Minority Shareholders

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Published May 25, 2020

Minority shareholders in Australia have various rights and protections under Australian Law – for instance, the right to be heard at company meetings.¹ Majority shareholders often have a lot of power and influence, and in some circumstances, they may even have the ability to elect the whole Board of Directors and effectively control the company entirely. However, the law has always had some regard for minority interests.

One of the main issues we regularly hear from some of our clients is that, as a minority shareholder, they feel unfairly treated or oppressed. As controlling shareholders can exercise substantial influence over the operation of the corporation, they can undermine the principle of equality. Specifically, when controlling shareholders are not effectively supervised, they can often eventually obtain a position of unrivalled power in which they can easily take unfair advantage of minority shareholders – some even go so far as to abuse and manipulate their position by breaching their fiduciary duties for their personal advantage and interest. Such power imbalance can potentially be damaging, both to the corporation as a whole, and to other shareholder interests.

Consequently, preventing and rectifying this imbalance to prevent controlling shareholders from abusing their power is a vitally important equitable principle in all companies where shareholder interests are concerned.

What is a Shareholder?

A shareholder is someone who owns shares (also referred to as stocks) in a company. Shares refer to units of ownership interest in a corporation or financial assets, and relate to the value and distributions of equity and profits derived from those corporations or financial assets. As issuing company shares is an effective way for companies to raise capital, shareholder interest is an integral part of many company structures. However, allowing a large number of different entities to own small pieces of one individual company comes with its fair share of complications and legal regulations.

To ensure all shareholders’ rights are protected, there are a number of regulations and guidelines that apply to a company that wishes to issue shares. Although it is not required by the law, it is generally good practice for a company to issue a Shareholder’s Agreement. A Shareholder’s Agreement will be the first point of information to shareholders about their ownership rights in the company they have invested in.

Majority Shareholders vs Minority Shareholders

A minority shareholder can be any person or entity that owns and controls less than 50% of all shares issued by a company. Technically, minority shareholders combined can end up holding the largest interest in the company; for example, three shareholders who each have a 20% interest share against one single shareholder who holds the remaining 40% interest. Usually, however, most minority shareholder disputes relate to a minority shareholder with less than 20% of the shares in a company.

As a majority shareholder (or group of shareholders) in effect owns a larger portion of the company, it follows that the majority shareholder will also have more power and control in relation to the day to day running of the company, as well as any important company decisions that may have a direct impact on the company’s future.

Although minority shareholders do hold some power, they will never hold final controlling power over a company without owning a majority of that company’s shares.

However, minority shareholders do have legal rights that a company must follow. Some of these rights include:

Access to shareholder meetings
Access to record books of the company;
The right to address directors at meetings; and
The right to address shareholders at meetings.

What is Minority Oppression?

Although there are no defined limits on what constitutes shareholder oppression, shareholder oppression will generally occur where a minority shareholder is subjected to unfairness or prejudice by the abuse of a major power.

The Corporations Act 2001 (Cth) section 2323 defines the term ‘minority oppression’ as conduct involving a mere failure to agree between majority and minority shareholders. By itself, it is not usually enough to demonstrate general oppression (i.e. prolonged unjust treatment or exercise of authority).

What Constitutes Oppression or Unfair Treatment of Minority Shareholders?

A minority shareholder faces oppression when they are denied their rights as a minority shareholder, or when the majority shareholder is acting against the best interest of minority shareholders. A common example of this happening would be in smaller companies where minority shareholders are not able to easily sell off their shares, or the conditions of sale are oppressive.

Most companies are generally controlled by a single shareholder or a small group of shareholders. Controlling shareholders who hold the majority of shares are able to elect directors of their own choosing in order to exercise further control over the company’s finances and activities. Consequently, the shareholders that do hold a majority of the votes may have little to no control or influence over the direction and development of the company.

As an example of oppression or unfair treatment, a minority shareholder may request copies of record books from the company, and if they are denied access to these records, that minority shareholder may be held to be oppressed as they are not being provided with all relevant information about the company’s finances, which has a direct relevance to that shareholder’s investment in the company.

In order to limit minority oppression, the Courts have identified this as an important legal issue and have sought to provide protection to minority shareholders by virtue of enacting section 232 of the Corporations Act 2001 (Cth) (the Corporations Act). Any member of a company, including minority shareholders, may be able to seek numerous remedies listed in this section.

Depending on the circumstances of each individual case, the following list notes a few common examples of unfair prejudicial conduct and oppression:

Sham Investments;
Misappropriation of funds;
Improper diversion or exclusion from participation in company management;
Improper action to remove or appoint directors;
Unfairly restricting dividends;
Abuse of voting power;
Denial of access to company books and records;
Oppressive conduct of board meetings;
Use of company funds to defend oppression proceedings; and
Transfer of benefit by related-party transactions.

This list is not exhaustive.

Situations that have triggered Minority Protection

Various disconcerting situations relating to the treatment of minority shareholders and minority oppression have come to light in recent years in relation to Australian company law that have triggered the establishment of various minority protection remedies. Some examples of these types of situations include:

Excluding a minority shareholder from the involvement in the affairs of the company;²
Denial of information;³
The diversion of legitimate corporate opportunities by directors to themselves;⁴ and/or
The diversion of a legitimate corporate opportunities by directors to associates.⁵

It is worth mentioning that a mere failure to reach an agreement between majority and minority shareholders is not usually, in itself, enough to demonstrate oppression. Where a minority shareholder brings a claim for minority oppression, the Courts will be required to examine all of the relevant facts and circumstances in order to determine whether the conduct, under scrutiny, resulted in some prejudice or harm that is not ‘reasonably or commercially justifiable’.⁶

What types of companies are bound by relevant provisions relating to minority oppression under the Corporations Act?

The Corporations Act specifies various grounds for oppressive conduct of affairs in which a member or other eligible person can apply to the Court to make an order to remedy the oppressive, unfair or prejudicial conduct.⁷ The oppression remedies contained in section 232 of the Corporations Act can apply to the following different types of companies:

Companies limited by shares;
Unlimited companies;
Public and proprietary no liability companies;
Cooperative societies (which are incorporated); and
Companies limited by guarantee.

A person ‘eligible’ to apply for a Court order in relation to oppressive conduct under Part 2F.1 of the Corporations Act include:

A member of the company;
A person removed from the register of members before of a selective reduction;
A person who has ceased to be a member of the company (provided the application relates to the circumstances in which they ceased to be a member;
A person to whom a share in the company has been transmitted by will or by operation of law; or
A person whom ASIC thinks appropriate having regard to investigations it is conducted or has conducted into the company’s affairs or matters connected with the company’s affairs.⁸

Although the Corporations Act 2001 (Cth) generally applies to all different types of companies, certain common provisions are most frequently applied in relation to small or closely held companies. There are several reasons for this, including that shareholders in these companies may be subject to a higher level of risk than that which applies merely to the share capital they have invested in the company. This will often be because they may be more frequently involved in the day-to-day management of the company, and shareholders in small companies do not have all the protections available to them that shareholders in larger public companies do.

What requirements must a Court consider in making an order for oppression?

In order for a claim for oppression to succeed, it must be proven that the company’s affairs were conducted in a manner that was, taking all relevant factors and circumstances into consideration, oppressive, unfairly prejudicial or unfairly discriminatory against a singular member or members.⁹ The conduct of the complainant must be in relation to the affairs of the company. This could include, amongst other things:

The promotion, formation, membership, control, business, transactions, dealings, profits and or other income, receipts, expenditures, losses and outings of the company;
Internal management of the company; and
Internal proceedings of the company.

When determining what is unfair or oppressive, the Courts will look to the interests of both the majority and minority shareholders of the company and specifically identify the background of the company, as well as the reasonable expectations of all its shareholders.¹⁰

Basis of Valuation

Generally speaking, the relief specified under section 232 of the Corporations Act will attempt to place the oppressed applicant in the same position as if there had been no oppression.¹¹ The Courts need to assess and consider the appropriate value of the relevant shareholders’ shares at a selected date had it not been for the effect of the oppressive or unfair conduct.¹² The Court will then need to consider the appropriate basis of the valuation.

As seen in Sanford v Sanford Courier Service Pty Ltd (1987) 10 ACLR 549 at 560, the Court may consider the appropriate basis of valuation by asking some of the following questions:

Is the amount that would be distributed to shareholders an orderly winding up?
Should the shares be valued on a “going concern” basis?
Is the company’s goodwill its main asset?
Is the goodwill dependent on the present controllers?
Would it be inequitable to buy out the applicant on terms equivalent to the sale of the company’s business?¹³

Costs of the Valuation

The person who has been found to have engaged in oppressive conduct will usually be ordered to pay the costs of the valuation.¹⁴

Remedies for Minority Oppression

A minority shareholder who has been the victim of minority oppression or prejudicial or unfair treatment can apply to the Court for relief under section 232 of the Corporations Act, which specifically deals with conduct that is oppressive and unfairly prejudicial to a shareholder.

Under section 233 of the Corporations Act, the Court has discretion to make “any order that it considers appropriate” in relation to the company, including:

That the company be wound up;
That the company’s existing constitution be modified or repealed;
Regulating the conduct of the company’s affairs in the future;
For the purchase of any shares by any shareholder or person to whom a share in the company has been transmitted by will or by operation of law;
For the purchase of shares with an appropriate reduction of the company’s share capital;
For the company to institute, prosecute, defend or discontinue specified proceedings;
Authorising a shareholder, 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;
Appointing a receiver or a receiver and manager of any or all of the company’s property;
Restraining a person from engaging in specified conduct or from doing a specified act;
Requiring a person to do a specified act.¹⁵

In choosing a remedy, the Court will usually follow the principle set out by the Court in the case of Vigliaroni & Ors v CPS Investments Holdings Pty Ltd & Ors [2009] VSC 428, which stipulated that the Court should seek to make an order ‘to put the company back on the rails and avoid the cause of conflict and oppression’. The purpose of granting a remedy under the provisions relating to oppression under the Corporations Act is to ‘bring an end to the oppression and to compensate the person oppressed fairly’. ¹⁶

Nevertheless, it is accepted that the most common remedies a plaintiff will seek will, in fact, be an order that either the company, or a member of the company (generally the majority shareholders), compensate the oppressed shareholder for any financial loss suffered in relation to that shareholder’s shares in the company as a result of the oppression, or for the shareholder to be removed as a shareholder entirely and be compensated fairly for their established investment in the company. Whilst this remedy is most common, the Courts are met with the issue of determining what value should be attributed to the shares and or how the value of the shares should be determined.

For when you need Assistance

From time to time, disputes arise in relation to company structures and relationships between minority shareholders and majority shareholders that are difficult to avoid. Sometimes, these disputes can be resolved quite easily through friendly mediation. However, in other circumstances, the business relationship may become so toxic that the relationship will need to be entirely terminated.

Oppression and unfair treatment can be a complex area of law to navigate, and even more difficult to litigate in Court. Furthermore, shareholder disputes can often be very costly and time-consuming.

Gibbs Wright Litigation Lawyers represent companies, individual directors and majority and minority shareholders alike in a number of different types of disputes. Some of these disputes may need to be resolved through alternative dispute resolution, some may require vigorous negotiations to reach a settlement agreement, and some may require strong litigation strategies and skills through an entire Court process.

At Gibbs Wright Litigation Lawyers, we are here to fight for you. Contact us today for a free and confidential discussion about your shareholder dispute to explore your legal rights and options.

References

[1] Corporations Act 2001 (Cth).

[2] Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97.

[3] Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR 614; Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13.

[4] Re Bright Pine Mills Pty Ltd [1969] VR 1002.

[5] Re Bright Pine Mills Pty Ltd [1969] VR 1002.

[6] Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14 at [48].

[7] Corporations Act 2001 (Cth) s 232.

[8] Corporations Act 2001 (Cth) s 234.

[9] Reid v Bagot Well Pastoral Co Pty Ltd (1993) 12 ACSR 197 at 212.

[10] Wayde v NSW Rugby League Ltd (1985) 180 CLR 459.

[11] ES Gordon Pty Ltd v Idamenneo (No 123) Pty Ltd (1995) 15 ACSR 536 at 539.

[12] Rankine v Rankine (1995) 18 ACSR 725.

[13] Sanford v Sanford Courier Service Pty Ltd (1987) 10 ACLR 549 at 560.

[14] Tomanovic v Global Mortgage Equity Corporation Pty Ltd (No 2) (2011).

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

[16] Vigliaroni & Ors v CPS Investments Holdings Pty Ltd & Ors [2009] VSC 428.

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The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.