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Sharing Is Caring – What To Do When You No Longer Care For The Company or Your Fellow Shareholders

Friday, September 21, 2018

Equal shareholders face similar difficulties to partners in a failing marriage when the corporate relationship faces an irreconcilable breakdown. This usually occurs where the parties fail to, or refuse to, share the love instilled in an initially entrusted business venture.

Individuals embarking on these business ventures often do so full of confidence and trust, but with a considerable degree of naivety as to the future conduct of the business. Typically, the business relationship is considered more as a “quasi-partnership” rather than a larger corporate arrangement, and the parties are usually unaware of the consequences that will follow if, and when, the initial excitement dissipates and emotions conflict with the future conduct of the business.

When the parties are on the precipice of corporate despair, sections 232 and 233 of the Corporations Act (“the Act”) provides a wide range of remedies available to aggrieved shareholders when the love leaves the room and where the shareholders have reached an intractable deadlock in their business affairs.

Under the Act, the most common relief relied upon to break this deadlock is the “oppression” remedy which applies to “oppressive, unfair and discriminatory conduct” on the part of one shareholder towards the other(s).

Several recent decisions of the courts have clarified the definition of “oppressive conduct” and the relief that is available to an oppressed shareholder under the Act in resolving a dispute. In Munstermann v Rayward, involving a closely held family business on the Gold Coast, and other recent decisions, some of the oppressive conduct contended between the parties included:

  • workplace bullying and harassment, disparaging behaviour and intense personal acrimony;
  • unilaterally and unreasonably taking control of business finances and accounts, client information and company billings;
  • being unnecessarily intrusive, objectionable and failing to involve the other shareholder(s) in the decision-making processes;
  • taking unaccountable and extended leaves of absence;
  • failing to attend meetings when convened;
  • wilfully withholding reasonable consent to day-to-day business transactions;
  • misappropriating or misusing company funds;
  • causing the business to trade in a manner not envisaged by the parties and attempting to paralyse the company in the course of its business; and
  • generally acting in an “unfairly prejudicial” manner.

In Munstermann and a recent decision of the Queensland Court of Appeal in Asia Pacific Joint Mining Pty Limited v Allways Resources Pty Limited, the courts have confirmed the definition of “oppressive conduct” and the relief that will be provided to an oppressed shareholder, if the following criteria are met:

  • the test of oppression is an objective one based on what the “objective commercial bystander” would consider “unfair or prejudicial” in all of the circumstances of the individual matter;
  • oppressive conduct is “something which lacks probity and fair dealing, is something which is burdensome, harsh or wrongful. Inequitable or unjust, or exhibits commercial unfairness”;
  • oppressive conduct does not have to be unlawful or in breach of a director’s fiduciary duties to be considered oppressive;
  • conduct that has the effect of paralysing a business in its day-to-day operation will be oppressive particularly where the oppressor is using “strong arm tactics”. The courts are very wary and take a dim view;
  • a 50 percent shareholder can seek relief if there is no readily apparent way to control or prevent the oppression;
  • the court’s discretion under the Act is very wide. A court will consider various options including a forced share buy-out (being the most common remedy) to allow the shareholders to make a clean break; and
  • a court will only look to wind up an otherwise solvent company as a last resort and such relief will not be granted if a less drastic form of relief is available and appropriate.

In both Munstermann and Asia Pacific Joint Mining, the court ordered that the oppressor shareholder buy out the oppressed shareholder’s shares at a value decided by the court or by an independent forensic valuer. The respective companies were viable, trading well and with significant accountable assets, and therefore did not warrant a winding up order.

The courts will equally look at the unfortunate consequence of equal shareholder disputes as far as it concerns the prevention of business paralysis or the stagnation of corporate prosperity, the diminution of business profits, a down-valuing of stock, assets and good-will and the avoidance of a continued erosion of trust and respect between the parties, which further impairs the ongoing viability of the company.

Protracted litigation can be avoided by the parties entering into a carefully drafted shareholders’ agreement. This is always the most preferable course notwithstanding the parties’ initial trusting and enthusiasm in embarking on a new and life-changing venture.

This agreement should contain provisions to enable the timely resolution of seemingly inescapable shareholder deadlock disputes. Such provisions should include the ability of one shareholder to acquire the shares of the other in accordance with an accepted independent valuation. The agreement should also include referral to an independent arbitrator or other avenues of dispute resolution.

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