Minority shareholders - ignore them at your peril

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:

• that the company be wound up;
• that the company’s existing constitution be modified or repealed;
• regulating the conduct of the company’s affairs in the future;
• for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
• for the purchase of shares with an appropriate reduction of the company’s share capital;
• for the company to institute, prosecute, defend or discontinue specified proceedings;
• authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
• appointing a receiver or a receiver and manager of any or all of the company’s property; or
• restraining a person from engaging in specified conduct or from doing a specified act.

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:

1. a declaration that the affairs of QSL have been conducted in a manner which is contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly prejudicial against Wilmar; and
2. an order that QSL’s Constitution be varied to delete the relevant amendments and to restore the Constitution to the form it was in prior to the resolutions being passed.

At first instance, the trial judge:

1. stated that the test as to whether or not the conduct complained of by Wilmar was oppressive was ‘whether, objectively viewed, the hypothetical reasonable commercial bystander having regard to all the relevant circumstances would regard the amendments as unfair’.³
2. held that held that the change to QSL’s Constitution was not oppressive to, unfairly prejudicial to, or unfairly discriminatory against Wilmar, having concluded that the circumstances which existed before the change in constitution were less fair than those existing after the decision, finding that they were not.

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:

• Wilmar now had materially inferior rights to BIM Mills in respect of the appointment of directors; and
• the amendments had immediate effect, and could not be changed but for a vote by a special majority.

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:

• excluding Peter from the business;
• failing to tender for new work;
• making payments direct to Ian and his son and using company funds for his benefit, including making payments to a related company for Ian’s benefit;
• making payments which were not backed up by the relevant documentary evidence; and
• entering into dealings outside the ordinary course of the Exton Group’s business.

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:

• relief under sections 232 and 233 of the Act can be granted even if the oppressive conduct has stopped by the time of the Court hearing;
• the test as to whether behaviour is ‘contrary to the interests of the members as a whole’ is an objective one.  The behaviour may not necessarily involve commercial unfairness and the Court must determine whether or not the conduct complained of is in the best interests of the company as a whole, apart from its members.  This distinction often gets blurred in family businesses and where there has been an ongoing pattern where certain types of decisions have been endorsed by family members, the behaviour may not be contrary to the interests of the members as a whole, or unfair;
• whether or not conduct will be considered to be ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member’ will depend on whether the conduct, when judged objectively, will be considered to be commercially unfair; and
• whether the conduct of the applicant should be taken into account.

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.

Lavan comment

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.