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Oppression Claims in Shareholder and Unitholder Disputes

By Bill Lambros

Disputes between co–owners of a business can arise for a variety of reasons, ranging from disagreements over financial management and business strategy to conflicts around roles, responsibilities, business direction and decision–making authority.  Such disputes can escalate to internecine warfare between those co–owners, which may threaten the stability and success of the business enterprise and the value built into it by the owners over previous years, sometimes decades.  It is important for the disputing parties to know and understand their rights and obligations and the legal processes available to facilitate a resolution of such disputes in the quickest and most cost–effective manner and hopefully negotiate a mutually beneficial outcome, particularly when a separation of their business interests becomes the inevitable outcome.

Businesses in Australia today are most commonly operated through a company, either in its own right as a stand–alone entity or as the corporate trustee of a trust or as part of a partnership or some combination of any or all of these.

When disputes arise between co–owners of a business involving a company and/or trust, it is important for them to identify and understand their rights and obligations, by reference to:–

  1. the company’s constitution, the shareholders’ agreement (if one exists) and/or the trust deed establishing the trust or unit trust in question – which set out the rules governing the formation and operation of these entities; and
  2. the Corporations Act 2001 (Cth) (Act) in the case of the company and the Trustee Act 1958 (Vic) in the case of a trust.

At first instance, the aggrieved party, which is usually a minority shareholder or unit holder, should try to resolve the issue or dispute internally by:–

  1. Requesting access to information of the business – financial and other – which may resolve concerns or at the very least identify and narrow any specific issues of concern.
  2. Calling a meeting, if necessary, either by reference to the company’s constitution or the trust deed or relevant provisions of the Act, such as section 249D(1), by which the directors are compelled to call a general meeting on the request of members with at least 5% of the votes that may be cast at the general meeting.

If the dispute cannot be resolved at that level, then the aggrieved party may escalate the dispute to a court process, either in the Supreme Court or the Federal Court, most commonly with resort to the statutory remedies available under Part 2F of the Act, for shareholders who feel unfairly treated, prejudiced, discriminated against or oppressed.

Directors who refuse a request for access to information reasonably made in good faith and for proper purpose, should be aware that the Court can compel inspection of the company’s books and records under section 247A of the Act upon application by the member who was refused access.

More substantially, under section 232 of the Act an individual member can also commence a legal proceeding against other members (shareholders), directors and the company itself, seeking relief by way of the remedies set out in section 233 of the Act if:–

  • the conduct of a company’s affairs; or
  • an actual or proposed act or omission by or on behalf of a company; or
  • a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

  • contrary to the interests of the members as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

If a member (or members) demonstrates any of those matters, then the Court’s discretion is enlivened to make orders giving effect to the very broad range of remedies listed in section 233 of the Act – from a winding up of the company or appointment of external receiver, to the forced purchase of shares by another shareholder, to requiring the company and/or specified persons to do or to not do specified acts.

The Victorian Supreme Court decision in Vigliaroni & Ors v CPS Investment Holdings Pty Ltd & Ors [2009] VSC 428 established that these oppression remedies are also accessible to beneficiaries or minority unitholders in unit trusts who experience oppressive conduct by the other members, including the trustee of the unit trust.

Issues that are commonly litigated in such conflicts include:–

  • Ownership.  The continued participation of the oppressed minority in the business may become untenable under the circumstances.  They may seek a Court order forcing the other shareholder or unitholder or majority to buy them out at a price determined by the Court by reference to an independent valuation of the shares and/or units in question.
  • Directorship and control. There is usually a dispute about management of the business (e.g. the exclusion of the minority shareholder or unitholder from the corporate management) and access to information (particularly financial information) and books and records (e.g. failing to provide financial disclosures).  The oppressed minority shareholder or unitholder may initially seek a Court order compelling access to such books and records.
  • Employment.  Quite often the oppressed minority shareholder or unitholder is also an employee of the business and issues may also arise about their treatment as an employee by reference to their rights and entitlements at law and under any employment contract as an employee.

Both the Supreme Court and the Federal Court are geared towards providing a quick and cost–effective forum for managing and resolving such disputes.  Both Courts have rules that require such legal proceedings to be commenced with the filing of an application and a short affidavit (of no more than 3 pages in the Supreme Court and no more than 5 pages in the Federal Court) setting out a clear and succinct summary of the facts alleged to constitute the acts of oppression, a preliminary estimate of the value of the shares in question (where practicable) and exhibits only a current ASIC search of the company and no other exhibits.  After immediately dealing with any urgent orders sought, both Courts commonly order the disputing parties to participate in mediation before the case progresses any further and further expense incurred on litigation.  The Court may at this point also order the parties to jointly appoint an independent valuer to prepare a valuation of the shares or units in question, which can be a costly, but necessary, exercise depending on the circumstances.

Ultimately, the outcome of such disputes may turn on a business negotiation between the outgoing owner and the remaining owner or owners at mediation, usually by reference to an independent valuation.  Whilst the valuation is commonly the most important aspect of such disputes, the conduct of the parties cannot be ignored as it may also be important in determining the appropriate outcome.

Understanding your rights and seeking advice early may be critical in these situations.  It is important to immediately identify, collect and preserve all available evidence that may be crucial to your claim or position in such dispute, regardless of which side you are on.  Parties should aim to navigate the dispute in the quickest and most cost–effective manner with minimal disruption to the underlying value of the business in question, to achieve a mutually beneficial outcome.

We offer and provide a full range of expert services to assist you with these and all other issues that arise in such areas of disputation and to help you navigate through the available processes, which could get stressful, complex and expensive.  Do not hesitate to reach out to our team of experienced professionals who can advise and assist you.