Shareholder oppression involves conduct by the majority shareholder(s) that is unfairly prejudicial to the interests of the minority. The courts are able to provide a variety of remedies to affected minority shareholders.
What is shareholder oppression?
The Corporations Act defines shareholder oppression by reference to conduct that is either:
- contrary to the interests of the members as a whole; or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders (whether as shareholders or otherwise).
Shareholder oppression typically occurs in closely held private companies, including family businesses. Usually it involves conduct where a minority shareholder is effectively squeezed out of the company following a breakdown in relationships.
It is important to note that, to constitute oppression, the conduct does not have to affect a minority shareholder in their capacity as a shareholder. For example, if they are unfairly prejudiced as a director or an employee, that can be oppressive.
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Examples of shareholder oppression
There is no exhaustive list of the types of conduct that might be considered oppressive. Instead, the courts focus on the language of the statute and past cases to determine whether oppression has occurred.
The following conduct that has been held to be oppressive:
- Appointing additional directors to increase control of the board, and then transferring assets out of the company, undervaluing the company’s shares and taking other steps to alienate minority shareholders [1].
- Dominating meetings and behaving in an overbearing manner, where the minority shareholder (also a director) was excluded from meetings and/or given reduced speaking time, was not given relevant information or sufficient notice of important matters to be discussed [2].
- Issuing shares to the majority to outvote other shareholders [3].
- Taking a lucrative contract in the directors' own names and passing a shareholder resolution declaring that the company had no interest in the contract to the detriment of the minority [4].
- Alienating a director from participating in management decisions [5].
- Altering the company's constitution to allow a majority shareholder to compulsorily acquire the interests of minor shareholders and capitalise on administrative and tax benefits that arose from restructuring [6].
- Paying excessive remuneration to directors at the expense of dividends to shareholders [7].
- Improperly applying drag along provisions in a shareholders agreement to compulsorily acquire a minority shareholder’s shares [8].
- Ignoring the interests of minority shareholders [9].
What isn’t shareholder oppression?
The critical feature of shareholder oppression is that the unfairness must go beyond mere disadvantage. The line between oppressive and non-oppressive conduct is often unclear.
A minority member may resent being outvoted or be dissatisfied at the way the majority is managing a company’s affairs, but this alone will not be enough to constitute oppression.
The court will balance the interests of the company as a whole against the interests of the minority, to determine whether the majority shareholders have acted so unfairly as to prejudice the interests of minority members.
Examples of conduct that is not oppressive
Circumstances where conduct has not been found to go beyond mere disadvantage include:
- Conservative but proper management, including paying fair and reasonable wages [10].
- Increasing remuneration to directors but refusing to increase dividend payments in a family company [11].
- Minority shareholders being unable to sell shares [12].
- Amending voting rights in a company constitution in good faith where this was in the best interests of company [13].
- Excluding a sporting team from a competition in good faith and for the benefit of the competition as a whole [14].
What remedies are available for shareholder oppression?
The courts can make a variety of different orders in response to oppression. These include orders that:
- the company be wound up;
- the company’s constitution be modified or repealed;
- the company’s affairs be regulated;
- a member’s shares be purchased;
- the company start or discontinue legal proceedings;
- a receiver be appointed;
- a director be required to do (or not do) something.
Why is this important?
If you are a majority shareholder, you need to make sure that the company acts in the interests of all shareholders at all times, not just your own. Your majority voting rights do not allow you to behave in a way that is oppressive to minority shareholders.
If you are a minority shareholder, simply being aware of these rights is a good starting point if you start to get the sense that you are effectively being squeezed out. It is important to keep in mind that a disagreement with the majority does not automatically amount to oppression. Something more is required.
It is also important to keep these concepts in mind when preparing a shareholders agreement. The exercise or purported exercise of compulsory buy-out rights in a shareholders agreement can sometimes be a source of oppression, as was the case here.
Although the terms of a shareholders agreement will often not provide a complete answer about whether certain conduct is (or is not) oppressive, they can provide some useful clues.
Where the parties go through the process of defining their rights and obligations in a shareholders agreement, that tends to ensure that they are joining the venture on the same page - which tends to reduce the chances of a major dispute arising later in the relationship. Indeed, this is one of several reasons why it is worth taking the time to set up a shareholders agreement at the time you join the venture.
Click here to download your free Shareholders Agreement Guide.
*The author acknowledges the assistance of Stephanie Scott, a lawyer who no longer works with the firm, in the preparation of this article.
[1] Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
[2] Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC
[3] John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 9 ACLA 1372
[4] Hannes & Ors v M J H Ply Limited & Ors 7 ACSR 8
[5] Cook v Deeks [1916] UKPC 10
[6] Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413
[7] Sanford v Sanford Courier Service Pty Ltd (1987) 5 ACLC 394
[8] William McCausland v Surfing Hardware International Holdings Pty Ltd (No. 2) [2014] NSWSC 163
[9] Re Spargos Mining NL (1990) 3 ACSR 1
[10] Thomas v HW Thomas Ltd (1984) 2 ACLC 610
[11] Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
[12] Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193
[13] Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
[14] Wayde v New South Wales Rugby League [1985] HCA 68
