Australia: Oppression claims in shareholder and director disputes

Oppression claims relate to disputes between directors and/or shareholders of a company, as directors of a company are almost always a shareholder or control another entity that is a shareholder.

Oppression claims can be made against the company if the directors have been conducting the affairs of the business which is:

1. oppressive to another director/shareholder; and/or
2. unfairly discriminatory against another director/shareholder; and/or
3. unfairly prejudicial to another director/shareholder; or
4. contrary to the interests of the directors/shareholders as a whole.

The type of conduct which constitutes this type of behaviour is very broad, but can include conduct by a controlling shareholder/director which:

1. denying minority shareholders access to information about the affairs of the company; and/or
2. diluting the minority shareholders' shareholding and voting power; and/or
3. making decisions that are not in the best interests of the company; and/or
4. making decisions that would damage the company's value; and/or
5. preventing minority shareholders from selling their shares; and/or
6. prevents minority shareholders from exiting the company by fair value; and/or
7. using the company's resources for personal gain.

If this type of conduct is occurring, then the oppressed person will be able to seek a remedy under section 233 of the Corporations Act 2001 (Cth).

In this article, our corporate & company disputes lawyers break down the law around oppression claims in shareholder and director disputes.

What are Shareholder Oppression Claims?

Oppression claims are a creature of section 232 of the Corporations Act 2001 (Cth) ("the Corps Act").

This Statutory provision says:

As mentioned above, director/shareholder oppression claims can be made against another director/shareholder if they have been conducting the affairs of the business which is:

1. oppressive; and/or
2. unfairly prejudicial; or
3. unfairly discriminatory; and/or
4. contrary to the interests of the directors/shareholders as a whole.

However, this begs the question, what constitutes oppressive, prejudicial, and/or discriminatory conduct?

What Constitutes Oppressive, Prejudicial, or Discriminatory Conduct?

The starting position is to see what the words themselves mean.

Oppressive is defined as:

Synonyms may include - autocratic, brutal, cruel, crushing, dictatorial, domineering, harsh, iron-fisted, repressive, and tyrannical.

Prejudicial is defined as:

Synonyms may include - damaging, deleterious, detrimental, disadvantageous, harmful, hurtful, inimical, injurious, and prejudicious.

Discriminatory is defined as:

Synonyms may include - biased, inequitable, invidious, one-sided, partisan, preferential, prejudiced, prejudicial, unfair, and unjust.

In Butterworths Concise Australian Dictionary (third edition), they define oppressive, prejudicial, and/or discriminatory conduct on page 309 as:

The Courts have defined this conduct very broadly.

In Scottish Co-operative Wholesale Society Ltd. v. Meyer (1959) AC 324 Viscount Simonds defined oppressive to be:

In John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'Asia) Pty Ltd (1991) 6 ACSR 63, Young J said:

In Thomas v H W Thomas Ltd [1984] 1 NZLR 686, Richardson J looked at the three (3) expressions used - oppressive, unfairly prejudicial, and unfairly discriminatory, and said:

The overarching principle in relation to the above is the principle of fairness and commercial fairness.

In Wayde v New South Wales Rugby League [1985] HCA 68, Brennan J said at [39]:

In Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Young J (as he then was) stated that the individual elements of oppressive, prejudicial, and/or discriminatory conduct:

In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25, the High Court said:

In Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55 the Full Court stated:

In Mackay Sugar Ltd v Wilmar Sugar Australia Ltd [2016] FCAFC 133 Gilmour, Jagot and White JJ said:

This essentially means that the applicant will need to have 'clean hands' when commencing these types of oppression claims.

In summary, the Courts posit an objective test to determine if a company has engaged in unfair and uncommercial conduct, which a reasonable director would not have thought fair, and would not have entered into.

What Type of Conduct is Oppressive, Prejudicial, and/or Discriminatory Conduct?

As you can probably imagine, there are a very likely hundreds or even thousands of circumstances where a shareholder may think that they have been oppressed, prejudiced, or discriminated against.

The types of scenarios are listed below, but this is not meant to be an exhaustive list, merely a list of some of the most usual:

1. A denial of access to company information (e.g., financial information, constitution, shareholder agreement).
2. An improper diversion of business opportunities to another entity.
3. Appointing additional directors to increase board control without shareholder consent.
4. Exclusion from participation in the management of the company.
5. Failure to act in the best interests of the company (e.g., the directors taking a contract in their own name).
6. Failure to take steps to achieve an equitable and fair exit event (if at all).
7. Failure to prosecute the misconduct or derivative action of a majority shareholder director.
8. Forcing the minority shareholder(s) to sell some or all of their shares at less than fair value.
9. Improper oppressive conduct at board meetings (shouting, bullying, harassment).
10. Improperly issuing shares for the purpose of diluting other shareholders to reduce their voting power.
11. Improperly issuing shares to third-parties or to themselves to out-vote other shareholders.
12. Make decisions to pay excessive salaries / wages at the expense of paying dividends to shareholders.
13. Misusing company funds in any way (such taking cash out of the till).
14. Running the company for their own interests, ignoring the interests of minority shareholders.
15. Selling shares of a subsidiary undervalue in the absence of minority shareholder consent.
16. Stripping of land and assets from the company on uncommercial terms.

If any of the above has occurred, or some other objectively unfair or uncommercial conduct, then you may have a claim for shareholder oppression.

If you have sufficient grounds, then you can seek remedy in Court.

What Remedies are Available for an Oppression Claim?

Section 232 of the Corps Act says that if you are a victim of the above, then the Court may make an order under section 233 of the Corps Act.

Section 233 of the Corps Act says:

Again, the Court has broad powers to do what is necessary to right the wrong, including removing the entire board of directors if necessary (Re Spargos).

We will explain briefly what each of these mean in a little more detail below.

That the Company be Wound Up

A Section 232 order implements winding-up provisions as if they were made under section 461 with any required modifications.

This injunction may be necessary if there is:

1. persistent hostility and animosity amongst the shareholders; and/or
2. there is a risk of additional oppression; and/or
3. the company's activities are extremely restricted.

That the Company's Existing Constitution be Modified or Repealed

Unless the order specifically states that the company has the authority to make such changes, or the company first seeks the court's permission, the business does not have the ability under s. 136 to amend or abolish the constitution if doing so would conflict with the requirements of the order: s. 233.

Regulating the Conduct of the Company's Affairs in the Future

By way of example, the court mandated the following in Re Spargos Mining NL (1990) 3 ACSR 1:

1. Section 233(1) allows the court to choose a new board to replace the old one.
2. Extreme, but deemed acceptable in light of the grave corporate mismanagement.
3. Asking the new board to look into various transactions and, as necessary, launch legal action.

For the Purchase of any Shares by any Member by any other Member

This is both 233(1)(d) and (e), and are the most common orders if a member wants to sell and leave the company.

The difference between (d) and (e) is a corporate order for purchase or buyback with a corresponding decrease in capital.

For the Company to Institute, Prosecute, Defend or Discontinue Specified Proceedings

Both 233(1)(f) and (g), are very similar to a members' derivative actions, please see below.

Appointing a Receiver or a Receiver and Manager of any or all of the Company's Property

A receiver and/or a receiver & manager are usually appointed when the property of the company is at risk, and these insolvency practitioners are appointed to protect that property.

Restraining or Requiring a Person from Engaging in Specified Conduct or from Doing a Specified Act

Both 233(1)(i) and (j) are very similar to injunctions, both mandatory and prohibitory injunctions.

This could include to compensate the company for wrongs committed against it if the court may address such matters as part of the oppression application.

This order may also be used to amend or supplement the company's constitution.

What Other Remedies are Available for Oppression Claims?

As the Court has broad powers to make the orders it considers appropriate, some of the most common include:

1. An order for the buyout of your shares.
2. An order to appoint a manager or managing director to run the company until court proceedings are concluded.
3. An order appointing an administrator or liquidator over the company.
4. An order for the sale / purchase of shares by members at a determined price.
5. An order regulating the affairs of the company in future.
6. An order restraining the other directors from engaging in any specific conduct.

You will need to give serious consideration to what kind of relief you want from the Court.

What kind of Relief should you Seek in an Oppression Claim?

An oppressed minority shareholder must think about the type of relief that will best end the oppression and advance the applicant's business goals (and the goals of the company).

The least restrictive or oppressive order that would end the oppression is often the one that the court would initially consider. This is the starting point at least.

For example, a solvent company being wound up is a drastic measure that is not arbitrarily ordered. A winding-up can be the only realistic option in some situations to end the oppression claim.

The court has the discretion to provide relief. This implies that in determining whether the court would exercise its discretion and the kind of order it would make the applicant's motivation for obtaining orders and the applicant's behaviour are crucial considerations.

Although it is not strictly necessary for the oppressed shareholder to have clean hands when appearing in court, any bad behaviour of misconduct by an applicant may render the opposing party's behaviour less oppressive or unjust or could affect the remedy awarded.

To be able to seek a remedy, a minority shareholder will need to commence legal action in the Federal Court, or your State Supreme Court.

What Are Oppression Proceedings?

Oppression proceedings commence by way of originating application in the Federal Court or your State Supreme Court.

An application and an affidavit or affidavits supporting the application may be filed to begin court proceedings. Although a statement of claim is not strictly required, the court may ask for a statement of claim if they believe the claim is not obvious.

To persuade the court to award relief under section 233 of the Corps Act, the supporting affidavit should be sworn/affirmed, and signed by a person who has the applicant's consent to do so and who can attest to the factual basis establishing the oppression. It needs to be made by someone with direct knowledge of the conduct.

Who Can Make an Oppression Claim?

If you want to bring an oppression claim in the Court, you must have the right to bring the claim.

Section 234 of the Corps Act states the types of people who can bring an oppression claim. It says:

This essentially means that the class of people who can bring oppression claims are:

1. Current and past shareholders; or
2. A person to whom a share has been given by will or by operation of law; or
3. A person whom ASIC thinks appropriate.

If this is you, then you will have grounds to make your oppression claim.

If this is not you, or you do not exactly fit into the definitions above, then you may be able to also make a members' derivative actions claim.

Breaches of Director Duties and Derivative Action Claims

A members' derivative action is a legal claim brought by a shareholder or group of shareholders on behalf of a company against third parties, typically the company's directors or officers, for breaches of their duties to the company.

The purpose of a derivative action is to remedy harm caused to the company, rather than to the individual shareholders.

Derivative actions typically arise in situations where the directors or officers of a company have engaged in misconduct or have breached their fiduciary duties to the company, and the company is unable or unwilling to bring the claim itself.

Members' derivative actions may be brought if:

1. The applicant is acting in good faith; and/or
2. There is inaction on behalf of the company; and/or
3. It is in the best interests of the company or shareholders; and/or
4. There is a serious question to be tried by the Court.

What is Director Misconduct?

Director misconduct refers to action, inaction, and/or decisions made by the director(s) of an Australian company in breach their legal duties and/or obligations to the company and the shareholders of the company.

All company directors have a fiduciary duty to act in the best interests of the company and to exercise their powers as director for a proper purpose and for the benefit of the company.

Examples of director misconduct in Australia include:

1. Conflicts of interest
2. Failing to act in the best interests of the company
3. Failing to disclose their interests in transactions or arrangements with the company
4. Failure to disclose material information to shareholders
5. Failure to exercise due care and diligence
6. Fraud or dishonest conduct
7. Making improper use of company property or information
8. Manipulating the company's financial statements
9. Misappropriation of company assets

These are just examples and this is not an exhaustive list of director misconduct.

A members' derivative action may also be brought for a breach of the director's fiduciary duties.

What is a Breach of Fiduciary Duties by a Director?

A director's fiduciary duty is a legal duty to act in the best interests of the company and its shareholders.

There are a number of examples of when directors breach their fiduciary duties to the company and/or its shareholders:

1. Conflicts of interest between his/her interest and the interests of the company/shareholders.
2. Failure to act in good faith in the best interests of the company.
3. Failure to act in the best interests of the company
4. Failure to disclose personal interests or interests which conflict with the interests of the company or its shareholders.
5. Failure to exercise due care and diligence
6. Failure to implement corporate governance
7. Insider trading and dealing fraudulently with company assets.
8. Misappropriation or stripping of company assets.
9. Self-dealing or dealing for his/her own interests.

Therefore, if the director(s) of the company have also breached any of their fiduciary duties, then you may also be able to bring a claim for a members' derivative action.

Oppression Claims in Shareholder and Director Disputes

In summary, to bring an oppression claim, or a members' derivative claim, a shareholder must do the following key steps:

1. Check the status of the company (see if its in liquidation or deregistered).
2. Determine if there are grounds under section 232 of the Corps Act, namely the conduct of a company's affairs is either:
   1. contrary to the interests of the members as a whole; or
   2. oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in their capacity as a member or otherwise.
3. Check to see if you have standing to apply for the remedy under section 234 of the Corps Act, namely you are:
   1. A current and past shareholders; or
   2. A person to whom a share has been given by will or by operation of law; or
   3. A person whom ASIC thinks appropriate.
4. Consider what relief to seek from the court to remove the oppression pursuant to section 233 of the Corps Act; and
5. If not, instead of, or as well as, see if you also have any members' derivative claims; and
6. Commence court proceedings to seek the relief.

Definitions of Terms Used in this Article

There are a number of terms used in this article that may not be common day-to-day terms. I think sometimes lawyers forget that we are not speaking to other lawyers. Here are a few definitions:

What is a Member of a Company?

A member of a company is simply a shareholder of the company. Section 231 of the Corps Act says that a person will be a member if they:

1. Are a member of the company upon registration; or
2. Agree to become a member of the company after its registration and their name is entered on the registered of members; or
3. Become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by share).

What is a Minority Shareholder?

A minority shareholder is a person or entity who is a member of a company in Australia who owns less than 50% of the shares in that company. This is also referred to as a non-controlling shareholder.

A minority shareholders does have protections and legal rights in Australian law.

What are the Affairs of the Company?

Section 53 of the Corps Act has a list of what may constitute "affairs of a company" but it is only a guide and not an exhaustive definition of what constitutes the affairs of the company.

Affairs of the company may cover the affairs of a related company, such as a parent company or subsidiary.

Shareholder Oppression Claims FAQ

We get asked questions about shareholder oppression claims all the time.

Here is a list of frequently asked questions about shareholder oppression claims:

Who can apply for the oppression remedy?

Section 234 of the Corporations Act 2001 (Cth) states that you can apply for the oppression remedy if you are:

1. A current and past shareholder; or
2. A person to whom a share has been given by will or by operation of law; or
3. A person whom ASIC thinks appropriate.

What are oppression proceedings?

Oppression proceedings commence by way of originating application in the Federal Court or your State Supreme Court.

An application and an affidavit or affidavits supporting the application may be filed to begin court proceedings. Although a statement of claim is not strictly required, the court may ask for a statement of claim if they believe the claim is not obvious.

What is the difference between a derivative action and oppression claims?

The difference between a derivative action and an oppression action is that an oppression claim must have the oppression conduct element, while a derivative action is an action against a director (or directors) or officers of a company have engaged in misconduct or have breached their fiduciary duties to the company, and the company is unable or unwilling to bring the claim itself.

What is oppressive conduct?

Section 232 of the Corps Act says that oppressive conduct is conduct of a company's affairs is either:

1. Contrary to the interests of the members as a whole; or
2. Oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in their capacity as a member or otherwise.

What is not oppressive conduct?

The types of conduct which may not be oppressive conduct will include:

1. Conduct that is applicable to all shareholders (not just minority shareholders).
2. A breach of directors' duties may not in itself be oppressive.
3. Where there is a lack of trust or a breakdown in a business relationship.
4. Any loss of faith in the company's management or the management of the company.
5. Failing to reach an agreement between the majority shareholders and the minority shareholders.
6. The minority shareholder applicant being constantly outvoted by other shareholders.
7. The company being controlled by the majority shareholders.

What is the test for oppression claims?

The Courts posit an objective test for oppression to determine if a company has engaged in unfair and uncommercial conduct, which a reasonable director would not have thought fair, and would not have entered into.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.