SHAREHOLDER OPPRESSION REMEDIES – SECTION 232 OF THE CORPORATIONS ACT 2001

by Drazen Kozaric

Overview of Section 232

Section 232 of the Corporations Act provides a remedy for company members who feel that the conduct of the company’s affairs is oppressive, unfairly prejudicial, or discriminatory. It is part of the statutory framework that aims to balance the interests of majority and minority shareholders, ensuring that the power dynamics within corporations do not unfairly disadvantage a minority group. It allows shareholders to bring actions against the company or others within the company (i.e. directors).

The key components of section 232 are as follows:

1. Oppressive Conduct: This refers to situations where the conduct of the company or its management is detrimental to the interests of one or more shareholders, or the company itself. Oppressive conduct often involves:

1. • unfair treatment;
   • disregard for shareholders’ rights;
   • actions that benefit the majority at the expense of others;
   • increasing salary of directors;
   • non payment of dividends;
   • diluting the shareholders’ interest etc.
2. Unfairly Prejudicial Conduct: This occurs when the actions of the company cause harm or disadvantage to one or more shareholders, often in a manner that is not just or reasonable. Prejudicial conduct can include unfair exclusion of shareholders from decision-making processes or actions that diminish the value of their shares.
3. Unfairly Discriminatory Conduct: This arises when certain shareholders are treated differently in a way that is not justified by the circumstances or the company’s interests, typically to the benefit of others.

What Remedies Are Available?

If the court determines that the conduct of the company is oppressive, unfairly prejudicial, or discriminatory, Section 233 of the Corporations Act allows the court to issue a range of remedies. These remedies can include:

1. Order for the company to be wound up: The court may decide that the best way to resolve the dispute is to order the company’s liquidation.
2. Order for the purchase of shares: In some cases, the court may order that shares be purchased from the aggrieved shareholder, often at a fair value, in order to resolve the dispute.

3. Order for rectification of conduct: The court may order the company to change its conduct or policies in a way that is fair to all shareholders, especially if the conduct in question is discriminatory or prejudicial.
4. Other orders: The court has the discretion to issue other orders that it deems just, depending on the specific circumstances of the case.

Who Can Apply Under Section 232?

An application for an order under section 233 in relation to a company may be made by:

 (a)  a member of the company, even if the application relates to an act or omission that is against:

 (i)  the member in a capacity other than as a member; or

 (ii)  another member in their capacity as a member; or

 (b)  a person who has been removed from the register of members because of a selective reduction; or

 (c)  a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or

 (d)  a person to whom a share in the company has been transmitted by will or by operation of law; or

 (e)  a person whom ASIC thinks appropriate having regard to investigations it  is conducting or has conducted into:

          (i)  the company’s affairs; or

          (ii)  matters connected with the company’s affairs.

Key Elements of Section 232 Applications

There are several critical aspects that need to be considered when applying for relief under Section 232:

1. Standing: The applicant must have an appropriate standing to bring the application. This generally means that the applicant is a shareholder of the company. In some cases, an interested party may be able to apply.
2. Oppression or Unfair Prejudice: The applicant must demonstrate that the conduct of the company is oppressive, unfairly prejudicial or discriminatory. The court will assess whether the company’s conduct has harmed the applicant’s interests or treated them unfairly.
3. Reasonable Expectation: The applicant must show that they had a reasonable expectation of fair treatment or specific conduct by the company or its directors. If these expectations are not met, and the conduct is found to be oppressive or prejudicial, the application may succeed.
4. Relief: The applicant must seek specific relief, whether it be winding up, share buybacks, or another form of redress.

Case Law and Interpretation

Section 232 has been subject to judicial interpretation over the years. Courts have looked at various cases to clarify the meaning of oppressive conduct and unfair prejudice.

In the landmark case of Gambotto v WCP Ltd (1995), the High Court in a decision seen as a major victory for minority shareholders, ruled that for an amendment to a corporate constitution permitting the expropriation of shares to be valid, it must serve a proper purpose and not be oppressive. The court narrowly defined a “proper purpose” as an amendment being valid only if the expropriation was intended to prevent harm or detriment to the company. It is not enough for the expropriation to benefit the company in other ways, such as providing tax or administrative advantages. This ruling also emphasized that the price paid to those whose shares were expropriated must be fair. The Court also determined that the burden of proof lies with the party seeking to expropriate, requiring them to demonstrate that the power was exercised validly.

Practical Considerations

For company members, understanding the application of Section 232 is important, as it provides a means to challenge unfair conduct. However, it is crucial to approach such applications with caution. Legal proceedings can be lengthy, complex, and expensive. Furthermore, the courts are likely to take a careful view of the facts to ensure that a genuine case of oppression or unfair prejudice exists.

Corporate governance practices, transparency in decision-making, and effective communication among shareholders are essential steps for avoiding disputes under Section 232. Regular reporting, the maintenance of shareholder rights, and ensuring that all members are treated equitably can minimize the risk of legal challenges under this provision.

Conclusion

Section 232 of the Corporations Act is an essential safeguard in Australian corporate law, ensuring that the rights of minority shareholders are protected against oppressive, prejudicial, or discriminatory conduct. It offers remedies that can help resolve disputes within a company, ranging from winding up the company to ordering the purchase of shares. For individuals involved in corporate governance, it is crucial to understand the implications of Section 232 to prevent potential disputes and to ensure fair and just treatment for all parties involved.