Where partners disagree about the direction of a company or minority shareholders feel unheard, there is a mechanism within company law known as oppression action.

In a business sense, oppression could relate to behaviours contrary to a shareholder’s interest. But just what constitutes a claim of oppression? A shareholder feeling unsupported or unheard isn’t necessarily an oppressed one. More so, oppression relates to weighing the benefit of the conduct to the organisation versus the shareholder’s perceived oppression – essentially, if they feel they’ve been treated unfairly.

This was evident in the Federal Court decision of Jolan v Essential Investments (No 2) [2021] FCA 1533 – the Federal Court found that the directors and majority shareholders of the defendant had acted oppressively towards the plaintiff regarding the pattern of conduct over an extended period.

So, what’s the law?

Section 232 of the Corporations Act 2001 (Cth) empowers a Court to issue any orders necessary to correct conduct that has been oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder.

The primary consideration when assessing conduct is whether there has been commercial unfairness towards a shareholder. In other words, has there been a deviation from the rules of fair play, or has a decision been made to subject a member to an unfair disadvantage or burden under the normal rules of reasonableness and fair play? The alleged conduct must be evaluated objectively considering the specific context in which it occurred, and the effect of the behaviour matters when determining whether it violated the oppression provision.

As demonstrated in the Jolan case, the Court will consider each instance of unfair behaviour, some of which may be relatively minor, to determine whether the overall impact of each action constitutes oppressive behaviour against a shareholder.

The Case

Jolan Pty Ltd (Jolan) was a minority shareholder of Essential Investments Pty Ltd (Essential Investments), a holding company for the subsidiaries – Essential Brands Group Pty Ltd, Essential Coffee Pty Ltd and Essential Coffee (NZ) Limited. The directors for Jolan, Mr and Mrs McWilliam, invested AUD$1million into Essential Investments, becoming one of their more significant shareholders.

Mr and Mrs McWilliam decided to invest because they thought it would be a quick investment and the company would experience an exit event through a business sale or initial public offering within 2 years. There was only one unsuccessful sales effort for Essential Investments during this time. Jolan attempted to sell its shares after realising that Essential Investments would not be able to complete the exit event, which caused a rift between the directors and the other shareholders.

Following this, Mr and Mrs McWilliams became the target of a continuing offensive that prohibited them from participating in the firm’s operation and thwarted their attempts to sell their shares.

Did the Court consider this a breach of section 232?

The Court determined that the collective impact of the following actions was oppressive, unfairly prejudiced, or unfairly discriminatory to Jolan.

Cutting them off from management

Jolan had the authority to participate in the management of Essential by choosing a director for the Board under a shareholders’ agreement.

Several general meetings were conducted between November 2020 and June 2021, after Jolan had started taking action to sell its shares, during which Essential’s shareholders decided to remove either Mr. or Mrs McWilliam from the Board. Every time Mr. or Mrs McWilliam was fired as a director, Jolan promptly named the other spouse as its nominee to serve as a director of Essential. A second general meeting was held to adopt a new resolution to dismiss the director.

The directors of Essential adopted a resolution in June 2021 that effectively prohibited Jolan from selecting either of the McWilliams as a director of the firm after the McWilliams had each been fired as a director on numerous occasions. Jolan was no longer allowed to be part of Essential’s management or have a director nominated to the Board after this resolution.

Restricting access to information

It was discovered that Essential’s principal shareholders and directors participated in two types of behaviour intended to prevent Jolan from accessing company-related information.

Initially, Mr McWilliam asked that specific fundamental financial data about the company be given to him so that he might give it to a potential buyer of Jolan’s shares in 2020 when the company tried to sell its shares. Despite Mr McWilliam’s repeated demands, the directors refused to give him access to this material, claiming that it went beyond what the Board had committed to divulge to minority shareholders to assist in share sales. The potential buyer lost interest without this knowledge, and the deal fell through.

Jolan’s capacity to gain knowledge about Essential’s operations also deteriorated over time. As a result, the following things happened:

  • All of Essential’s directors stopped getting updates on the three subsidiary companies in December 2020
  • Essential prohibited its directors from sharing any papers they obtained while serving as directors with any third parties from March 2021. This means that Mr and Mrs McWilliams couldn’t share information that they obtained as directors with Jolan.

Impeding an exit event through non-action.

The Court acknowledged the McWilliams’ view that their investment in Essential would only be for a limited period of two years – and this was central to their investment decision.

The shareholders’ agreement required each shareholder to do everything reasonably within their power to achieve that goal. However, Jolan was the only shareholder to make an effort to sell Essential during that timeframe. The remaining shareholders passed a resolution postponing any prospective sale for at least 12 to 18 months after specified conditions were met – but the timing for satisfying those conditions was vague.

Key takeaways

A thorough understanding of all prior dealings and interactions between an aggrieved minority shareholder and the company’s other members (and directors) is crucial, regardless of whether you bring or defend an oppression claim.

Even though some actions taken in favour of a minority shareholder may seem insignificant and not oppressive in and of themselves, those actions cannot be judged in isolation. Instead, when determining whether a shareholder has been oppressed, consideration should be given to the entire course of conduct. A Court will have the discretion to determine whether a series of decisions or actions that negatively affect a minority shareholder over an extended period constitute oppressive conduct.