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Question:
The shareholders of a company have their rights and remedies stipulated under the Australian Corporations Act 2001 (Cth). Due to their state of vulnerability, the minority shareholders have additional rights provided under section 232 of the Act.
Looking at the facts of this case, Walter and Shirley can be categorized under the minority shareholders because of their status.
There are several rights and remedies that are envisaged in the Corporations Act that are provide an avenue for a disgruntled shareholder to seek for justice. These include;
Apart from the remedies mentioned above, shareholders can claim for other rights in accordance with the law if they feel that their rights have been violated by the directors.
In the case of Walter and Shirley, a number of issues arise from the facts as stated. Having invested in Happy Days Ltd., Walter and Shirley dully qualify as legitimate members of the company by virtue of being shareholders.
It will be important to determine whether the conducts of the directors can the said to be oppressive or unfair towards the two. It will also be paramount to identify some of those acts that have been found to amount to oppressiveness by the courts of law in the previous cases.
These include but not limited to;
This paper will scrutinize the above mentioned actions in reference to section 232 of the Corporations Act and case law. The aforementioned actions of the directors are the most common areas that affect the minority members of the company. However, other forms of oppression may arise and it is the duty of the courts of law to look into the merits of each and every case before it.
This paper shall also look into the remedies available to Walter and Shirley once it has been established that they have been oppressed by the directors of Happy Days Ltd.
Established general principles concerning section 232 of the Corporations Act include;
The Court's authority to award reprieve as per section 233 of the Corporations Act is hinged on proof that the activities of the company have been carried out in a manner that is deemed to be unjustified.
It widely accepted that the standard for determine whether the action of the directors amounts to oppression should not be considered in isolation. One should further consider whether the conduct of the directors is unfair to the extent that a reasonable director would not have thought the decision was fair.
In Wayde v New South Wales Rugby League Limited (1985) Brennan J observed that when determining whether there has been an issue of unfairness, the authorities should consider looking into the facts and not the degree as stipulated under section 320. There should be consideration to the intention of the directors when arriving at the decision without putting much attention to the skill possessed by them.
It was held that the action of directors of to reduce the number of contestants in the in the league to twelve and to deny others chance was made despite them being aware of the implications of the decision. It was later identified that the directors had full knowledge about the bad consequences of the competition to the players and that a season that is shorter would be favorable for a healthier organization. The honorable court was required to recognize the fact that the judgment was arrived at after consulting skilled managers of the sport in ascertaining whether the decision was unfair or not. The distinguished judge ascertained that he could not identify anything that was unfair to the exclusion of the unavoidable bias to and discrimination against Wests, which was not sufficient by itself to demonstrate that rational directors who are skilled would have found it to be illogical to implement their authority in the same manner as the directors implemented.
Byrne J further put into consideration Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 in the determination of Re George Raymond Ply Limited; Salter v Gilbertson (2000) 18 ACLC 85 in which Byrne J asserted,
The honorable courts are assigned with the duty to study the demeanor, in combination with the context within which it takes place in order to determine whether the allegations of oppression exist.
In the case of Re Baggett Well Pastoral Co Ply Limited (1994) 12 ACLC 42 at 212 per Debelle J, oppression cannot be ascertained solely on the grounds that the behavior has a bad effect on minority shareholder. It should be considered that there are high probabilities that the interest of the minority will be overtaken by the interest of the majority which is a logical fact and that there is an attached risk to the minority incurring financial loss because of the decision of the majority. It should further be recognized that the shareholder is at risk that a decision made by the majority may further have a financial consequence adverse to the minority.
Re M Dailey & Co Pty Limited (1968) 1 ACLR 489 at 492, according to learned Judge Lush J, in Australian legal system, there are matters that were introduced in 1984 under the enlarged provision that include the word “unfairly”. However, the extended legislation comes with an extra meaning, which involves the entrenchment of a behavior that is unreasonably harmful to the already helpless a minority shareholder. It is paramount in this particular case to determine that the behavior was beyond control or was done in good faith or contrary to justice in relation to normal principles of rationality and fair dealing.
In his ruling, Brennan J in Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459 sets out some of the general principles concerning oppression. The principles should be considered alongside the conduct of directors which may be regarded as oppressive.
The directors’ action of stopping payment of dividends without a justifiable reason
Oppression and unfairness does not necessarily arise by the mere fact that dividends have not been paid to its members. It would be paramount to look into every aspect keenly to establish the motive behind such a move. The extent of the company’s financial needs the company’s history and the rational anticipation of its members.
In D G Brims & Sons Pty Limited (1995) 16 ACSR 559, the claimants wanted reprieve against oppression on the grounds that dividends have been withheld, exclusion from board representations, and misappropriation of company funds used for the defense of the case among others.
In determining whether the company’s failure to remit dividends was oppressive, many factors were considered by the court. These included the history of the company, how important is the needs, the prevailing and expected financial status, the rational prospects of the members among others.
It was on the basis of these factors that the court deemed it fit not to grant reprieve for oppression. The court considered a number of matters in arriving at its decision.
The main reasons for claiming oppression included denial for issuance of dividend in 1991, which the claimants were not included in the board representations, that the company was spending the shareholders money to stand in for the defendants in the case. It was also observed that the amount of money determined by the directors and the company’s auditor for the applicant's shares was irrationally little.
However, it should be noted that the non-declaration of a dividend without the review of a policy by the board of directors of not declaring a dividend and subsequent increase in the salary of the directors may amount to oppression, Shamsallah holdings Pty Limited v CBD Refrigeration and Air conditioning Services Ply Limited (2001) 19 ACLC 517.
In the case of Scottish Cooperative Wholesale Society Limited v Meyer [1959] AC 324, it was held that the deviation of business from the company by the directors can amount to oppression.
In that particular case, the manufacture of rayon cloth which was under the control in England. A dispute arose as to amount of shares a Scottish company owned and two other individuals who had been licensed to manufacture rayon cloth. The company embarked on a mission to acquire the shares of the two individuals on a lesser value than their true value. Later the government dropped its interest in the control of the manufacture of the said rayon cloth. Consequently, the Scottish Society decided to transfer its business to another department within its own company tremendously pulling down the worth of the shares of the company.
It was in the view of the courts that such an action amounted to oppressive conduct, thereby shielding the applicants against the arbitrarily action. The applicants were in this situation eligible for reprieve. This could be achieved by a mandatory order by the court directing the Scottish Society to acquire the shares of the two individuals.
Oppression is not expressed solely by the subsequent increase in the amount of fees charged to the Shareholders. This can however be oppression if the intention of the directors is for self-interest and goes against the principal of mutual trust and confidence.
In J D Hannes & Ors v M J H Ply Limited & Ors 7 ACSR 8, the Court of Appeal observed that the appellant was moved by personal interest in allocating more shares thereby being oppressive to the shareholders of the company.
Genuine Anticipation and Mutual Trust and Confidence
In the case of Re Dalkeith Investments Pty Limited 9 ACLR 247, underlying the concept of oppression is the concept of genuine anticipation and mutual trust and confidence.
The above mentioned principle of legitimate expectation also relates to a situation in which a shareholder is denied the opportunity of receiving remuneration as other shareholders. Despite the action being legit in accordance with the process and procedures, it may still be unfair and unwarranted if the action was unexpected. This was well represented in the case of Hogg v Dymock Ors 11 ACSR 14.
In Re Westbourne Galleries Limited [1973] AC 360, Lord Wilberforce observed that defining the situations in which the legitimate expectation principle would apply. Lord Wilberforce indicated that organizations are based on associations hinged on money-making relations of which the foundation of that association is sufficiently provided for by the respective constitution of every company.
In the case of John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63, it was widely observed that there are situations that lead to a series of board meetings and does not automatically lead to oppression. This is so despite the fact that some of the matters being discussed may be termed as not important.
In the above mentioned case, the company in question carried on business as a franchisor of real estate agencies. Orders were sought by one of its shareholders for the winding up of the company on the grounds of oppression in lieu of section 232 of the Corporations Act (2001).
It was averred by the applicant that the directors of the company were being carried on in an oppressive manner.
In conclusion, Walter and Shirley will be able to receive orders of remedy for the action of oppression by the directors of Happy Days Ltd on the following factors;
The action by the company to stop paying dividends to minority shareholders,
The directors action of diversifying the company’s business, and
The action of the directors of increasing fees of the shareholder.
The Corporations Act further bestows upon the minority shareholders power to seek for further remedies and rights in case their issues have not been dealt with in the above case.
In this particular situation, the fact that Walter incurred damages after entering into a scuffle with the director opens up an opportunity for extended remedies for damages. On the same note, the defamation of Walter by the director on national television warrants him to seek for damages from the court of law.
This paper recommends that Walter and Shirley are entitled to seek legal redress for the remedy of oppression from the courts of law. This has been prompted by the actions of the directors that are bound to cause irrevocable damage to the couple.
The two minority shareholders can also seek for an injunction order and an order of winding up that would stop the directors from causing much havoc to them.
Legislation
Australian Corporations Act 2001 (Cth.)
Case law
D G Brims & Sons Pty Limited (1995) 16 ACSR 559
J D Hannes & Ors v M J H Ply Limited & Ors 7 ACSR 8
John J Starr (Real Estate) Ply Limited v Robert R Andrew & Ors 6 ACSR 63
Re Baggett Well Pastoral Co Ply Limited (1994) 12 ACLC 42
Re Dalkeith Investments Pty Limited 9 ACLR 247
Re George Raymond Ply Limited; Salter v Gilbertson (2000) 18 ACLC 85
Re M Dailey & Co Pty Limited (1968) 1 ACLR 489 at 492
Re Westbourne Galleries Limited [1973] AC 360
Scottish Cooperative Wholesale Society Limited v Meyer [1959] AC 324
Shamsallah holdings Pty Limited v CBD Refrigeration and Airconditioning Services Ply Limited (2001) 19 ACLC 517
Wayde v New South Wales Rugby League Limited (1985) 180 CLR 459
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