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Oppression Claims In Shareholder And Director Disputes

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Oppression claims are a critical aspect of Corporations Law and are subject to provisions under the Corporations Act 2001. It is irrelevant whether you are classed as a minority shareholder or a majority shareholder the remedy exists to rectify any oppressive conduct towards shareholders.

Key aspects of Oppressive claims involve;

  1. A clear understanding of the company’s financial status (i.e. liquidation, bankruptcy, etc);

  2. An analysis and determination of whether the facts of the matter satisfy the applicable provisions of the Corporations Act;

  3. Whether the conduct of the companies affairs is contrary to either the shareholders as a whole or unfairly prejudicial and/or unfairly discriminatory against an individual member;

When considering what relief should be sought under such circumstances, expert legal advice should be sought to ensure appropriate legal remedy. Shareholder disputes can be both expensive and complex and an oppression claim is no guarantee.

Oppression Claims

Who Has Standing?

Standing is the term used to describe whether an individual has a definable right to make a claim in any given legal situation. They must have a direct, or in some cases indirect, interest or financial relationship with the company.

Standing, in the case of oppression claims, refers to any shareholder, director or other members who have a financial interest in the company’s affairs. Namely, the individual will be a current and past shareholder or a person by whom a share has been given by will or by operation of law. There may be other subcategories of individuals deemed to have standing by ASIC however you should seek legal advice if you do not fall within the first two main categories as already described.

You will need to be absolutely certain that you have standing before commencing any legal proceedings.

What Is The Difference Between Minority Shareholders and Majority Shareholders?

Minority shareholders are individuals who own less than 50% of the shares in a company whereas majority shareholders are individuals who own more than 50% of the shares available in a company. Majority shareholders will also have a greater amount of power when it comes to voting, decision making and the like simply due to the amount of shares they hold within the company.

In some circumstances, a majority shareholder can ignore the opinions of minority shareholders because they hold the majority power. this can of course leave some shareholders feeling oppressed and potentially falling victim to oppressive conduct. In circumstances where majority shareholders are either a singular or very select number of members, the risk of financially oppressive conduct is high. A singular or select number of members may forgo the company’s best interest in place of their own best interests.

What Is Considered Oppressive, Discriminatory or Prejudicial Conduct?

Oppressive, discriminatory or prejudicial conduct is conduct which seeks to dominate another person or group of persons and take power away from them. To begin however, it is critical to understand what each term means so that you can appropriately apply them.

  1. Oppressive

Refers to an authoritarian, autocratic type of behavior which often inflicts harsh conduct against another.

  1. Discriminatory

Refers to a biased or unjust distinction between different categories of people. Examples of this may include, gender bias or discrimination, age or ethnicity discrimination, etc.

  1. Prejudicial

Refers to damaging or detrimental behavior which highlights and takes advantage of the disadvantages faced by either a singular individual or a group of individuals.

Once there is an understanding of the terms and their exact interpretations, we can explore how they are applied to examples of oppressive conduct and more importantly, legal proceedings.

There are in all likelihood, hundreds, if not thousands of reasons why a shareholder may consider they have been subject to oppressive, prejudicial or discriminatory conduct. In reality however, not every perceived unfair conduct can be considered oppressive, prejudicial or discriminatory.

Types of scenarios of oppressive conduct are;

  1. Diverting business opportunities away from the company without consultation;

  2. A breach of the company’s fiduciary duties;

  3. Conduct which creates commercial unfairness;

  4. An inappropriate level of personal expenditure with company funds;

  5. Appointing directors without shareholder permission;

  6. Paying excessive remuneration without basis;

  7. Failure to prosecute derivative conduct of a majority shareholder or director;

  8. Inappropriate oppressive conduct at shareholder meetings such as bullying, harassment, coercion, etc;

  9. Suppression or withholding of certain company information, financial or non-financial;

  10. Forcing minority shareholder’s to sell their shared for less than fair value;

  11. Making company decision which negatively affect minority shareholders, i.e. increase in director salaries which lowers minority shareholder’s dividends;

  12. Acting in any way which can be considered discriminatory against a member of the company or the board;

  13. Making decision on behalf of the company which may negatively impact the company’s image;

  14. Etc.

The above is hardly an exhaustive list but it clearly demonstrates the types of scenarios which may constitute oppressive conduct. If there is any perceived breach of either director’s duties, derivative action or oppression action then legal advice should be the first step. There is a limit to the wide powers or discretion which exists within shareholder groups and these powers should not be abused.

Remedies

Corporations Act 2001

The applicable legislation when dealing with matters involving an oppressed shareholder is the Corporations Act 2001. Section 233 of the Corporations Act lays out the remedies available to if any oppressive, prejudicial or discriminatory conduct has occurred and the courts powers under these sections are broad. The court can do whatever they consider necessary to right the wrongs that have occurred including, removing the entire board of directors or even winding up the company depending on the circumstances.

Section 233 states;

(1)  The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a)  that the company be wound up;
(b)  that the company’s existing constitution be modified or repealed;
(c)  regulating the conduct of the company’s affairs in the future;
(d)  for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
(e)  for the purchase of shares with an appropriate reduction of the company’s share capital;
(f)  for the company to institute, prosecute, defend or discontinue specified proceedings;
(g)  authorizing a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h)  appointing a receiver or a receiver and manager of any or all of the company’s property;
(i)  restraining a person from engaging in specified conduct or from doing a specified act;
(j)  requiring a person to do a specified act.

It will depend on the circumstances of the matter which remedy is undertaken to resolve the conduct but as you can see above, they range from moderate orders to severe orders. The Federal Court take the issue of shareholder oppressions and inappropriate company directors conduct very seriously and their proposed resolution will always seem to right the wrong that has occurred by whatever means necessary.

Choosing The Type Of Relief

When shareholder oppression claims are filed, consideration must be given to the type of relief the shareholder is seeking as part of their claim. There needs to be a balance between rectifying the oppressive conduct, advancing the interests of the company and advancing the interests of the company.

It may be that the appropriate remedy is as simply as requiring a person to so a specific act or restraining a person from doing a specific act. Oppression proceedings can act as injunctive in that sense if a decision has been made but not yet implemented and a minority shareholder seeks to stop the implementation of the proposed act before it can cause damage. For example, diverting business opportunities which may have stood to make the company a significant profit.

It may be that the constitution awards very wide powers to the offending director and it needs modification by the court to end oppressive or specific conduct. In many cases it may even be as simple as an order requiring the sharing of financial information including, the company’s books, profit and loss statements, etc. Shareholders, whether majority or minority are entitled to company financial information. This is especially when considering the negotiating table because shareholders need to be aware of all the circumstances of the company before they can vote about decisions, i.e. paying dividends, business management, profit and loss, etc.

What Is Not Considered Oppressive Conduct?

There will always be times when decisions need to be made which negatively affect all shareholders, whether majority or minority, but which will not amount to an oppression claim. Not all shareholder disputes are as a result of oppressive actions or unfairly prejudicial behavior.

  1. Directors’ Duties

A breach of director duties may not be oppressive as it can only be considered oppressive if it inflicts harsh conduct on an individual or a group of individuals. For example, a breach of directors’ duties may not negatively impact a shareholder or the company as a whole therefore it will not be considered oppressive.

  1. Breakdown In Business Relationship and Loss Of Faith

A breakdown in a business relationship may see a company becomes solvent or management decisions become fraught, but it will not automatically result in shareholder oppression. Likewise, a loss of faith in the director or management by shareholders will not automatically result in an oppression claim. A loss of faith in a particular context is a further extension of a breakdown in the relationship but there is no remedy for this except to part ways. There is no unconscionable or prejudicial conduct involved.

  1. Failing To Reach Agreement

A failure of minority and majority shareholders making an agreement is again not grounds for an oppression claim. It is common for shareholder disputes to arise simply due to disagreement and difference of opinion. There is a difference between an actual or proposed act. A proposed act has not yet occurred and could simply just be an idea on the table. It is common for there to be no shareholders agreement.

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