How to Avoid Oppressive Conduct in Companies: Key Insights

n an ideal world, directors and shareholders of a company would always be in sync. In reality, however, competing interests often create conflict between directors, shareholders, or even shareholders themselves. While internal conflict is common, it doesn’t have to spell disaster. Companies that adopt strong corporate governance practices, supported by clear shareholder agreements and constitutions, are better positioned to handle internal issues effectively. However, when it comes to oppressive conduct, the stakes are much higher.

What is Oppressive Conduct?

Oppressive conduct refers to actions taken by a company or its shareholders that either:

• Are against the interests of the shareholders as a whole, or
• Are oppressive, unfairly prejudicial, or discriminatory toward a shareholder.

The Corporations Act prohibits oppressive conduct, and those responsible can face serious legal consequences.

Examples of Oppressive Conduct

Directors or majority shareholders might unintentionally engage in oppressive conduct while trying to act in the company’s best interests. However, even well-meaning actions can lead to legal claims if they harm other shareholders. Common examples include:

• Paying dividends to yourself while excluding other shareholders.
• Making major business decisions or passing resolutions without consulting other shareholders.
• Misusing company funds for personal or non-business-related purposes.
• Withholding critical information from shareholders.
• Diluting shareholding intentionally to gain a voting majority.

How to Avoid Oppressive Conduct

Directors and shareholders must recognize that the company, its directors, and its shareholders all have distinct roles and responsibilities. Even if you’re the majority shareholder and managing director, you can’t treat the company as your personal asset.

A well-drafted shareholder agreement and governance documents are essential in avoiding claims of oppressive conduct. Following these documents ensures that shareholders are treated fairly and that decisions are made transparently. It’s much harder for someone to claim oppressive conduct when you follow established processes and governance rules.

Even if you act in good faith, a disgruntled shareholder may still try to claim oppressive conduct, whether or not their case is justified. Defending against these claims is costly and time-consuming, and even if you win, you’ll still face legal fees and stress. To protect your company, adhere to governance documents, maintain transparency, and exercise care when making decisions.

Remedies for Oppressive Conduct

Courts provide several remedies for oppressive conduct, and the consequences for the responsible party can be significant. Some possible remedies include:

1. Regulating the Company’s Affairs: The court can order changes to the company’s constitution or direct how the company should be managed.
2. Financial Compensation: The company or individuals responsible for the oppressive conduct may have to pay compensation to the oppressed shareholder for financial losses, such as a decrease in the value of their shares.
3. Modifying Shareholder Rights: The court can order changes to the rights attached to shares, such as voting or dividend rights.
4. Buyout of the Oppressed Shareholder: The court may order the company or majority shareholder to buy out the oppressed shareholder at a fair value, resolving the conflict and separating the shareholder from the company.
5. Changing Directors: The court may order the appointment or removal of certain directors.
6. Winding Up the Company: In extreme cases, the court may order the company to be wound up.

Seek Legal Advice Early

If you’re concerned that you may have been subjected to oppressive conduct or fear that your actions could be seen as oppressive, it’s crucial to seek legal advice as soon as possible. At Allied Legal, our team of commercial law experts has significant experience helping directors and shareholders resolve disputes. We can guide you through your options and help protect your interests.

To discuss your situation or to get more information, contact us at (03) 8691 3111 or email hello@alliedlegal.com.au.