Further clarity in the law of shareholder oppression
Shareholder oppression cases require a careful consideration of the circumstances in which the aggrieved shareholder has brought its claim. This is true in the context of closely-held, family-run businesses. The recent Victorian Supreme Court case of Peter Exton & Anor v Extons Pty Ltd & Ors[1] illustrates such a scenario. The Court’s decision is noteworthy for its exploration of a number of important factors in shareholder oppression cases, including:
whether the oppressive conduct complained of need be ongoing at the time of the court hearing;
whether the conduct of the party seeking relief is relevant to an assessment of the conduct of the offending party; and
the kinds of orders a court can make in favour of an aggrieved shareholder.
The facts
The first plaintiff, Peter Exton, held 50 percent of the shares in each of the defendant companies (together, the ‘Extons group’). The Extons group carried out earthworks and related contracting work, and also sold machines associated with earthworks. The sixth defendant, Ian Exton, was Peter’s brother. Together, the brothers were effectively equal owners and equal directors of the business and had carried on the business together since the early 1980s.
In around March 2015, the brothers disagreed about the management of the Extons group business. Peter suggested to Ian that they appoint a manager to manage the business. Peter perceived that Ian had failed to treat him as an equal director of the business and that Ian had carried on the Extons group business in a manner unfairly prejudicial to, and unfairly discriminatory against, him as a member, director, and employee of the Extons group. The conduct alleged included:
Ian procuring payments to himself, his family and friends (albeit some of which was later repaid);
Ian downplaying Peter’s role in relation to suppliers and employees;
Ian causing Extons group to withhold Peter’s salary; and
Peter being denied access to Extons group’s financial information.
Peter commenced proceedings against Ian and the Extons group, applying to the Supreme Court under sections 232 and 233 of the Corporations Act 2001 (Cth). Under these provisions, a shareholder may sue on the basis that a company’s affairs, actual or proposed are:
contrary to the interests of its shareholders generally; or
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, one or more shareholders whether in a shareholder capacity or in any other capacity.
Peter sued on both these grounds. Ian and the defendants denied Peter’s claims.
The Court’s analysis
The matter was heard before Sifris J, who observed at the outset that the ‘real issue’ between the parties and ‘the most significant in terms of the relief to be granted’ was the difference in the parties’ valuation of Peter’s shares;[2] Peter had wanted Ian to sell his shares, and Ian asked for a price higher than Peter had offered.
His Honour proceeded to answer four key questions in the case, namely:
Is the grant of relief under the oppression provisions contingent on the alleged oppressive conduct extending to the date of the hearing?
What constitutes conduct ‘contrary to the interests of members [that is, shareholders] as a whole’, for the purposes of section 232(d)?
What constitutes conduct that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member, for the purposes of section 232(e)?
Is the conduct of the party seeking relief relevant to an assessment of the conduct of the offending party?
His Honour addressed these questions in turn.
Is the grant of relief under the oppression provisions contingent on the alleged oppressive conduct extending to the date of the hearing?
His Honour analysed a number of previous decisions, concluding that the High Court appears to have adopted the view of the New South Wales Court of Appeal in Campbell v BackOffice Investments Pty Ltd.[3] In that case, the Court of Appeal held that it is not necessary that the oppressive conduct complained of be ongoing at the time of the hearing. On the basis of this and other case authorities, his Honour held that whether or not the conduct is ongoing nonetheless ‘will be of relevance in determining whether and to what extent orders should be made. There may be no need or utility for any remedy. Any remedy will depend on the particular circumstances of the case’.[4]
This approach appears consistent with the discretionary nature of the courts’ power to order relief from oppression.
On the facts as made out, Ian had diverted money from the Extons group to a company owned by Ian and his wife. This brought his conduct within sections 232(d) and (e) as it was a breach of Peter’s fiduciary and statutory duties as a director. The money was repaid prior to the Court hearing but, in his Honour’s reasoning, ‘although the oppression in this regard has gone, the section is enlivened’.[5]
What constitutes conduct ‘contrary to the interests of members as a whole’?
The Court looked to the wording of section 232(e) — ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity’ — and held that the grounds in section 232(d) are ‘separate and distinct’ from those in section 232(e).[6] His Honour considered that ‘a breach [amounting to something that is contrary to the interests of shareholders as a whole] may not necessarily involve commercial unfairness’.[7]
His Honour observed in obiter that, in the context of a family-run business:
‘Whether breaches of duty in a small family type company, where there is an overwhelming identity of interest between shareholders and directors, fall within the sections is a related matter. There is authority … to the effect that where there is consent or ratification of such conduct, it may, in context and in the circumstances, not be contrary to the interests of members as a whole or indeed unfair’.[8]
Notwithstanding these comments, his Honour rejected the defendants’ argument that any breach was less significant in a family-owned company where shareholders and directors were identical. Given the particular facts of the case and the kind of conduct complained of, his Honour did not consider that such a situation gave a basis for consent, acquiescence or ratification of what had been done, instead holding that:
‘The proposition [of consent or acquiescence] may be relevant to hotel bookings or restaurant charges and the like, but not an egregious breach of duty, not consented to or ratified [by the complaining party] ...’[9]
What constitutes conduct that is oppressive to, unfairly prejudicial to or unfairly discriminatory against a shareholder?
For Sifris J, the body of case law showed that ‘the critical issue [in determining whether conduct is captured by section 232(e)] is commercial unfairness, judged objectively’.[10] His Honour further noted that there might be situations where conduct is unfair but is ‘fully justified’,[11] this necessarily depending on the facts and circumstances.
In the present case, his Honour held that some of the conduct complained of did not contravene sections 232(d) or (e). His Honour considered this to be the case in light of the brothers’ falling out, such a circumstance ‘always [giving rise to] suspicion, mistrust and even paranoia’.[12] In that context, his Honour considered, some of the conduct complained of could be considered ‘neither unfair nor unexpected’.[13]
Is the conduct of the party seeking relief relevant to an assessment of the conduct of the offending party?
His Honour considered that the preponderance of case law on the question suggested ‘the conduct of the applicant [seeking relief from oppression] may well be a relevant — and in some cases most relevant — factor in determining the nature and extent of any relief’.[14] Coupled with the Court’s comments regarding the typical consequences of a falling-out, it appears his Honour may have considered Peter’s own conduct when deciding that some of his brother’s conduct was not sufficiently offensive under the shareholder oppression provisions.
What was the appropriate remedy?
Courts have a broad discretion in the kinds of orders that can be made in response to a shareholder oppression claim, including ordering that the company be wound up. Peter sought orders that Ian and Ian’s shareholding company sell their shares in the Extons group to Peter and Peter’s shareholding company. Given the strained relationship with his brother, Ian preferred that the Extons group be wound up.
Having identified a number of matters that fell within the shareholder oppression provisions, Sifris J concluded that the ‘only proper remedy’ was a buy-out and that the parties should take steps to effect this.[15] In doing so, his Honour rejected the defendants’ submission that the only solution was to have the Extons group of companies wound up. His Honour did so not only because it was apparent that the parties had entertained the possibility of a buy out (and had merely disagreed on a price for the shares) but also because:
as a matter of policy, courts are reluctant to order a winding up if there is a preferable form of relief; and
Ian, as a defendant seeking a winding up order, had not come to the Court with ‘clean hands’ (although his Honour noted that this was not a determinative factor).
Conclusion
Oppression cases, particularly those involving closely-held, family-run businesses, can involve strong feelings of acrimony. The decision of Sifris J in Peter Exton & Anor v Extons Pty Ltd & Ors provides a useful exploration of some of the factors courts consider when determining whether to order relief from oppression, as well as the particular form that relief might take.
[1]: [2017] VSC 14.
[2]: Ibid [17].
[3]: [2008] NSWCA 95. For his Honour, the High Court had adopted this approach in its later decision in Campbell v BackOffice Investments Pty Ltd [2009] HCA 25, [68]-[72] (French CJ), [182] (Gummow, Hayne, Heydon and Kiefel JJ).
[4]: Peter Exton & Anor v Extons Pty Ltd & Ors [2017] VSC 14, [34] (emphasis added).
[5]: Ibid [59].
[6]: Ibid [39].
[7]: Ibid.
[8]: Ibid.
[9]: Ibid [61].
[10]: Ibid [48].
[11]: Ibid.
[12]: Ibid [69].
[13]: Ibid [72].
[14]: Ibid [49].
[15]: Ibid [73].