Valuation of Minority Interests in Shareholder Oppression Claims

Home In Australia, shareholders who feel oppressed or unfairly treated by the company or its directors can seek remedies under various statutory provisions. Here are some of the remedies available to shareholders: Oppression proceedings under the Corporations Act 2001 (Cth): Under section 232 of the Corporations Act, shareholders can apply to the court for relief if they believe that the company’s affairs are being conducted in a manner that is oppressive, unfairly prejudicial, or discriminatory to them. The court has broad powers to make orders to remedy the situation, including ordering the company to buy back the shareholder’s shares, ordering the company to pay compensation, or ordering the company to amend its constitution or replace its directors. Derivative actions under the Corporations Act: Shareholders can bring derivative actions under section 236 of the Corporations Act if they believe that the directors have breached their duties to the company. In such actions, the shareholder sues on behalf of the company to recover damages from the directors for any losses suffered by the company as a result of their breaches. Personal actions against directors under the Corporations Act: Shareholders can also bring personal actions against directors under section 180 of the Corporations Act if the director has breached their duty of care and diligence. This may occur if a director has made a decision that causes harm to the company, such as approving a risky investment without proper research or due diligence. Compulsory acquisition of shares under the Corporations Act: In some cases, shareholders may be able to force the company to buy their shares under section 461 of the Corporations Act. This may occur if the shareholder can show that they have been unfairly treated, and that it would be just and equitable for the company to buy their shares. The amount that is awarded will depend on the particular facts of the case.  In BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192, the Federal Court of Australia provided guidance on the principles that should be applied in valuing company shares in shareholder oppression claims. The following are some of the key principles: Compensation for oppression: The purpose of granting a remedy between parties in an oppression case is to “to compensate the oppressed shareholder for the oppression which has taken place”. Wide discretion: In cases where the relief to be granted is the compulsory purchase of shares, that object is achieved by the Court having a wide discretion to fix a price that “represents a fair value in all the circumstances”. That does not necessitate fixing a price only by reference to ordinary valuation principles. The question is to identify the price which should be paid in the circumstances. No benefit to oppressor for oppression: Where shares are to be valued as a starting point for determining the price which should be paid, the usual date for valuation is the date of the filing of the proceedings, but that is by no means a universal approach. The valuation does not value the shares at that date as if nothing but the ordinary course of business had preceded it. That would effectively allow the oppressing party the benefit of the wrongful conduct as, inevitably, that conduct has diminished the value of the oppressed party’s interest in the company before the proceedings are commenced. In Scottish Co-operative Wholesale Society v Meyer [1959] AC 324 , Lord Keith identified (at 364) that the valuation process must negate the effects of the oppressive conduct. His Lordship said the amount to be determined was: … what would have been the value of the shares at the commencement of the proceedings had it not been for the effect of the oppressive conduct of which complaint was made. This is clearly not a matter on which a calculation can be made with mathematical accuracy or by the application of strict accounting principles … Fair price to put applicant into position as if no oppression: A fair price would be the value which the shares would have had at the date of the petition, if there had been no oppression. In relation to the claim for oppression, when the court is valuing the oppressed shareholder’s interest in the determination of the relief to be awarded for oppression, the aim is to put the applicant in the position as if there had been no oppression. There are different methods of valuation that might be deployed, and there is no one size fits all answer.  Quite often, the outgoing shareholder will have been excluded from management, leaving the remaining shareholders / directors “in control”.  It is clear however from the authorities that the oppressors will not be entitled to benefit from the relevant oppression. Our corporate lawyers in Sydney specialise in dispute resolution relating to shareholder disputes and directors duties.  Be prepared to have to issue proceedings before the other parties properly come to the negotiating table.

FirmChecker 2021 ‘Best Law Firms in Sydney 2021’ Award Winners

Heathfield Grosvenor Lawyers has been recognised as ‘a highly rated firm’ by FirmChecker (don’t know what that is? It is equivalent to Tripadvisor in the tourism industry), Australia’s leading site for professional service reviews. Do we work for the accolades and the recognition? Absolutely not. Thankfully, these recognitions come with the ardent work that we pride ourselves in. But, as a law firm, we are always thankful for the recognition given, and most importantly, knowing that our clients receive the best and just outcome. Survey results, as published by Lawyers Weekly show that ‘NZ lawyers are more trustworthy than Australian Lawyers’ – now that is another point to add onto Australia’s long-standing scoreboard with New Zealand! But, the point being is that we aim to restore the integrity and trust between clients and lawyers through our firm. For us, it is not about competition because we distinguish ourselves with our inherent ability to achieve just outcomes, and a pleasant and professional experience for our clients. Serving justice is a privilege and a duty for us, and nothing else. Just leave it with us. See the full FirmChecker article below: https://www.firmchecker.com.au/news/best-rated-law-firms-in-sydney-cbd Lawyers Weekly Article: https://www.lawyersweekly.com.au/biglaw/25220-nz-lawyers-more-trustworthy-than-australian-research-shows

Unenforceable Penalty Clauses & Agreed Damages in Contracts

Home Table of Contents When negotiating a contract the parties commonly think about what should happen in the event that the other party breaches a term of the contract. They may also wish to stipulate what should happen upon the occurrence of a certain event (which may not technically constitute a “breach” of the contract). The other party might be required to pay an amount of money or provide some other non-monetary benefit as a result under the contract. Often it is difficult at the time the contract is made for a party to anticipate or foresee exactly what the damage or loss will be in the future if specified event(s) occur. Nevertheless, many contracts do specify what should happen upon the occurrence of certain events. Breach of contract If the parties agree on what will happen in the event of a breach of the contract, then the clause will either be (1) enforceable because it is a liquidated damages clause or (2) unenforceable because the clause is deemed to be a penalty. Primary contractual stipulations with secondary collateral stipulations Where a technical breach of the contract does not trigger what will happen but rather it is some other contractual stipulation / event which triggers payment, the question is “whether the party is restricted by covenant from doing the particular act [by] … payment”.  This might occur for example through the imposition of a collateral contractual stipulation which imposes an additional detriment to the benefit of a party and acts as security for the performance of the primary obligation, or acts as a deterrent to non-performance of the primary obligation. Such a stipulation would be a penalty. Alternatively, the question is “whether according to the true construction of the contract, its meaning is, that the one party shall have the right to do the act, on payment of what is agreed upon as an equivalent[1]” it which case it would be enforceable. Enforceable agreed damages or liquidated damages clauses Generally, the law will enforce a clause which provides for the payment to a party of an amount (or benefit) which is a “genuine covenanted pre-estimate of damage[2]”. Unenforceable penalty clauses In summary, clauses which are in the nature of a punishment for breach of the contract or to deter non-performance of a contractual term can be characterised as penalties and therefore unenforceable. Factors which indicate an unenforceable penalty clause include where[3]: The agreed sum is “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”. The sum needs to be out of all proportion to the damage that would normally be awarded by a Court in the absence of the clause (i.e. it is “in terrorem”). This is the most important test and merely because no pre-estimate was made at the time the contract is entered into does not determine that the clause a penalty[4]; or The breach consists only in not paying a sum of money, and the agreed damages are more than what should be paid as a result; or A single lump sum is made payable by way of compensation on the occurrence of one or more events, some of which may occasion serious damage but others insignificant damage. General principles It is important to keep in mind the following: The circumstances and the terms of the contract as at the time the contract was made are relevant, not the circumstances at the time of the breach of contract; The fact that it was difficult or impossible to precisely estimate the likely damage at the time the contract was made does not determine that it is a penalty clause[5]; The substance and effect of the clause must be considered (not merely the way the clause has been described in the contract); and The burden of proving that the clause is a penalty and unenforceable is on the defendant (i.e. the breaching / paying party). Special rules apply where payment is accelerated and damages for loss of bargain are payable (for example which often appear in hire purchase agreements).  These are treated differently and specific legal advice should be sought[6]. A party seeking to rely upon an agreed damages clause would be best advised to draft the clause with the above in mind and to keep a note of the basis for the calculation and estimate of the damages. …………………………….. [1] See Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30 and Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 (27 July 2016) [2] Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda [1905] A C 6. [3] See Amev-Udc Finance Ltd v Austin (1986) 162 CLR 170 and Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 [4] Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 (27 July 2016) [5] This was the fourth “test” from Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 [6] See Melbourne Linh Son Buddhist Society Inc v Gippsreal Ltd (No 2) [2017] VSCA 198 (4 August 2017) for a recent application of the principles. Contact our contract lawyers for assistance in relation to the above. Our commercial lawyers, business lawyers, and disputes lawyers provide expertise in corporate and commercial advisory services as well as litigation and dispute resolution. HEATHFIELD GROSVENOR Level 21, 133 Castlereagh Street Sydney NSW 2000 Australia T: +61 2 8005 7388 E: contact@hglaw.com.au www.hglaw.com.au The information provided in this article is provided by way of general information only. It does not constitute legal advice, and should not be relied upon as such. Specific independent legal advice should be obtained before deciding to act, or not to act, upon the views expressed or information contained in this article.

Australian business structures – choosing the right structure for your business

In this issue we examine the key types of business structures through which business can legally be conducted in Australia as follows: 1.     Sole proprietors: individuals who are liable for the business. 2.     Partnerships / limited partnerships: two or more persons or entities who are jointly and individually liable for the business (unless it is a limited partnership in which case the limited partner can enjoy limited liability). 3.     Joint ventures: contractual arrangements between two or more persons entities usually for a limited time or specific project whereby the rights and obligations are governed primarily by the contract. 4.     Companies: separate legal entities which basically have the same rights as natural persons and which can provide limited liability to their owners (i.e. shareholders). This can also include startups. 5.     Trusts: a person or entity that holds assets or income for the benefit of others. Sole proprietors: Sole proprietors or sole traders conduct business as individuals i.e. in their personal capacity. Sole proprietorship is the simplest business structure, but provides no protection to the sole proprietor from debts or other liabilities. A different trading name for the business is often used (formally referred to as a “business name”). If so, the name must be registered in the name of the individual with the Australian Securities and Investments Commission (ASIC). Please refer to the business names section at the end of this paper which applies to all persons and entities wishing to trade under a different name to their own name for additional information. Aside from the usual laws which regulate all businesses in Australia, there are significantly fewer regulatory requirements imposed upon sole proprietors in comparison with other business structures. There is for example no need to publish financial information. Business income is declared separately to the Australian Taxation Office (ATO) but is taxed at the same rate as individual Australian residents for tax purposes. There is a tax free threshold available for individuals of $18,200. The rates of tax for income above $18,200 are as follows: $18,201 – $37,000 = 19% $37,001 – $87,000 = 32.5% $87,001 – $180,000 = 37% $180,001 + = 45% Tax offsets, levies, and deductions may apply depending on individual circumstances. Specific financial / tax advice should be sought from an accountant. Partnerships: A partnership is a relationship between two or more individuals or companies who carry on business in common with a view to profit. The relationship is primarily governed by a written partnership agreement entered into between the partners, as well as the Partnership Acts in each state and territory. Partners (other than limited partners discussed below) are jointly and severally liable for liabilities of the partnership. They also share the profits. As is the case with sole proprietors, there is no need to publish financial information relating to the partnership. The partnership does not pay tax on its income; it is the individual partners who must declare their individual share of the partnership’s net income or loss. The partnership must however lodge a partnership return with the ATO declaring total income less deductible expenses. Individual partners also account for capital gains tax in proportion to their share of each CGT asset, not the partnership itself. Limited partnerships are a species of partnership which need to be registered involving at least one general partner and one limited partner. Limited partners have different rights and obligations and liability is limited to an extent. Limited Partnerships are generally taxed in the same manner as companies. Joint ventures: Joint ventures are essentially contractual arrangements whereby two or more individuals or companies enter into a negotiated agreement to work together to achieve specific goals, usually for a finite amount of time, or the agreement is otherwise terminated. Joint ventures are typically used for specific projects, and are not usually appropriate for ongoing business commitments. Joint ventures are commonly established where each party has different assets / resources which, when combined, can provide advantages / synergies / efficiencies to all parties. The rights of each party primarily depend on the contractual terms of the relevant joint venture agreement that has been negotiated between them. Joint ventures can be incorporated (e.g. where the parties establish a new company as the vehicle for the joint venture), or unincorporated. The tax implications for joint ventures depend upon the parameters of the arrangement. Australian Companies: A company incorporated under the Corporations Act 2001 (Cth) (Corporations Act) is a separate legal entity and has the same rights as a natural person. The company must be registered with ASIC, and ASIC administers the Corporations Act and regulates companies. Australian companies typically provide limited liability for their owners (i.e. shareholders). The directors are responsible for the day to day management of the company. There are numerous obligations and reporting requirements prescribed under the Corporations Act. Companies can either be private (known as proprietary companies) or public (the capital of which is raised from the public e.g. those listed on the Australian Stock Exchange). The different types of company are as follows: company limited by guarantee: liability is limited to a guaranteed amount. This is often used by entities that do not trade. company limited by shares: liability is limited to the relevant amount which is unpaid for the shares held by the particular shareholder unlimited company: liability is unlimited. no liability company: only available to mining companies.  The unpaid amount for shares cannot be called upon. The most common type of company is a company limited by shares. There are different requirements depending on the size of the company. Small business entities pay tax at a rate of 28.5% otherwise most companies pay tax at a rate of 30%. Foreign Companies: Companies that are incorporated in countries other than Australia must register with ASIC if they wish to carry on business in Australia. Trusts: Trusts can carry on business in Australia. The trustee owns and manages the business for the beneficiaries of the trust. Generally, the beneficiaries pay tax on their share of the