The statutory remedy most often used by shareholders who feel they have been unfairly treated, prejudiced, discriminated against or oppressed, is the oppression remedy in Part 2F of the Corporations Act (“Act”).

Any individual member (or members) can commence a proceeding against the directors of the company or the company itself.

Oppression proceedings are often brought by small and/or family companies which have fewer members. This is often because they are involved in management of the company and not able to sell their shares. They are “locked in” to the company. Contrast this to public companies where there is a liquid market for shares.

The action may be brought by the majority of members. If the majority bring the action it would not be for a breach of duty because directors and other officers owe duties to the company, but not to minority members or the company.

Statutory provisions

Section 232 of the Act allows the court to provide a remedy to a member where it finds that:

The conduct of the company’s affairs; or
An actual or proposed act or omission by or on behalf of the company; or
A resolution, or proposed resolution, of members or a class of members of the 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 any other capacity.

What is oppressive conduct?

What are established examples of oppressive conduct which will enliven section 232?

Without being an exclusive list, the majority members may have:

Amended the company’s constitution in a way which disadvantages the minority
Amended the constitution with the objective of forcing the minority to sell some or all of their shares at an unfair price
Altered the share capital of the company in a way that disadvantages the minority
Voted to approve the sale of assets of the company to themselves at a below-market price
Paid themselves excessive remuneration and refuse dividends to members
Unfairly restricted dividends
Diverted business opportunities from the company to themselves
Issued shares to themselves with the objective of becoming majority members and diluting other members
Been pointlessly wasteful
Excluded members from the business or management
Failed to act in the best interests of the company
Engaged in unfair conduct such that reasonable directors who consider the matter would not have thought the decision fair

What is not oppressive conduct?

The below list represents some of the more common examples of conduct which has been found to be not oppressive.

“Lack of trust” or “relationship breakdown”
Loss of confidence in the management of the company
Tension, anxiety and difficulties
Mere failure to agree between the majority and the minority
The majority being in control of the company
The applicant is consistently outvoted
Conduct which is in breach of director’s duties may not necessarily be oppressive
Conduct which applies to all shareholders
Undertaking a capital raising; restructuring the company; funding litigation; payment of bonuses; initiating a voluntary wind-up.

The above list is contingent on the circumstances of each case and does not apply in every instance.

Common law tests

The established legal tests allow a large discretionary berth for a court to objectively consider the conduct in question in order to determine whether there has been oppressive conduct.

The frequently applied test formulated by the High Court in Wayde v New South Wales Rugby League Ltd 180 CLR 459 is:

“was the decision made by the director a decision that no board of directors acting reasonably would have made? If so, the directors have acted oppressively in breach of s 232.”

Objectively, the court is looking at the effect of the actions of the directors or majority members, not their intentions.

Likewise, directors may discriminate against certain members without enlivening s 232. The court will look for unfair prejudice or unfair discrimination against a member or members.

Specifically, commercial unfairness is the centre of the court’s enquiry. In Ubertini v Saeco International Group SpA (No 4) VSC 47 at [494] Elliot J considered the meaning of company “commercial unfairness”:

Assessing commercial unfairness

494 The task of determining whether or not there has been commercial unfairness must be considered in the context of the particular relationship in issue, which will not infrequently involve a balancing exercise between competing considerations, including examination of the conduct of the applicant [247]. As was observed in Re London School of Electronics Ltd: [248]

The conduct of the petitioner may be material in a number of ways, of which the two most obvious are these. First, it may render the conduct on the other side, even if it is prejudicial, not unfair. Secondly, even if the conduct on the other side is both prejudicial and unfair, the petitioner’s conduct may nevertheless affect the relief which the court thinks fit to grant ... In my view there is no independent or overriding requirement that it should be just and equitable to grant relief or that the petitioner should come to the court with clean hands. (Citations omitted.)

495 This passage was referred to with approval by the Court of Appeal of this court in Joint v Stephens.[249] Having referred to this passage, the Court of Appeal continued:[250]

It is not clear whether Nourse J also had in mind the sort of case in which a respondent reacts with prejudice to an applicant because of prejudicial conduct by the applicant. But in Morgan v 45 Flers Avenue Pty Ltd, which did involve that sort of reactive prejudicial conduct, Young J said in considered obiter that it does:

I should indicate that in my view the approach taken by Nourse J in Re London School of Electronics Ltd is the correct one, that is that such conduct may either render the conduct on the other side not unfair or may affect the relief which the court thinks fit to grant and that there is no overriding requirement in a case under [the oppressive conduct section] that the plaintiff should come to the court with clean hands.[251]

496 In summary, the authorities make it clear that the court must carefully consider the conduct of both applicant(s) and respondent(s) before making any determination about first, whether the section has been contravened and, secondly, if so, whether, and what, relief ought to be granted.

The court will also look at whether the reasonable expectations of the minority member/s have been breached. Breaches of reasonable expectations include:

Exclusion from management of the company
Lack of information being provided by the directors to the member
Attempts to force the member to sell their shares

Bringing an oppression proceeding

Supreme Court of Victoria: The Supreme Court’s Practice Note SC CC 8 (revised 18 May 2018) sets out the procedure for bringing applications under section 233 of the Corporations Act.

Pilot program: From 18 May 2018 under the new pilot program which emulates the Federal Court process, oppression proceedings are commenced by originating process and supporting affidavit of no more than 3 pages in length. The only exhibit permitted is an ASIC search of the company. A valuation of the shares may be permitted where practicable.

The matter is swiftly moved to mediation if it doesn’t involve complex trust structures or shares in a large or public company.

The pilot is designed to save costs for the parties and avoid the need for long ‘tit-for-tat’ affidavits which may never be used.

Federal Court: The Federal Court allows an affidavit of 5 pages under its Commercial and Corporations Practice Note at [16] – [19]. The matter is also swiftly moved to mediation within the court system.

Don’t delay: A party experiencing oppressive conduct should not delay in bringing an action, as laches, acquiescence and delay may result in the court refusing relief in the exercise of its discretion: Falkingham v Peninsula Kingswood Country Golf Club [2015] VSCA 16 at [47] – [49], [74] – [100].

Timing of oppressive conduct: The oppressive conduct may have ceased by the time of trial, or may continue to trial. Either way, section 233 is enlivened if the conduct occurs at any time. The cessation of any oppression may be relevant to any remedy ordered by the court: Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14 at [34].

Remedies

Section 233 of the Act provides a broad suite of remedies which the court may order, including:

Wind-up the company on the ‘just and equitable ground’ (see my post on this here)
Modify or repeal the constitution
Regulate the affairs of the company in future
Order the sale / purchase of shares by members at a determined price
Appoint a receiver to control company property until court proceedings are concluded
Appoint a manager to run the company until court proceedings are concluded
Restrain a person from doing something
Require a person to do something
Order the company to commence or defend specific legal proceedings, especially where the company is controlled by those who have acted oppressively by breaching their duties.

Members' derivative actions

There is an important distinction between members statutory remedies (like the oppression remedy and personal actions) and a member’s derivative action pursuant to Part 2F.1A.

A member's personal action is brought in a personal capacity because the member has a personal right or is affected personally.

By contrast, a members derivative action is brought by a member based on a legal action which the company has, such as a breach of duty owed to the company by a director. Briefly, the criteria used by the court for granting leave include:

inaction by the company
applicant acting in good faith
its in the best interests of the company to grant leave
there is a serious question to be tried by the court

The distinction between the two actions should be kept in mind when considering an oppression action.