Free Sample   Corporate Law : For Minority Shareholders

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Corporate Law : For Minority Shareholders

  0 Downloads   |   12 Pages 2,825 Words   |   Published Date: 29/12/2017

Question:

Discuss about the Corporate Law For Minority Shareholders.

 

Answer:

Introduction

A minority shareholder, as the name suggests, is a person who has shares in a company but which are very less in number. Any decision of the company is made by passing resolutions in majority. This holds the minority shareholders in a losing position. Even if they want to protect their interests, they cannot do so as they do not hold the majority. To protect the interests of such minority shareholder from such oppression, certain remedies are available with the minority shareholder (Macmillan, 2003). The present case deals with the oppression of minority shareholders and the remedies that are available to them.

Oppression of Minority Shareholders

As stated above, the work done in any company is based on the principle of majority rule. The majority shareholders and the Board make the decision, which have an impact on the overall company and includes an impact on the minority shareholders.  And herein is the problem. The rule of majority is accompanied by the risk of abuse. This concept was established in the case of Foss v Harbottle (1843) 2 Hare 461 (Boyle, 2002). The recognition of such risks has led to the introduction of statutory remedies for the relief of minority shareholders (Lexis PSL, 2016).

In the given case, Walter and Shirley are minority shareholders in Happy Days Ltd. The Board of Directors of Happy Days Ltd. has changed certain policies of company which has resulted in an oppression of Water and Shirley being the minority shareholders. The change in policies includes the adoption of no dividend policy, diversification of company’s business and an increase in the fees. These decisions were taken without the any participation of minority shareholders. Further, these decisions have a significant negative impact on the interests of these minority shareholders. Hence, an oppression of minority shareholders is present in this case (Law Teacher, 2016).

Statutory Remedies

Part 2F.1 in the Corporation Act 2001 (Cth) contains sections regarding oppressive conduct of affairs (Tomasic, Bottomley & McQueen, 2002). As per section 232 of this Act the Court has the liberty to make an order under section 233 in case the performance of the affairs of a corporation; or a proposed or an actual act or omission by or on behalf of such corporation; or a proposed resolution or a resolution of members of a class of members of a corporation is either opposing to the interests of the members totally; or unfairly prejudicial or unfairly discriminatory or oppressive to or against a member(s) in any capacity. A notable case in this regard is Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 334 [72] (High Court of Australia, 2009).  

When unfairly prejudicial or unfairly discriminatory or oppressive conduct is established in a case, the Court has the power to make an order which grants relief stated in section 233 of this Act (Corporations Act 2001, 2016). The Court can make an order for winding up of a company; or a modification or revocation of the constitution of the company; or regulation of the conduct of affairs of a company; or purchase of shares by any person or member of the company which have been transmitted by operation of law or by will; or purchase of shares with suitable diminution of the share capital of the company; or authorize a person or member to whom the shares of the company have been transmitted by operation of law or by will, to defend, discontinue, institute or prosecute particular dealings on behalf of or in the name of the company; or appointment of a receiver for all or some of the property of the company; or imposing a restriction on a person from engaging in particular conduct or from doing a particular act; or the Court may require a person to do some particular act (Victorian Law Reform Commission, 2016).

The order that a Court can make may fall outside the mentioned list as the Court has the liberty to provide relief in the manner it deems most appropriate (Latimer, 2012). But the aggrieved party would have to mention the nature of relief it seeks from the Court. The Court awards such remedy which is the least interfering and which eliminates the oppression (Austin & Ramsay, 2013). In the case of Re Spargos Mining NL (1990) 3 ACSR 1, 50–1, the Court ordered appointment of a new board, an amendment of the articles of the company and reporting by the new board to the court in every 3 months (Blumberg, 2004). Further, an action can be taken not only against the company, but also against the directors and other shareholders.

Being the member of Happy Days Ltd, Walter and Shirley can apply for the statutory remedies mentioned in Section 233 of the Corporation Act 2001 (Corporations Act 2001, 2016). The first remedy stated in this section is winding up of the company. This order is passed as a last resolve and is considered very drastic and is not usually awarded in cases of oppressive conduct. Especially when the company is doing well in trade, the other available remedies are awarded by the court. In this case, Walter and Shirley would not be able to apply for this remedy.

The next relief available for Walter and Shirley is the modification or revocation of constitution of company. The changes made by director are not affected due to an error or loop in the constitution and hence, Walter and Shirley cannot resort to this remedy.

Walter and Shirley can apply for regulation of the conduct of company’s affair in future. The performance of the affairs of the company is currently conducted in a manner which results in harm to its members. The change in policies affects the interest of Walter and Shirley. They can prove this by making a reference to the increase in fees. Walter and Shirley have to show evidence that the steep price hike is to provide money for the proposed development in Melbourne. Also, they can make a reference to the diversification of business. In this matter, they can clearly show the a retiree requires more space than a student who moves out of the accommodation after completion of studies but a retiree spends the rest of his life in such accommodation and hence requires more space. And so Walter and Shirley can resolve their concern of increase in fees and diversification of business by using this remedy.

The shares have neither been transmitted by operation of law, and nor by will so, Walter and Shirley cannot request the Court to get their shares purchased by any member or person. Walter and Shirley should not ask for purchase of shares with a reduction in company’s share capital. The reason behind this is that the company is a growing business and running its trade. There are other members also and a reduction in share capital of company would result in oppression against such members (Willcocks, 1991). Hence, Walter and Shirley cannot use this as a remedy.

Walter and Shirley can ask the court to discontinue the diversification of the business of the company. They can also request the court to pass an order to discontinue the increase in fees. The proof would be the same as given in the case of conduct of company’s affairs in the future.

As the shares have neither been transmitted by operation of law and nor by will so Walter and Shirley cannot ask the Court to authorize any member or person to defend, discontinue, institute or prosecute particular dealings on behalf of or in the name of the company. And as the company is not being wound up, Walter and Shirley cannot request for appointment of a receiver for the property of the company.

Walter and Shirley can request the court to restrain the directors from diversifying the business of the company. The proof would be the same as given in the case of conduct of company’s affairs in the future (Keay, 2011). Further, Walter and Shirley can also request the court to prevent the Chairman of the company from defaming Walter. The proof of defamation is evident from the interview conducted by Channel 7 news. In that interview the Chairman had made very rude remarks about Walter. Further, Walter and Shirley can request the Court to stop the Chairman from forcing Walter out of the village. This would relieve Walter and Shirley from the concerns of moving out of the village where they have been living for the last three years.

Walter and Shirley should also request the Court to direct the company to restart the payment of dividends as it is a right of a member. They can also request the court to direct the Chairman to pay the damages in form payment for knee replacement which resulted from the knee damage that Walter received as a result of scuffle between him and the Chairman. This would ensure that their concerns regarding dividend and knee replacement are met. Lastly, going beyond these statutory remedies, Walter and Shirley can ask the court for monetary damages due to the negligence of the Chairman which resulted in injury to Walter.

 

Practical Implications of Statutory Remedies          

The court passes a winding up order when it proved to be just and equitable. In case Walter and Shirley apply for a winding up of the company, they would have to show to the satisfaction of the court that the winding up would result in huge sur and would not be in the nature of an insolvency procedure. The court passes a winding up order on the same basis as it grants a relief for an unfair prejudice application.

In reality, a winding up order is not considered to be beneficial for the minority shareholders as the breakup value of the assets of the company is usually small. Also, the purchases available are usually the majority shareholders who have resulted in such oppression (Bottomley, 2016). As stated above, winding up is a drastic remedy and is considered as the last resort to be awarded as a remedy. Hence, it is not practical for Walter and Shirley to consider this statutory remedy.

The constitution of a company is the document which contains the rights, duties and powers of a company and provides the rules which govern the relationship between the company and its various stakeholders. The Constitution binds the directors and shareholders to abide the provisions of the constitution.  Modifying or revoking a constitution is not practical. It is formed after taking into consideration a lot of factors and modifying it as a remedy is way too extreme. So, Walter and Shirley should not consider this statutory remedy.

Regulation of conduct of a business is quite normal in case of a remedy involving oppressive conduct. In case a minority shareholder is harmed from the oppressive conduct, the best way to resolve the situation is by regulating the affair of the business (Baxt, 2005). This ensures an absence of oppressive conduct in future.

In a landmark case of Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, [89], the judge held that the complained conduct should be related to the affairs of the company (Berkahn, 2008). The court has to examine whether the conduct was in interest of the company or not. Here, the conduct was oppressive as it was against the interests of minority shareholders (CCH Australia Limited, 2011). Further, the judge in this case held that even though the affairs may be against minority shareholders, but if the conduct is in favor of the company as a whole, then the company’s interest would be given preference instead of the interests of minority shareholders. Hence, this remedy is unrealistic in the case of Walter and Shirley.

The shares have neither been transmitted by operation of law and nor by will so asking the Court to get their shares purchased by any member or person is not a practical approach for Walter and Shirley. Even if such had been the case, by losing their shares, they would have no further rights in the company. Moreover, such shares are usually purchased by the majority shareholders and beat the whole purpose of seeking a remedy as a result of oppressive conduct.

The reduction of share capital has negative impact not only on the company but all of its shareholders. By asking for a reduction in the share capital, Walter and Shirley would themselves be at a loss.

By requesting the court to discontinue the diversification of the business of the company and to discontinue the increase in fees, Walter and Shirley would prove ass a hurdle in the growth of the company. Any diversification, a company grows, and stopping the growth of the company is completely impractical. Further, the fee has been increased due to the rise in demand by the residents of more facilities. And the contract between Happy Days Ltd and the residents does allow for a review of annual fees. This gives company the right to increase the rent. Further, if the company does not increase the fees, it would not be able to provide such amenities to the members and could also incur loss. So, Walter and Shirley would not be successful in attaining this remedy and so, this remedy is unrealistic.

As stated above, asking the Court to authorize any member or person to defend, discontinue, institute or prosecute particular dealings on behalf of or in the name of the company is impractical. And requesting for receiver for the property of the company in case of winding up of the company is also not a viable option.

As stated above, restraining the directors from diversification is not a suggestive approach. But restraining the director from making any adverse remarks against a person is a completely practical thing to do. This would result in firstly, a stoppage on such remarks in future and secondly, damages from such defamation. No one has the authority to defame any one. And so, by requesting the court to pass an order to stop the chairman from making defamatory statements would result in proper conduct on part of Chairman in the future. This type of remedy is awarded quite common in such cases.

A dividend cut is considered as a very negative act. A company is free to increase, decrease, start or stop the payment of dividend. When a company faces financial crunch as a result of weakened earnings or a loss or does not have enough funds to pay the dividends, it can stop the payment of dividend. Here, the company stopped paying dividends so as to use the retained earnings for the growth of company. A company grows with its shareholders. If the shareholders are not happy, the company would not grow. So, by cutting back the dividends, the company would actually be in an adverse state. By applying to the court for restarting the payment of dividend, Walter and Shirley would be held in a favorable position. And have a high chance of getting this remedy awarded to them by the Court. 

 

References

Austin, R.P., & Ramsay, I.M. (2014). Ford’s Principles of Corporations Law (16th ed.). Australia: LexisNexis Butterworths.

Baxt, R. (2005). Duties and Responsibilities of Directors and Officers (18th ed.). NSW: The Australian Institute of Company Directors.

Berkahn, M. (2008). Unfair Prejudice: Who has it right, economically speaking?. Journal of the Australasian Law Teachers Association. Retrieved on 10/09/16 from: http://www.austlii.edu.au/au/journals/JlALawTA/2008/7

Blumberg, P.I., et al. (2004) Blumberg on Corporate Groups (2nd ed., pp 90-14). New York: Wolters Kluwer.

Bottomley, S. (2016). The Constitutional Corporation: Rethinking Corporate Governance. UK: Routledge. 

Boyle, A.J. (2002). Minority Shareholders’ Remedies. Cambridge, UK: The Press Syndicate of the University of Cambridge.

CCH Australia Limited. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Australia: McPherson’s Printing Group.

Corporations Act 2001. (2016). Retrieved on 10/09/16 from: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

Corporations Act 2001. (2016, March 19). Retrieved on 10/09/16 from: https://www.legislation.gov.au/Series/C2004A00818

High Court of Australia. (2009). Campbell v Backoffice Investments Pty Ltd [2009] HCA 25. Retrieved on 10/09/16 from: http://eresources.hcourt.gov.au/showCase/2009/HCA/25

Keay, A.R. (2011). The Corporate Objective. UK: Edward Elgar Publishing Limited.

Latimer, P. (2012). Australian Business Law 2012 (31st ed.). NSW: CCH Australia Limited.

Law Teacher. (2016). Remedies Available to Minority Shareholders Members. Retrieved on 10/09/16 from: http://www.lawteacher.net/free-law-essays/business-law/remedies-available-to-minority-shareholders-members-business-law-essay.php

Lexis PSL. (2016). Minority shareholder protection- overview. Retrieved on 10/09/16 from: http://www.lexisnexis.com/uk/lexispsl/disputeresolution/document/393747/58XG-2F51-F18B-7005-00000-00/Minority%20shareholder%20protection%E2%80%94overview

Macmillan, F. (2003). International Corporate Law. Oregon: Hart Publishing.

Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations Law in Australia (2nd ed.). NSW: Federation Press.

Victorian Law Reform Commission. (2016). The oppression remedy in the Corporations Act. Retrieved on 10/09/16 from: http://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act#footnote-135972-53-backlink

Willcocks, P.G. (1991). Shareholders’ Rights and Remedies. NSW: Federation Press.

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