Oppressive Conduct

In an ideal situation, directors and shareholders of a company would enjoy perfect harmony in operating their company. In reality, this is not always the case due to the oft-competing interests of directors with shareholders, and shareholders with other shareholders. Internal conflict in a company is often inevitable, but it doesn’t have to be fatal. Companies with good corporate governance practices and documents (primarily, shareholder agreements and constitutions) are well placed to navigate internal conflict effectively. However, not all conflict can be easily managed and one area that can put a company in serious hot water is oppressive conduct.

Oppressive Conduct Defined

Oppressive conduct is defined in the Corporations Act as conduct undertaken by the company or the shareholders that is seen to be either –

1. Contrary to the interests of the shareholders as a whole; or
2. Oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder.

Oppressive conduct is prohibited by the Corporations Act and can lead to serious consequences for the responsible party.

Examples of Oppressive Conduct

Often due to nothing else but ignorance, directors or majority shareholders sometimes take action that can be considered oppressive when they only had good intentions. Some things to be careful of that may trigger oppressive conduct action include:

1. Paying yourself a dividend to the exclusion of other shareholders.
2. Making material business or shareholder decisions without notifying or getting the approval of other shareholders.
3. Using company funds for things other than operating the company.
4. Failing to provide sufficient information to shareholders when passing resolutions.
5. Withholding information from shareholders.
6. Intentionally diluting shareholding in order to gain a voting majority.

Avoiding Oppressive Conduct

It is critical that directors and shareholders understand that the Company, each director and each shareholder are different entities with different roles and responsibilities. Even where you have founded a company and are both the majority shareholder and managing director, this doesn’t mean you have free reign to treat the Company as your plaything.

In the context of a shareholder dispute, this is where the importance of good governance documents, like a robust shareholders agreement, comes in helpful. It is far more difficult to allege oppressive conduct where a robust shareholders agreement has been strictly complied with.

Even where you do everything morally right, a disgruntled shareholder might look into remedies under oppressive conduct if only as a matter of pride or vindication. Even if you are entirely in the right, defending such an action is going to be timely and expensive. People often fail to realise that even when they are successful in legal action, the reality of litigation is that no one really wins. You won’t recover all of your legal fees (generally you’ll only recover 40-60%), and there’s no getting back the time and stress expended. Ongoing compliance with directors duties and governance documents, and exercising a high degree of care and diligence when operating a company is the best way to protect your company (and yourself) from such a dispute.

Remedies for the Oppressed

The remedies available for oppressive conduct are diverse and can be onerous on the responsible party. Some of the remedies available for an oppressed shareholder include:

• The court can make orders to regulate the Company’s affairs, for example altering its constitution or directing how it should be managed moving forward.
• The company or individuals who acted oppressively can be ordered to pay financial compensation to the oppressed shareholder. This is typically relevant where the oppressive conduct has caused financial loss (such as the value of a shareholders shares decreasing).
• A court may make an order modifying rights attaching to shares or specific classes of shares, such as voting rights or dividend rights.
• An order that the company or majority shareholder buy out the oppressed shareholder at a fair value. This can often be a best case scenario, as it resolves the dispute and results in a separation of the disgruntled shareholder from the company.
• The court can order that certain directors are appointed or removed.
• An extreme outcome, the court also has the ability to order for the winding up of the company.

Seek Advice

If you are concerned that you may have been oppressed or acted oppressively, our team of commercial law experts at Allied Legal can help, as we have a wealth of experience assisting directors and shareholders navigate such disputes. You can connect with one of our commercial law experts by giving us a call on (03) 8691 3111 or sending us an email at hello@alliedlegal.com.au.