The Corporations Act 2001 (Cth) (Act) provides protection for minority shareholders of a company in circumstances where either 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 proposed resolution of members or a class of members of a company is either:
contrary to the interests of members as a whole; or
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members.1
Under section 233 of the Act, the Court can make any order that it considers appropriate, including an order:
Two recent cases have considered the application of sections 232 and 233 of the Act.
In the 2017 Federal Court case of Wilmar Sugar Australia Limited v Mackay Sugar Limited,2 the Federal Court considered the issue of whether a resolution to amend the constitution of Queensland Sugar Limited (QSL),was oppressive to, unfairly prejudicial to, or unfairly discriminatory against particular members of QSL.
QSL is a public company limited by guarantee which operates on a not for profit basis.
Its members comprise 7 entities who own sugar mills in Queensland, including Wilmar Sugar Australia Ltd (Wilmar), and 23 grower representatives. Wilmar was the largest of the mill owners.
By a requisition dated 13 June 2016, several mill owners, collectively known as BIM Mills, sought a resolution that QSL’s Constitution be amended.
On 5 July 2016, resolutions were passed at a general meeting of members of QSL amending QSL’s Constitution. The practical effect of the resolutions was to weaken Wilmar’s voting position in that instead of being able to vote on the appointment of up to 4 directors of QSL (and to control any vote on any of the directors), Wilmar was now reduced to being able to vote for one director.
BIM Mills issued proceedings seeking a declaration that the resolution to amend QSL’s Constitution was not ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ Wilmar within the meaning of section 232 of the Act.
Wilmar issued a cross claim seeking:
At first instance, the trial judge:
On appeal, the Full Court confirmed that the primary judge had correctly identified the test to be applied. However, he had incorrectly asked the wrong question in considering whether the position before the 5 July 2016 amendments to QSL’s Constitution was more unfair to BIM Mills than the position after 5 July 2016 was unfair to Wilmar.
The correct question was whether, objectively, the effect of the amendments was unfair to Wilmar, not whether their effect was more or less fair than the circumstances existing before the amendments.
The Full Court found that the amendments to QSL’s constitution were unfair due to a range of factors, including:
The Full Court ordered that the amendments were oppressive to Wilmar within the meaning of section 232 of the Act, and that proposed orders for the deletion of the amendments from the Constitution should be prepared.
It should be noted that although Wilmar issued proceedings after the resolution had been passed by QSL, it was open to Wilmar to issue the proceedings and seek injunctive relief prior to the resolutions being passed by QSL.
Another recent Victorian Supreme Court case of Peter Exton & Anor v Extons Pty Ltd & Ors.4 Considered S232 and 233 Peter and Ian Exton were brothers who each held 50% shares in, and were each directors of the companies that made up the Extons group (Extons).
Ian was involved with management and administration of the businesses, and Peter was involved as a site manager.
In 2015, Peter issued proceedings in the Supreme Court of Victoria, seeking orders pursuant to sections 232 and 233 of the Act that Ian sell his shares in certain entities within the Exton Group to Peter.
Peter alleged that Ian was treating him as an employee, rather than as an equal in the business.
During the proceedings, Peter alleged various grounds of oppressive conduct against Ian as follows:
Ian denied that his conduct had been oppressive, but said that in any event, the alleged conduct had ceased by the time of the hearing as Peter was now in control of Extons.
Ian further referred to Peter’s refusal to act in his usual role as site manager as having informed Ian’s own conduct.
Having considered all of the factual allegations raised by both Peter and Ian, the Court found that Ian had acted contrary to the interests of all members as a whole by making three separate payments which diverted funds away from the Extons group, and for which Ian did not have an adequate reason.
The Court held that Ian’s actions were contrary to the interests of all members because by his actions, Ian had not acted in the best interests of Extons as a whole, and had deprived Extons from a profit it earnt which it should have received.
Importantly, the Court commented that there were four legal issues to consider in relation to Peter’s application:
Having taken into account the conduct of both Peter and Ian, the Court granted Peter’s application (with which Ian by that time agreed) that Ian sell the shares that he owned in certain entities to Peter.
The Court left the parties to work out an agreed value of Ian’s shareholding.
Importantly, the Court commented that if Peter and Ian could not agree on a way forward, winding up the relevant entities was an option that the Court would consider.
It is important to consider the impact of decisions in relation to your company on the interests of members as a whole, and whether it can be argued that the decision is oppressive to, unfairly prejudicial to, or unfairly discriminating against a member or members.
If you are concerned about the potential impact of a decision. Lavan’s Corporate Disputes team can assist in identifying the risk to you before the next step is taken.