Under Australia’s Corporations Act 2001, minority shareholders (including employee shareholders) can make a claim for oppressive conduct by majority shareholders in a company. Oppressive conduct is conduct that is contrary to the interests of shareholders as a whole or is oppressive, unfairly prejudicial or unfairly discriminatory to or against a shareholder or shareholders. To successfully prove a claim of oppressive conduct, the shareholders must show the unfairness they experienced goes beyond mere disadvantages. By way of example, claims may be made for situations where there have been:
- A failure to pay dividends;
- Exclusion of minority shareholders from company affairs; or
- Failure to consider the minority shareholder’s request to reduce the remuneration of a majority shareholder as director of the company.
Simply being unhappy with a decision made by a majority of shareholders through a vote or losing confidence in a board of directors’ decision-making capacity will not be enough to demonstrate oppressive conduct.
Oppressive conduct claims can be extremely damaging and expensive for companies. Courts have powers to make orders for winding up a company, modifying or repealing a company’s constitution, purchasing shares, regulating the company’s affairs or appointing receivers, amongst other things. Companies need to exercise high levels of caution that there is no oppression in their decision making or actions, including when the company has discretionary powers to act in certain ways.
There are other options available for companies who wish to offer their employees buy in to their business or start up, including the creation of a unit trust or the creation of a new company that acts as a shareholder for an operating company. In this way, employees are one step removed from being shareholders in an operating company and therefore not able to bring claims for oppressive conduct against an operating company.
If you’re a small business or start up looking at securing additional shareholders, feel free to reach out to our Bolter team today for assistance and advice. Bolter offers tailored advice around company creation, company trusts, including unit trusts, and company documents such as constitutions or shareholders agreements.