Shareholder oppression: no free ticket for forced sale or winding up13 April 2010 Topics: Compliance and corporate governance, Insolvency and restructuring
It is not uncommon in shareholder disputes involving allegations of oppression under section 232 of the Corporations Act 2001 (Cth) for the aggrieved shareholder to seek to wind up the company as part of a wider strategy seeking a buy-out order.
Although the court has a broad discretion in granting relief under section 233 where there is oppression under section 232, the court is required to act strictly on the evidence.
It is well established that the oppression remedy is not simply a “free ticket” for a forced sale of a shareholder’s interest.
The winding up of a company is a remedy of last resort and should not be ordered if some other less drastic form of relief is available and appropriate.
The New South Wales Supreme Court decision of Tomanovic v Argyle HQ Pty Ltd; Tomanovic v Global Mortgage Equity Corporation Pty Ltd; Sayer v. Tomanovic  NSWSC 152 (5 March 2010) provides a recent illustration of the approach of the court in these types of situations.
Tomanovic alleged oppression and sought a winding up order under sections 233 and 461(1)(f) or alternatively on the just and equitable ground in section 461(1)(k). Alternatively a buy-out order was sought under section 233.
At the eight-day hearing there were a number of factual disputes including access to books and records, provision of information, failure to pay dividends and an alleged failure to buy out Tomanovic.
There had been lengthy and protracted negotiations for Sayer to buy out Tomanovic. There was a heads of agreement where Tomanovic claimed Sayer was bound to buy his shares. Tomanovic also argued that, if there was no binding agreement or an estoppel, it was “oppressive” for Sayer not to buy his shares on the terms contained in the heads of agreement.
Justice Austin referred to a number of principles in ascertaining whether there is oppression. These include the following:
- Courts must be slow to interfere with the responsibility of management. The mere fact that decisions may adversely affect the applicant is insufficient. The applicant needs to show that there is a lack of good faith or that no reasonable board could have come to the decision reached.
- Unfairness is assessed objectively in the eyes of a commercial bystander. Would reasonable directors consider the matter unfair?
- Improper exclusion from a legitimate expectation to participate in the management of a company may be oppressive. Is there some good reason for the extinguishment of the expectation?
- Unfairness does not lie in the exclusion alone, but in exclusion without a reasonable offer to buy the excluded shareholder’s shares.
- The extent to which the minority shareholder has “baited” the majority shareholder to act in an oppressive matter can be relevant.
- There is no basis for an oppression claim where the conduct is undertaken with the “acquiescence or consent” of the applicant.
- Relief will generally be inappropriate as a matter of discretion if there is no continuing oppression.
On the evidence Justice Austin determined that Sayer was not contractually bound to buy Tomanovic’s shares and that there was no estoppel.
He also found that there had been no oppression (and therefore did not order a buy out of Tomanovic’s shares).
The protracted negotiations did not generate a “legitimate expectation” to buy out the shares, and did not constitute oppression if Sayer failed to do so. The mere fact a person is unable to dispose of his or her shares is not oppression.
A lack of trust or breakdown between the shareholders is not a ground of oppression.
The court also declined to make a winding up order on the just and equitable ground set out in section 461(1)(k).
For a ”breakdown” or a loss of ”confidence” to provide a sufficient basis for a winding up on the just and equitable ground there are two elements that must generally be satisfied:
- First, the nature and degree of the “breakdown” must materially frustrate the commercially viable and sensible operations of the company in accordance with the incorporators’ expectations; and the loss of confidence must be justified.
- Second, there must generally be a restriction upon the transfer of the shareholder’s interest. Where there is no evidence that the board will refuse to register a transfer in favour of a respectable transferee, this factor alone makes it extremely difficult for the applicant to obtain a winding up order on the just and equitable ground in the absence of oppression.
Justice Austin said “it would be unwise to order the winding up of the viable and now reasonably long-standing business, in circumstances where the breakdown in the shareholder relationship is not materially frustrating the commercially viable and sensible operations of the company”.
Sayer was in managerial control of the business and there was no deadlock as Sayer controlled 55% of the company. Tomanovic had not actively participated in the company for a number of years. The business was continuing to operate successfully despite the breakdown in the relationship.
Justice Austin commented that once the legal dust settles he hoped the parties could try again for a mediated resolution. He suggested third-party equity may provide a solution.
Importance of shareholders agreements
Tomanovic is a reminder of the importance of having an appropriate shareholders agreement to deal with issues of shareholder buy-outs.
In the absence of oppression and where the company is not deadlocked and is otherwise functioning profitably, the court may resist the judicial temptation to use the powers under the Corporations Act to find a solution where the parties have been unable to reach a solution by negotiation.