Shareholder Agreements

The marginalisation of one shareholder or group of shareholders is called ‘shareholder oppression’. The shareholder oppression claims heard in Australian courts are in situations where a minority shareholder (or shareholders) are being unfairly treated by a larger (and usually a majority) shareholder. The oppressive conduct provisions of the Corporations Act are
commonly used in conjunction with a claim of breach of director’s duty or in bringing an application to wind up the company entirely. Situations in which shareholder oppression occurs may be avoided by using a minority shareholder agreement, particularly in situations where the minority shareholders are making a significant financial contribution to the company.

1 Shareholder oppression
Shareholder oppression occurs when majority shareholders in a corporation take action thatunfairly prejudices the minority. It most commonly occurs in small unlisted companies, because the lack of a public market for shares leaves minority shareholders particularly vulnerable. In a small, private company minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. The majority shareholders may harm the economic interests of the minority by refusing to declare dividends or locking the minority out of the corporate premises and even deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them.
An oppressed minority shareholder can ask the court to dissolve the corporation or to hold the
corporation’s leaders accountable for their fiduciary responsibilities. Contractual protections, suchas a minority shareholder agreement, are a potential alternative to statutory protections.

2 Legislative remedies for shareholder oppression Under the Corporations Act 2001, shareholders may seek remedies in circumstances where the controllers of a company unfairly misuse their positions of power or breach their duties. Part
2F.1 of the Corporations Act provides remedies to protect shareholder rights in such
circumstances.
2.1 Eligible claimantsSection 234 of the Corporations Act sets out who may apply for an order. They include:
(a) a shareholder of the company;
(b) a person who has been removed from the register because of a selective reduction;
(c) a person who has ceased to be a shareholder and the application relates to the circumstances in which they were removed.
2.2 Remedies
Section 232 of the Corporations Act provides remedies for what is referred to as ‘oppressive
conduct’. That section of the Act allows a court to grant relief to applicants if it is of the opinion
that:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of shareholders or a class of shareholders of
a company,
(d) is either:
(i) contrary to the interests of the shareholders as a whole; or
(ii) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a
particular shareholder.2
The court may make such orders that it considers appropriate including compelling a
reinstatement, a compulsory sale and purchase of shares, or winding up. The test here is commercial unfairness, looked at in light of the history of the company’s affairs and what the owners intended when they formed or joined the company.
2.3 Winding up
The most common remedy sought and granted in these types of applications is winding up.
Winding up is covered under Section 461 of the Corporations Act.
Applications under Section 232 of the Corporations Act are usually made in conjunction with an application for winding up on the grounds that it is just and equitable under s 461 of the Act. The court may order a company be wound up under this Section even if the company is still solvent. The court could make a winding up order under s461 pursuant to an application under s 232 if it were of the opinion that the directors have acted in their own interests or in any other manner that appears to be unfair or unjust to other members.

A winding up order would also be likely if the court were to form the opinion that the
directors/shareholders are incapable of working together with no wrongdoing by anyone.
3 Glossary
Options give the right (without the obligation) to transact at a predetermined price within a certain time period.
Call option: the buyer has the right (but is not required) to buy an agreed quantity from a seller by a certain date (the expiry) for a certain price (the strike price).
Put option is the right to sell at a predetermined strike price by a certain date.
The party that sells the option is called the writer of the option. The option holder pays the optionwriter a fee, called the option price or premium. In exchange for this fee, the option writer isobligated to fulfil the terms of the contract should the option holder choose to exercise the option

This information is not nor represents legal advice by Precedents Online or its Authors.