreasonable director-related transactions” in the event of insolvency
- Improper share issue. For example, in the case of Pacific Dairies Limited v Orican Pty Ltd  VSC 647, directors resolving to issue additional shares to themselves as consideration in lieu of directors fees, and not offering those shares to other shareholders, was found to be oppresive conduct
- Denying access to information to minority shareholders which is essential for decision-making
- Misuse of company funds. This could include directors diverting funds for their own personal use or into another entity that they control
- Diverting business to another entity that the directors control. This behaviour could also in some cases be a form of illegal phoenix activity prior to liquidation.
Of course the oppressive conduct remedy provides general relief and there is an unlimited range of cases that may be found to be oppressive conduct.
What are the available remedies for minority shareholder oppression?
The court has a broad discretion to make orders with respect to oppressive conduct. This includes, but is not limited to, the following orders listed in section 233 of the Corporations Act 2001 (Cth):
- That the company be wound up. Note, however that the courts are reluctant to wind up a solvent company unless absolutely necessary
- That the company’s existing constitution be modified or repealed
- That the conduct of the company’s affairs be regulated in some way
- That shares be purchased by a member or members, with or without a reduction in share capital (usually the shares of oppressed members)
- That the company initiate legal proceedings (e.g., in the case of director misconduct)
- That a member initiate legal proceedings in the name of the company
- That a receiver or a receiver and manager be appointed for all or any of the company’s property. This might be important to ensure that certain assets are secured from future misappropriation by disgruntled directors
- That conduct be restrained in a certain way
- That an individual be required to do something
The best choice for oppressed shareholders
Where minority shareholders consider themselves to be unfairly treated by majority shareholders, there is the option to bring action for oppressive conduct under the Corporations Act 2001 (Cth). However, the grounds for this action are narrow and will only be satisfied where majority shareholders have acted in an unusually unfair or unreasonable way.