Shareholder oppression: careful, unfairness adds up

When business partners fall out with each other, disagree as to the direction of a company, or simply face circumstances that leave a minority shareholder feeling harshly dealt with, threats of an oppression action are often not far behind.

However, although oppression can involve a broad range of conduct, the mere fact a shareholder is in some way disadvantaged by a majority decision does not automatically give rise to an oppression claim. An unhappy shareholder is not necessarily an oppressed one. Rather, it is a question of fairness, having regard to the benefit of the relevant conduct on the company as a whole versus the prejudice suffered by the shareholder.    

Importantly, when assessing oppression claims the Courts can also look at a course of conduct and are not restricted to looking at individual decisions or actions in isolation. The recent Federal Court decision of Jolan v Essential Investments[1] highlighted this issue in finding that the directors and majority shareholders of the defendant had acted oppressively towards the plaintiff in regards to the pattern of conduct over an extended period.

The relevant law

Section 232 of the Corporations Act provides that if the conduct of a company’s affairs has been oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member of the company, then a Court has the power to make any orders necessary to remedy that conduct. 

To determine whether conduct has been in beach of section 232, the key question is whether there has been commercial unfairness towards a shareholder. That is, has there been a departure from the standards of fair dealing, or has a decision been made to impose a disadvantage, disability or burden on a member that, according to ordinary standards of reasonableness and fair dealing, is unfair?[2] The alleged conduct is to be objectively assessed having regard to the particular context in which the conduct occurred, and it is the effect of the conduct that is material in determining whether the conduct was in breach of the oppression provision.[3]

Oppression actions are often brought against the background of a course of conduct, rather than a single action or decision that was made by the company. The Jolan case highlights that in these circumstances the Court will look at each instance of unfair conduct, some of which may be relatively minor matters, and will draw the various threads together to determine whether the cumulative effect of each individual action amounts to oppressive conduct against a shareholder. The cumulative effect of a series of conduct, even where none of the separate matters of conduct are found to be oppressive, may nonetheless be found to be oppressive.[4]

The facts

Jolan Pty Ltd (Jolan) was a minority shareholder of Essential Investments Pty Ltd (Essential), which was the holding company for three subsidiaries: Essential Coffee Pty Ltd, Essential Coffee (NZ) Limited and Essential Brands Group Pty Ltd (collectively, the Group). The primary business of the Group was the sale of coffee machines, coffee beans and other ancillary consumables. 

Jolan was incorporated in 2016 as the vehicle through which Mr and Mrs McWilliam (the McWilliams) could invest in Essential. The McWilliams were the only two directors of Jolan, which invested $1 million in Essential to become one of its five largest shareholders. The decision to invest was based on the McWilliams’ belief that the investment was for a short term, and that within two years the company would achieve an “exit event” (such as an IPO or a sale of the business).

There was only one campaign to sell Essential, which concluded unsuccessfully in about September 2019. When it became clear that Essential was not going to achieve an exit event in the short term, Jolan attempted to sell its shares. This action led to a breakdown in the McWilliams’ relationship with the other shareholders and directors of Essential, resulting in the McWilliams being the target of an ongoing campaign designed to prevent them from participating in the management of the company and to frustrate Jolan’s efforts to sell its shares to a third party.

The decision

The Court found that the combined effect of the following conduct was oppressive, unfairly prejudicial, or unfairly discriminatory to Jolan, in breach of section 232 of the Corporations Act.

Exclusion from management

Pursuant to a shareholders agreement, Jolan had the right to participate in the management of Essential by being able to appoint a director to the Board.

From November 2020 to June 2021, after Jolan had begun taking steps to sell its shares, a series of general meetings were held during which Essential’s shareholders voted to remove either Mr or Mrs McWilliam from the Board. After each instance in which either Mr or Mrs McWilliam was removed as a director, Jolan would immediately appoint the other spouse as its nominated director of Essential. This, in turn, was followed by a further general meeting to pass another resolution to remove that director.

In June 2021, after the McWilliams had each been removed as a director on a number of occasions, the directors of Essential passed a resolution which had the effect of barring Jolan from appointing either of the McWilliams as a director of the company. Following this resolution, Jolan ceased to have a director appointed to the Board or have any involvement in the management of Essential.

Imposing restrictions on information

The majority shareholders and directors of Essential were found to have engaged in two forms of conduct that was designed to deprive Jolan of accessing information relating to the company.

First, when Jolan attempted to sell its shares in 2020, Mr McWilliam requested that he be provided with certain basic financial information about the company, for provision to a prospective purchaser of Jolan’s shares. Despite repeated requests, the directors refused to provide Mr McWilliam with this information, stating that the request exceeded the information that the Board agreed to provide minority shareholders to aid in any share sale. Without this information, the prospective purchaser lost interest and the sale did not proceed.

Second, Jolan’s ability to access information about Essential’s business diminished over time. This occurred in the following ways:

• In December 2020, all directors of Essential ceased receiving information relating to the three subsidiary companies; and
• In March 2021, Essential imposed a restriction on its directors which prevented them from distributing any documents they received in their capacity as a director to any third parties (including, for example, Jolan).

Failure to take steps to achieve an Exit Event

The Court accepted that the McWilliams’ decision to invest in Essential was influenced by their belief that the investment would be for a short term, with the company to achieve an “exit event” within two years. To achieve this, the shareholders agreement imposed obligations on each shareholder to exercise their powers with the purpose of achieving that result.

Despite this, during 2020 and 2021 Jolan was the only shareholder who actively took steps to achieve a sale of Essential. The remaining shareholders refused to entertain any potential offers to purchase the company, and passed a resolution which deferred any possible sale for at least 12 to 18 months after certain criteria are satisfied (the timing of which was also uncertain).

Key takeaways

While the Court found that each individual action or conduct was unfair towards Jolan, it was the totality of that conduct, when combined, which was found to be in breach of section 232 of the Corporations Act.

Irrespective of whether you are prosecuting or defending an action for oppression, this decision highlights the importance of having a full and complete understanding of all previous dealings and interactions between a dissatisfied minority shareholder and the other members (and directors) of the company. While some conduct towards a minority shareholder might appear to be relatively minor and may not, in and of itself, be oppressive, that conduct cannot be looked at in isolation. Rather, regard should be given to the entire course of conduct in determining whether a shareholder has been oppressed. It will be open to a Court to find that the cumulative effect of a series of actions or decisions impacting a minority shareholder, which may have been carried out over a prolonged period of time, amounts to oppressive conduct.

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