Partnership Dispute Series: The ‘oppression remedy’ is the most effective minority shareholder remedy to redress abuse of power by a majority shareholder.  Although the Corporations Act 2001 provides a range of remedies to be catered to the circumstances of the case, the Courts will most commonly make an order that the oppressor party purchase the shares of the oppressed party at a fair value.[1]

In this article, we explore briefly:

• the nature of the oppression remedy;
• conduct which can constitute oppression; and
• forcing a ‘buy-out’ from a business partner.

Shareholder oppression; the forced buy-out – by Chad Gear

Corporate law provides business owners with a range of remedies to protect them from abuse at the hands of majority shareholders, some of which can bring about an end to the business relationship.  Once such outcome is an order that one partner purchase the other partner’s shares.

Under section 233 of the Corporations Act 2001 (the Act), an oppression claim can be commenced by a shareholder[2] if a company’s affairs are conducted[3] in a way which is:

• contrary to the interests of shareholders (as a whole); or
• oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder (or shareholders).

The test for whether conduct constitutes oppression is one of ‘commercial unfairness’.[4]  The inquiry is whether ‘objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair’.[5]  ‘Unfairness’ has further been defined as conduct that is ‘inequitable’ or ‘unjust’.[6]

Conduct sufficient to constitute ‘oppression’ includes:

• using company funds for an improper purpose (such as personal expenses);
• paying excessive remuneration (usually to the person in control of the company);
• excluding the oppressed party from the management of the company;
• issuing shares with the effect that the value of the oppressed party’s shares are diluted;
• unfairly allocating or restricting the payment of dividends;
• refusing access to information about the company’s affairs;
• failing or refusing to provide access to company records;
• failing to call general meetings and directors’ meetings and/or giving proper notice of such meetings to the oppressed party;
• failing to keep proper accounting and other records of the company;
• denying other directors the opportunity to carry out their functions; and
• refusing to make a reasonable offer to buy the oppressed party’s shares, while at the same time improperly excluding the oppressed party from the management of the company.

In terms of the occurrence of the act or acts which might constitute oppression:

• a single oppressive act can be sufficient to attract the intervention of the Courts;[7]
• alternatively, oppressive conduct can take the form of multiple acts which in isolation might otherwise not be sufficient to attract judicial intervention.

In Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, the Court considered the cumulative effect of a number of acts by a director who misused and misappropriated company assets.  The issue in this case was that no one instance was sufficient to result in a finding of oppression. Instead, oppression required consideration of the combined or cumulative actions.

In terms of the temporal occurrence of the oppressive conduct:

• a number of cases have held that the oppressive conduct can be a single, historical isolated act or omission; the oppression was not required to be a continuing process.[8]
• there is at least one case however where the Courts have held that the conduct must persist up to the time an order is made.[9]

Section 233 of the Act provides a non-exclusive list of remedies the Court can impose:

• winding up the company;[10]
• modifying or repealing the company’s constitution;[11]
• regulating the conduct of the company’s affairs in the future;[12]
• ordering members of the company to purchase the shares of any other member of the company;[13]
• reduction of the company’s capital;[14]
• authorising the company to institute, prosecute, defend or discontinue Court proceedings,[15] for example against a shareholder who has behaved improperly;
• directions as to proceedings;[16]
• appointment of a Receiver, or a Receiver and Manager to sell company property;[17]
• restraining a person from engaging in certain conduct or from doing a certain act;[18]
• requiring a person to do certain things.[19]

Typically:

• a winding up remedy is an order of last resort;[20] and
• the most common remedy sought is that the company or other shareholders purchase the oppressed party’s shares.

Importantly though, the range of remedies provided by section 233 are not exclusive, and the Court will endeavour to find a scheme short of winding up which will ‘put the company back on the rails’ and avoid the causes of conflict and oppression, yet will as far as possible allow members to participate in the business”.[21]  However, where continued participation is not possible, the most common remedy provided by the Courts is an order that the oppressor party purchase the oppressed party’s shares at a ‘fair price’.[22]  In making such an order, the Court commonly orders that the oppressor is to purchase the shares at a price that reflects the value of the shares in the event that the oppressive conduct had not occurred.[23]  Conversely, it is possible for the Court to make an order permitting the oppressed party to purchase the shares of the majority shareholder.[24]

An inter-parties buy-out order is in the nature of compensation for oppressive conduct, as opposed to an adjustment of the shareholdings of parties who are equally successful.  Accordingly, the fact that the oppressed party may have difficulty complying with a buy-out order (because of lack of funds) has been held to be insufficient to oppose such an order.[25]  However, some decisions suggest that the Court will not make an order for a forced buyout where the purchasing party cannot obtain sufficient funds in a relatively short period of time;[26] the rationale being that the Court should not adopt a supervisory role in terms of the orders it makes.

Section 233 of the Act provides a powerful range of tools for an oppressed party to extract the value of their interest in a business partnership.  A remedy can also often be swiftly obtained when sufficient evidence of oppressions can be established.

Gear & Co Lawyers have a proud track record of assisting their clients to resolve shareholder disputes, often at a very early stage without the intervention of the Courts.  If you require assistance with a business dispute, contact Chad Gear on (07) 3209 2547, or at info@gearandco.com

Copyright © 2023 Chad Gear

While attempts have been made to ensure the currency of information contained in this publication, it is not guaranteed.  This publication is intended to provide only general information on matters of interest.  It is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.  You should seek legal or other professional advice which is specific to your circumstances.

[1] Bonollo, Francesco, ‘The nexus of contracts and close corporation appraisal’ (2001) 12 Aust Jnl of Corp Law 165.

[2] Or, among others, a former shareholder.

[3] The conduct of the company’s affairs, an actual or proposed act or omission by or on behalf of a company or a resolution or proposed resolution is either.

[4] Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; 5 ACLC 222, cited in Reid v Bagot Well Pastoral Co Pty Ltd (1993) 61 SASR 165; 12 ACSR 197 at 205, Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459.

[5] Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 704; 5 ACLC 222; see also ASC v Multiple Sclerosis Society of Tas (1993) 10 ACSR 489 at 515; 11 ACLC 461 and Backoffice Investments Pty Ltd v Campbell  (2007) 61 ACSR 144; 25 ACLC 302; [2007] NSWSC 161; BC200701286  at [97].

[6] Thomas v H W Thomas Ltd, cited in ASC v Multiple Sclerosis Society of Tas (1993) 10 ACSR 489 at 515; 11 ACLC 461.

[7] Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279; 5 ACLC 184 at 212 per Derrington J, Donaldson v Natural Springs Australia Limited [2015] FCA 498 at [77], [248] and [249].

[8] Re Tivoli Freeholds Ltd [1972] VR 445 at 453; (1971–73) CLC 40-027; De Tocqueville Private Equity Pty Ltd v Linden (2006) 59 ACSR 587; [2006] FCA 1309.

[9] Bessounian v Australian Wholesale Mortgages Pty Ltd [2007] NSWSC 35 at [6]–[7].

[10] Corporations Act 2001 (Cth) s 233(1)(a).

[11] Corporations Act 2001 (Cth) s 233(1)(b).

[12] Corporations Act 2001 (Cth) s 233(1)(c).

[13] Corporations Act 2001 (Cth) s 233(1)(d).

[14] Corporations Act 2001 (Cth) s 233(1)(e).

[15] Corporations Act 2001 (Cth) s 233(1)(f).

[16] Corporations Act 2001 (Cth) s 233(1)(g).

[17] Corporations Act 2001 (Cth) s 233(1)(h).

[18] Corporations Act 2001 (Cth) s 233(1)(i).

[19] Corporations Act 2001 (Cth) s 233(1)(j).

[20] John J Starr (Real Estate) Pty Ltd; Re Quest (1992) 6 ACSR 659 at 667.

[21] John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’asia) Pty Ltd (1991) 6 ACSR 63 at 74; 9 ACLC 1372.

[22] Ramsay, I. M., ‘Members’ statutory remedy for oppressive or unfair conduct of the company’s affairs’ May 2023, Ford, Austin & Ramsay’s Principles of Corporations Law.

[23] Scottish Co-operative Wholesale Soc Ltd v Meyer [1959] AC 324.

[24] Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136, Patterson v Humfrey (2014) 291 FLR 246; 103 ACSR 152; [2014] WASC 446, Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184, Seimer v Paragon Oil Systems Ltd (2001) 9 NZCLC 262,693, Goodchild v Taylor [2018] EWHC 2946 (Ch).

[25] Re a Company (No 002612 of 1984) (1986) 2 BCC 99,453; Re Hollen Australia Pty Ltd [2009] 27 ACLC 199; [2009] VSC 95 at [88].

[26] J & E Holdings Pty Ltd v Bourke (unreported, SC(NSW), Bryson J, 1992).