#7407 - Shareholders’ Remedies Oppression - Business Associations I

Class 18 Shareholders’ remedies: Oppression

Corporations Act ss 232-235.

CORPORATIONS ACT 2001 - SECT 232

Grounds for Court order

The Court may make an order under section233 if:

(a) the conduct of a company's affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.

Note: For affairs , see section53.

CORPORATIONS ACT 2001 - SECT 233

Orders the Court can make

(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(b) that the company's existing constitution be modified or repealed;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) authorising 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.

Order that the company be wound up

(2) If an order that a company be wound up is made under this section, the provisions of this Act relating to the winding up of companies apply:

(a) as if the order were made under section461; and

(b) with such changes as are necessary.

Order altering constitution

(3) If an order made under this section repeals or modifies a company's constitution, or requires the company to adopt a constitution, the company does not have the power under section136 to change or repeal the constitution if that change or repeal would be inconsistent with the provisions of the order, unless:

(a) the order states that the company does have the power to make such a change or repeal; or

(b) the company first obtains the leave of the Court.

CORPORATIONS ACT 2001 - SECT 234

Who can apply for order

An application for an order under section233 in relation to a company may be made by:

(a) a member of the company, even if the application relates to an act or omission that is against:

(i) the member in a capacity other than as a member; or

(ii) another member in their capacity as a member; or

(b) a person who has been removed from the register of members because of a selective reduction; or

(c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or

(d) a person to whom a share in the company has been transmitted by will or by operation of law; or

(e) a person whom ASIC thinks appropriate having regard to investigations it is conducting or has conducted into:

(i) the company's affairs; or

(ii) matters connected with the company's affairs.

Note 1: If an application is made under this section, in certain cases the court may order that the company be wound up in insolvency (see section459B).

Note 2: For selective reduction , see subsection 256B(2).

CORPORATIONS ACT 2001 - SECT 235

Requirement for person to lodge order

(1) If an order is made under section233, the applicant must lodge a copy of the order with ASIC within 14 days after it is made.

(2) An offence based on subsection(1) is an offence of strict liability.

Note: For strict liability , see section6.1 of the Criminal Code .

Redmond [8.180]-[8.230].

Shareholders’ remedies: Oppression

Main principles

• Under Part 2.F1, a court may grant a much wider variety of orders to members where the affairs of the company are being conducted in a manner oppressive to them.

• S232: Grounds for court order for oppressive conduct

• S233: Range of orders available that the court can make

• S234: Who can apply for an order

• S235: Requirement for person to lodge an order

• Thomas v HW Thomas Ltd: The terms “oppressive, unfairly prejudicial or unfairly discriminatory” in s232(e) overlap and should be read compositely.

• Re Jeffrey: The requirement for the applicant shareholder to prove that some action was “unfairly prejudicial” or “unfairly discriminatory” is broader than “oppressive”, hence less onerous to prove.

• Courts’ test for grounds for oppressive conduct:

  • Morgan v 45 Flers Ave. Pty. Ltd.: 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.

  • Wayde v NSWRL: Test of unfairness. Whether a reasonable director weighing the furthering of the corporate object against the disadvantage, disability or burden, which their decision will imposes, would consider the decision not to be fair to impose it.

Case Law Application of “Oppressive”, “Unfairly Prejudicial and Discriminatory”

[8.200] Wayde v NSWRL Ltd (1985)- HCA

Facts:

• NSWRL incorporated to conduct rugby league competition. Objects included fostering and controlling the game and such action as may be conducive to its best interests. It gave authority to its board to determine which teams should participate in the competition. Decided to reduce the number of teams from 13 to 12, and Wests’ application was rejected. Wests brought action seeking relief against decision.

Held

• It is not necessarily unfair for directors in good faith to advance one of the objects of the company to the prejudice of a member where the advancement of the object necessarily entails prejudice to that member or discrimination against him

• The Court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.

Present case

• There is no suggestion that the board failed to give regard to relevant considerations.

• The decisions were made in exercise of power that is conferred to the board.

• The board possessed special expertise and experience and power was exercised bona fide and properly – it was not unfairly prejudicial action. The decision to reduce the number of competitors and exclude Wests was taken with full knowledge of the disadvantage to Wests, but this was weighed against the dangers of a larger competition.

[8.205] Re G Jeffrey (Mens Store) Pty Ltd

Facts

• Shareholding in 2 companies was passed through inheritance to 2 sons R and A (30%), 2 daughters (10%) and widow (20%). The widow and 2 sons became directors. Each son became MD of a company, but later R took over both companies because one company languished under A. R bought shares off his sister and treated the company as his own, supported by the widow. A became unhappy with R’s power. He also desired a greater distribution of dividends. Eventually, A tried to sell his shares to R, but the price offered was regarded as unrealistically low. A sought that R’s conduct in offering low dividends and retaining most of the cash as well as not offering a reasonable price for his shares were oppressive.

Held

• Defined “oppressive” in the same way as was done in Re HW Thomas Ltd (1983): “Oppression must import that the oppressed are being constrained to submit to something which is unfair to them as the result of some overbearing act or attitude on the part of the oppressor”.

• In relation to the retention of profits, as long as MD was acting bona fide and acting in a manner in which he honestly was in the best interest of the company’s members – judge unprepared to take action.

• Ongley J Re HW Thomas: “Fairness or unfairness of any conduct relating to the company’s affairs cannot properly be considered in relation to an individual shareholder except against the background of fair treatment of the whole body of the shareholders”.

Present case

• In this case, no active wrong has been done to A – the business is conducted in substantially same manner prior to inheritance and applicant was not discriminated against as he was treated in same manner as other members.

• The basis of A’s complaint is that he is required to abide by the decisions of the majority shareholders and directors which he disagrees with. There is nothing unfair about this, thus it cannot be said that he has been unfairly prejudiced.

• Mere refusal by other shareholders to accommodate A getting his money out of the companies by purchasing his shares does not amount to conduct that is prejudicial or discriminatory.

• Acting in a discriminatory manner means acting in a manner which makes a difference or distinction between one shareholder and another.

• In this case, A was treated no differently to any other shareholder, thus A’s claims were...