Shareholder oppression – how the laws and principles apply to small business

Despite the often informal nature of smaller businesses, especially family businesses, they are still typically bound by complex company constitutions and the Corporations Act 2001 (Cth) (the Act). Similarly, all businesses big or small inevitably run into disputes between those who are a part of the business. Oftentimes those disputes involve one or more parties being unfairly treated.

Section 232 of the Act provides a remedy for a member of a company who believes that the company’s affairs are being conducted in a way which is either contrary to the interests of the members as a whole or oppressive / unfairly prejudicial to / unfairly discriminatory against a member or members.

The second test provides a composite test that ultimately boils down to the concept of commercial unfairness. The Court will step into the role of an objective commercial bystander to review whether the affairs of a company were being conducted unfairly and then to put an end to it (Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692), ideally without being forced to resort to winding up the company.

Two common situations in smaller companies that could lead to acts of ‘oppression’ stem from the fact that:

  • there is a higher chance of deadlock amongst the owners of the business (i.e. it is easier for 2 or 4 shareholders to result in a 50-50 voting lock than it is for 200); and
  • family run businesses may be more likely to operate in what way that is different to how a larger commercial business would operate.

While the phrase ‘shareholder oppression’ brings to mind a majority voting to unfairly disadvantage a minority, the relief under Section 232 can apply even when the oppressor and oppressed member have what might seem equal footing. The relevant principle is that the oppressed member needs to demonstrate that they did not have control in the form of the power to prevent the oppression, especially (though not exclusively) where ‘strong arm’ tactics are used. (Beaumont v Peel [2018] NSWSC 95)

Oppression can even occur if deadlock simply forces a company into being unable to run its affairs, regardless of any aggressive tactics or actions.[1]

In the decision of Boyd v Feeney (2017) NSWSC 1595, Justice Black of the NSW Supreme Court stated that “fairness cannot be considered in a vacuum” when discussing oppression and that in respect of family companies, “the history of the company and the family and the purpose for which the company was formed” creates a different situation for someone who has been gifted their stake compared to those who have come in externally.

As a result, some decisions that might be considered unfair and oppressive in another company may be defensible in a family business. Matters such as loan agreements, for example, are often subject to less than formal or commercial terms within a family. Similarly, historical patterns of behaviour may differ substantially from common corporate procedure. The Court therefore will review the nuance and history of the situation in deciding what behaviour constitutes oppression.

Oppression in a partnership like company will similarly be reviewed in its particular circumstances and the “conventional understanding on which the parties’ relationship was based”. (Fexuto v Bosnjak (2001) 37 ACSR 672) [1]

The personal circumstances of each dispute can result in dramatically different outcomes and require tailored legal advice as there is no ‘one size fits all’ concept. If you are dealing with a company dispute, big or small, call Ezra Legal today to discuss your options and how best to resolve your problem.

Ashik Ibrahim

Lawyer

Ezra Legal

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