Whilst it is generally recommended to pursue mediation and other forms of conciliation at the outset of any significant company dispute, depending on the particular facts, a range of substantive remedies may be available to shareholders in the face of a company’s actual or proposed act of mismanagement.
With the increasing adoption in recent years of formal and informal business arrangements utilising the company structure, these remedies have seen a corresponding rise in their use to safeguard the rights and interests of participating shareholders.
These remedies also see considerable use in resolving situations where a management deadlock arises in “quasi-partnership arrangements”; situations typically involving two business partners controlling a company, each assuming the combined roles of shareholders and directors, amongst others, and having features commonly associated with a traditional partnership.
The statutory remedy against oppression of minority shareholders (oppression remedy) has historically provided a backbone of substantive rights for protecting an individual shareholder’s interests in the face of a company’s mismanagement. The oppression remedy (1) gives a Court the discretionary power to grant relief in circumstances where a company proposes, or has already embarked on, a course of action that is:
- Contrary to the interests of its members as a whole; or,
- Oppressive to, unfairly prejudicial to, or unfairly discriminatorily against, an individual member or class of members.
In such circumstances, shareholders may have the option of obtaining relief provided they can show the conduct or act meets either “limb” of these criteria. The grant of any relief will be a matter for the Court’s discretion.
The oppression remedy provides an exception to the general principle of “majority shareholder rule” prevalent in company management; and an important safeguard for the rights of an individual shareholder whose interests may be at risk of abuse from the strict operation of this principle in practice.
The oppression remedy is also highly flexible in terms of potential outcomes. The appropriate remedy in any given instance can be fashioned according to the particular needs and circumstances of the parties and business arrangement involved. This might include:
- A mandatory “buy-out” order for one party to purchase the shareholding of the other, facilitating the continuation of the business by one or more parties alone;
- An order regulating the company’s future conduct or an order restraining a person from engaging in a specified act, so as to prevent a repeat of the conduct or circumstances that have created the need for court intervention in the first place;
- An order modifying or repealing a company’s constitution;
- An award of compensation to the company where one party has caused loss or misappropriation of assets; and,
- Should the parties be at an irreconcilable deadlock and there is no prospect of the business continuing, an order can be made for the business to be wound up, even where it is solvent and continuing to trade.
Whilst the categories of oppressive conduct are not closed and will depend on the specific facts, some examples of oppressive conduct include:
- Misappropriation of company funds or assets;
- Running the company in a party’s own interests to the exclusion of (or indifference to) the interests of other shareholders;
- Denial of access to company information or unfair exclusion from participation in the company’s management;
- Payment of excessive remuneration to company officers, possibly at the expense of paying dividends;
- Improper diversion of company business to other entities / individuals;
- An improper issue of shares which might include, for example, one that is calculated to achieve a decisive majority shareholding or voting rights in that entity (or, conversely, dilute another party’s).
Alongside the oppression remedy, the statutory derivative action (2) is another important tool in protecting shareholder and company interests. This enables certain specified categories of persons to bring an action:
- On behalf of the company itself;
- With leave of the Court;
where a Court is satisfied that it is probable that the company will not otherwise do so.
This might include, for example, proceedings by the company to recover loss caused by an individual director through breach of their duties (where that same director exercises control over the company’s management) or where the company has rights against a third party which the company’s management refuses to prosecute.
Whilst certain formal and substantive requirements must be complied with before bringing a statutory derivative action (including the requirements that the Court is satisfied that an applicant is acting in “good faith” and in the best interests of the company), this provides another option for taking action to prevent or remedy a course of company mismanagement.
As with seeking any compensation order under the oppression remedy, the proceeds of any successful derivative action will generally be available to the company as a whole (which prosecutes the action), rather than for the specific benefit of individual shareholders. This requires a party to exercise careful judgment in determining whether it is desirable to bring a derivative action, as it will almost invariably be brought for the benefit of all shareholders of that company.
Winding up on the “just and equitable” ground
Thirdly, there is also the possibility for certain categories of persons to apply for the winding up of a company under the “just and equitable ground” (3).
As with seeking a winding up order using the oppression remedy, a Court will generally view the winding up of a solvent and trading entity as a drastic step, as this would result in the effective termination of the business (and, in all probability, any derived value associated with it).
Much will depend on the specific circumstances in terms of whether a Court will exercise its discretion to grant a winding up order. In certain instances, it may be appropriate for the Court to appoint a provisional liquidator to the company, particularly if there is a perceived risk of dissipation of company assets or intentional diminution in share value by management.
It has been recognised that in circumstances where a business has been formed and been dependent on the existence of a relationship of mutual cooperation, trust and confidence between business partners (for instance, where a business meets the description of a “quasi-partnership” as described above) and those relationships no longer exist, a Court may exercise its discretion to make the necessary order.
Given the potentially broad range of remedies available in any specific dispute and the equally broad range of considerations that a Court may apply in determining whether its discretion should be exercised, it is imperative that careful thought is given at the outset to the merits and suitability of each potential option that might be available. This is particularly so when pursuing the most dramatic forms of relief such as seeking an order for the winding up of a company itself.
Nevertheless, these remedies operate to provide valuable safeguards to any shareholder aggrieved by any unfair or prejudicial conduct on the part of a company’s management, and a crucial source of substantive rights for either rectifying or preventing it. For further information on this article or to discuss the various rights that may be open in your particular circumstances, contact Robert Ross, director of Composite Law for advice.
1) Contained in sections 232-233 of the Corporations Act 2001 (the Act).
2) Contained in sections 236-242 of the Act.
3) Contained in section 461(1)(k) of the Act.