The case of Sleeping Duck brings to light the principles of shareholder oppression.
Picture this:
You help run your family business. Your two siblings are majority shareholders, each owning 40%, while you are a minority shareholder with 20%. As a family-run business, key decisions are made informally, and for a while, this system works.
But over time, things change. Your siblings begin excluding you from decision-making. You’re no longer involved in managing the company, you’re not receiving your fair share of profits, and you feel increasingly iced out.
Is there any legal recourse for this type of wrongful behaviour?
Section 232 of the Corporations Act 2001 (Cth)
As a matter of fact, there is. Under section 232 of the Corporations Act, minority shareholders who experience oppressive conduct have legal remedies available. This section targets conduct by majority shareholders or directors that is oppressive, unfairly prejudicial, or discriminatory toward others.
Simply put, it is defined as the conduct or proposed conduct of the company’s affairs, including both act or omission and resolutions, which is oppressive, or unfairly prejudicial, or unfairly discriminatory against others.
This does not encompass all oppressive action – it must be judged on an objective and reasonable basis, taking into consideration instances of what has and has not qualified as such action previously. In reality, being a minority shareholder means that you hold limited control. Therefore, the actions of majority shareholders, who have more voting and decision-making power, must go beyond mere disadvantage.
If oppressive conduct is found, the court has the power to enact certain orders, such as winding up the company, injunctive relief against oppressive action, ordering the majority shareholders to buy out the oppressed minority’s shares at a fair value, compensation for loss caused by oppressive conduct, and so on.
A useful example is the case of BBHF Pty Ltd v Sleeping Duck Pty Ltd [2024] VSC 320. This case involved allegations of oppressive conduct by a company against the owner of another business, who, as a minority shareholder and advisor to the company, claimed to have been unfairly treated.
BBHF Pty Ltd v Sleeping Duck Pty Ltd [2024] VSC 320
Material facts
The case was heard in the Supreme Court of Victoria and involved a dispute between the plaintiff, Dr. Shiffman (owner of BHHF), and the defendant, the founders of Sleeping Duck. Dr. Shiffman, a minority shareholder in the company, alleged that the founders had engaged in conduct that was oppressive or unfairly prejudicial to him.
Dr. Shiffman claimed that he had entered into an agreement with Sleeping Duck’s founders under which BHHF would receive 5% of the founders’ shares, along with an option to acquire additional shares, in exchange for his advisory services. He argued that his contributions as an experienced entrepreneur had significantly benefited the company. Despite this, Dr. Shiffman alleged that the defendants engaged in oppressive behavior, including excluding him from management decisions, issuing shares through an employee share option plan that diluted his stake, and blocking him from realizing the full value of his investment.
In response, the defendants contended that Dr. Shiffman’s role was purely advisory and did not warrant involvement in the company’s management.
Key legal holdings
There was no oppression established by the plaintiff against the company under section 232 of the Corporations Act 2001 (Cth);
The plaintiff failed to prove any of the alleged acts of oppression;
Where legitimate business decisions are made by management, courts will be reluctant to intervene;
Reasons for judgment
The court found no evidence to support the plaintiff’s claimed right or expectation to participate in management. While he acted as an advisor and mentor, he did not perform management duties;
The issuance of shares under an employee share option plan was not oppressive. The plaintiff was aware of and agreed to the plan, which was approved based on reasonable commercial advice, despite it diluting his investment;
The founders’ decision to reject business proposals from the plaintiff was deemed reasonable and aligned with the parties’ prior understanding;
There was no agreement obligating the defendant to provide assistance to the plaintiff to sell down the plaintiff’s shareholding.
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