The principles governing corporate decision-making mirror those of our democratic governments, being that the majority generally prevail. In the Corporations Act certain organisational and decision-making rules enforce the legitimacy of corporate democracy. However, what happens when decision-makers behave unfairly or oppressively to the interests of minority shareholders? Majority shareholders can sometimes use their influence for their own benefit instead of the company’s benefit. Not only is such conduct illegal, but it can also have the effect of diminishing the value of a shareholding and cause damage to the company generally. This article considers the circumstances under which a court may make specific orders to remedy minority shareholder oppression. The policy considerations aim to enable the oppressed shareholder to exit the company under such circumstances.
Section 232 of the Corporations Act sets out conduct that constitutes “oppressive conduct”. In summary, minority oppression includes conduct that is:
- contrary to the interests of the shareholders as a whole; or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder or shareholders.
The fact that a minority shareholder has been prejudiced or discriminated against by the majority is not enough to prove oppressive conduct; the conduct must also be unfair.
Unfairness is assessed by reference to 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.
Remedies for an oppressed minority shareholder
Remedies for oppressive conduct are available under section 233 of the Corporations Act. Under this section, a court has the discretion to grant a range of remedies. Specifically, a court can make any order that it considers appropriate in circumstances where oppressive conduct has occurred.
The ultimate purpose of relief under s 233 is to secure the cessation of oppression going forward.
The power that a court has includes, but is not limited to, making orders for:
- one or more of the majority shareholders to purchase the minority shareholder’s shares at a price determined by the Court;
- the Company to purchase the minority shareholder’s shares;
- a receiver and manager to be appointed, and the Company wound up;
- the Company be placed in liquidation immediately;
- an injunction to be granted against the Company; or
- a director or majority shareholder to refrain from a specific act.
Winding up as a last resort
A court can order to wind up a company if it finds oppressive conduct against minority shareholders. However, s 467(4) of the Corporations Act requires the Court to consider whether some other remedy is available rather than a winding up order and whether the applicant is behaving unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
The court will consider the context in which the particular company or companies operate together with their structure and history when fashioning the appropriate discretionary relief. Courts have recently warned against parties neglecting to consider winding up as a possible remedy in an appropriate case. The court is empowered under s 233 to order a winding up, even if no party in fact seeks it.
Court ordered buy-outs
Given the reluctance of courts to compulsorily wind up a company, it is more common to order one party to buy out the other. However, in such instances, it falls upon the court to determine the value of the shares being bought. In this situation, the law provides little guidance.
One common approach used by courts to determine ‘market value’ is to consider the amount that a prudent purchaser would have been willing to give for the shares sooner rather than fail to obtain them. This is often known as involving a ‘not too anxious buyer, and not too anxious seller’.
Additionally, other methods look beyond fixing a fair price only by reference to ordinary valuation principles. Instead, they are based on the case’s facts and the price that should be paid in the circumstances. Some of these more methodical methodologies for determining fair value include the following:
- Discounted Cash Flow method: this valuation method determines the value of an investment based on its expected future cash flows.
- Capitalisation of future maintainable earnings method: this methodology values the investment based on the sustainable profits generated by the business relative to the risk-return expected.
In any case, courts have the discretion to adopt the valuation method it deems fair given the circumstances. Although, either party may appeal this decision if they believe the court’s decision has not provided them with a favourable valuation of their shares.
The court has recently noted that a buy out order should only be made if the court were satisfied that the purchaser could comply with it within the specified timeframe.
Shareholder disputes are extremely common but notoriously complex. There are also often personal dynamics at play within shareholder disputes which can make litigation more emotional than it needs to be, particularly within family companies or companies where shareholders have worked together closely for many years.
If you find yourself in a dispute concerning shares you own in a company, you require a team of expert shareholder disputes lawyers to advise you on your rights and to assist you in either exiting the company or acquiring the other party’s or parties’ shares.
Carneys Lawyers’ litigation and insolvency team are highly experienced in acting in some of New South Wales’ most advanced shareholder dispute cases. Get in touch today.