Members Rights v Best Interest of the Company - is there oppressive conduct?

In Barboza v Blundy & others [2021] QSC 68 the Supreme Court recently found a minority member’s right to claim oppressive conduct against its majority shareholders must fail, because the Defendants were acting correctly and in the best interest of the company. The decision highlights the importance of understanding Members Remedies.

Introduction

Janelle Barboza (the Plaintiff) was the co-founder of Honey Birdette (the Company), whose business was the sale of women’s lingerie, hosiery and “personal products”. The Plaintiff and her business partner founded the business with each originally holding 50 per cent of the issued shares.1

In 2011 the company came to the attention of a Mr Blundy (the Defendant), who was an experienced and worldly entrepreneur. Subsequently all relevant parties negotiated and entered into a suite of agreements,2 after which the Plaintiff and her business partners became minority shareholders holding 15% each.3

Best interest of the Company

In September 2014 the Defendant made a decision that required the shareholders to make a choice.

The Defendant identified that the problems being encountered by his retail business Diva presented an opportunity to the Company, and all Shareholders agreed. Both the Plaintiff and her business partner were initially enthusiastic in the Company proceeding to take advantage of the opportunity identified.

The parties conducted themselves based on the Company’s decision to take on the Diva leases and Diva staff, to the extent that it did what was seen to be a decision properly taken in the Company’s best interests. In due course the Plaintiff opposed the decision.

The action before the Court

The Plaintiff brought an action before the Queensland Supreme Court against Mr Blundy and Honey Birdette amongst others pursuant to s 233 Corporations Act 2001 (Cth) for Oppressive Conduct.

The Plaintiff’s pleading turned on the proposition that the Defendant made the “Decision” to impose the “Proposed Transfer” of some Diva leases, and staff on the Company over the Plaintiff’s opposition. The Decision was made by the Defendant. He imposed this decision on the Company and the minority shareholders as the majority shareholder.

The Plaintiff pleaded the decisions made by the Defendant were:

  • contrary to the interests of the Company inasmuch as it imposed on the Company the burden of the failing Diva business without bestowing any benefit;
  • was in fact imposed on the Company for the benefit of BBRC and the Defendant;
  • was imposed in a manner contrary to the shareholders’ agreement;
  • devalued the Company and, correspondingly, the shareholdings of its members including the plaintiff’s shares in particular.

The plaintiff alleged each of these matters constituted oppression under both limbs of section 232 of the Corporations Act 2001 (Cth), namely:

  • 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,

and therefore, constituted grounds for making an order under Part 2F.1 of the Corporations Act 2001 (Cth).

The Decision 

It was conceded that the Defendant’s decision was to benefit the Company “incidentally and in the long run”.4 The Court agreed.

Of relevance, the Court found that the opportunity of taking over some Diva staff and some Diva leases was thought by all the directors of the Company at the time (and found to be in hindsight) a good opportunity for the Company and in the best interests of the Company. Further the Plaintiff and her business partner did not oppose the uptake of the staff and leases, but instead were initially enthusiastic about it.5 Lastly that the Defendant’s choice considering the opinions of the Company’s joint managing directors, was a genuine choice made.

The importance of understanding members remedies

Oppressive conduct is not a mere disagreement between the majority and minority shareholders. The Court is required to exercise it discretion whilst looking at all the facts of the case to determine if the conduct has been “reasonably or commercially justifiable”. Reasonably or commercially justified was the test established in Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14 where a majority shareholder had used the Companies funds for his own benefit. 

Under section 232 of the Corporations Act 2001 (Cth), the Court is authorised to give relief to a party against oppressive conduct in the dealing of company’s affairs if the Court is of the opinion that:

  • the conduct of a company’s affairs (as defined in section 53); or
  • an actual or proposed act or omission by or on behalf of a company; or
  • a resolution, or a proposed resolution, of shareholders or a class of shareholders of a company; 

is either:

  • contrary to the interests of the shareholders as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity.6

Recognising oppressive conduct

  • Abuse of voting powers;
  • Unfair or unreasonable wages; 
  • Running of a company in their own interest;
  • Ignoring of minority shareholders;
  • Prejudice conduct;
  • Alienating a director;
  • Altering a company’s constitution;
  • Discrimination;
  • Improper diversion of business;
  • Misappropriation of company funds;
  • Decisions made for the benefit of only a discrete party;
  • Improper processes to remove or amend directors;
  • Unfair distribution of dividends.

Lavan comment

Allegations of oppression are not to be made lightly. The interests of the minority must not be ignored. Nor can the allegation be made without considering the proper tests.

If you have any questions in relation to this article, or require advice tailored to your situation, please do not hesitate to contact Cinzia Donald or Iain Freeman.

19 May 2021
Corporate Disputes
AUTHOR
Cinzia Donald
Partner
AUTHOR
Iain Freeman
Partner
SERVICES
Corporate Disputes and Investigations


FOOTNOTES

[1] Barboza v Blundy & others [2021] QSC 68, 8.

[2] Ibid, 2.

[3] Ibid, 10.

[4] Ibid, 142.

[5] Ibid, 149.

[6] Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14, 14.