Valuation of Minority Interests in Shareholder Oppression Claims

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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.

Shareholder Agreements – Avoiding Shareholder and Director Disputes

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Table of Contents Shareholder and director disputes At the outset of a new business venture the risk of a dispute may seem far fetched.  However, the practical reality that we often see is that disputes in one form or another frequently arise over time for example due to differences of opinion.  These differences can easily result in complete deadlock in decision making. The prevailing desire for ultimate control over a prospering enterprise frequently results in oppressive conduct against minority shareholders for example by way of dilution of shares, exclusion from management, and so forth.  These risks are elevated in the case of smaller “quasi-partnership” businesses with 50/50 shareholders and directors.  Directors may find themselves in a position of conflict between their fiduciary duties on the one hand to the company, and duty of care to shareholders, and their personal interests.  This may also result in causes of action or claims becoming available for the company against those directors who have breached their duties.  Where there is a trust involved, beneficiaries may also claim that directors have been involved in a breach of trust, or the directors may be liable to the corporate trustee arising from their conduct contrary to the corporate trustee’s obligations as trustee for the relevant trust. The risk of expensive and protracted litigation is rife, despite the fact that it can frequently be avoided. Shareholder agreements You will find that the importance of a carefully crafted shareholder’s agreement cannot be emphasised more by any corporate lawyer.  It frequently avoids the vast expense, stress and wasted opportunities that arise from and accompany bitterly fought disputes between shareholders / directors / beneficiaries.  Shareholder agreements do so by making provision for various scenarios and circumstances which would otherwise be inadequately specified in the company’s constitution or under the Corporations Act 2001 (Cth).  Key issues typically covered include: More clarity on decision making of the business, reporting, and tailored voting rights Procedures and requirements for the payment of dividends Clearer obligations and responsibilities of each key personnel The direction and strategy for the business Share options and vesting of shares over time Procedures in the event of breaches or disputes Ultimately, mechanisms designed to prevent disputes but also providing for the sale / purchase of shares in various common scenarios, and dispute resolution procedures which can avoid substantial costs of litigation. In the absence of provision in this regard, the parties will be left to try to negotiate on a solution.  Frequently, there are disputes over the terms e.g. the sale price of the shares, who the seller or buyer will be, etc.  In the absence of agreement, the parties will need to consider administration or otherwise seek relief from the Court. Winding up on just and equitable grounds; a remedy of last resort Common actions include: Proceedings for oppressive conduct under the Corporations Act 2001 (Cth) where the applicant can show that the conduct of a company’s affairs or an actual or proposed act or omission by or on behalf of a company or a resolution, or a proposed resolution, of members or a class of members of a company is either: contrary to the interests of the members as a whole; or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. Proceedings alleging breaches of director’s statutory and common law duties or obligations under the constitution. Statutory derivative actions on behalf of the company against officers e.g. to recover money misappropriated and/or to liquidate the company if necessary. Proceedings seeking a broad range of other remedies including for the purchase of shares by any person, the appointment of a receiver, an injunction preventing the doing of an act, or an order for the company to be wound up on “just and equitable” grounds. In Re SP Private Holdings Pty Ltd [2021] VSC 142 (23 March 2021) the Victorian Supreme Court were fairly robust in the management of the timetable.  Briefly, a 50% shareholder and director in a group of companies sought relief from oppression alleged to have been caused by the other 50% shareholder and director.  The application was amended less than one month before judgement to seek the appointment of a provisional liquidator, relying on the just and equitable ground for winding up. In short, there was evidence of an extremely dysfunctional relationship between the parties, a bitter dispute, clear deadlock, and deep acrimony.  Whilst the Court will be reluctant to wind up a solvent company (this being a rather drastic and last resort measure), there was no impediment to a just and equitable winding up in the circumstances.  There was clear deadlock, deep acrimony, thereby rendering the continuation of the enterprise futile.  There was no utility in a provisional liquidator being appointed and a winding up was ordered efficiently and in keeping with the overriding objective of the Court to facilitate the just, quick and cheap resolution of the real issues. contact us Contact our corporate 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, and specifically shareholder disputes. 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. Trustpilot Book Online Related services Related documents Get bespoke legal documents tailored by a lawyer quickly.  Complete our intake form to get started so that one of our lawyers can contact you within 24 hours. Free startups and business essentials guides We have collated some free helpful guides containing key important considerationsClick Here to download our guides

Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017

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The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill) was introduced by the House of Representatives on 1 March 2017.  A report of the Senate Education and Employment Legislation Committee is presently due by 9 May 2017.  It is anticipated that the Bill (in its current form or otherwise with amendments) will receive Royal Assent later this year. The Bill addresses the findings of various well publicised reports regarding the exploitation of workers (including migrant workers under temporary work visas).  Briefly, the measures to be introduced include: Higher penalties[1] for “serious contraventions[2]” of various workplace laws[3] (to act as a deterrent); Prohibitions against employers unreasonably requiring their employees to make payments (e.g. requiring their wages to be paid back in cash); Making franchisors and holding companies[4] potentially liable for underpayments by their franchisees or subsidiaries where they “knew or could reasonably be expected to have known” that the contraventions, or similar contraventions, would at least be likely to occur and failed to take reasonable steps[5] to prevent them; Higher penalties for record keeping failures; and Increased evidence gathering / investigatory powers of the Fair Work Ombudsman. The following activities are examples of some reasonable steps which could be taken by franchisors and holding companies (who have a significant degree of influence or control over their franchisees or subsidiaries) to try to avoid a contravention of the Bill (if and when enacted), depending on the size and influence of the relevant franchisor or holding company: ensuring that the franchise agreement or other business arrangements require franchisees to comply with workplace laws. Consider appropriate amendments to your franchise manual for example; providing franchisees or subsidiaries with a copy of the FWO’s free Fair Work Handbook and information notices / circulars; encouraging franchisees or subsidiaries to cooperate with any audits by the FWO; establishing a contact or phone number for employees to report any potential underpayment to the business; and auditing of companies in the network. ……………………… [1] Up to $108,000 for individuals and $540,000 for corporations [2] Where the conduct constituting the contravention was deliberate (i.e. expressly, tacitly, or impliedly authorised) and part of a systematic pattern of conduct bearing in mind the number of contraventions, the period of time during which the contraventions occurred, the effect of the contraventions, and any other relevant considerations [3] e.g. contravening the National Employment Standards, a modern award, enterprise agreement, workplace determination, national minimum wage order, equal remuneration order, certain payment related provisions and record provisions [4] Who have a significant degree of influence or control over the affairs of their franchisee or subsidiary [5] The court will take into account factors such as the size and resources of the franchisor or holding company, their ability to influence or control, any action taken to ensure that the franchisee or subsidiary knew about their obligations under the specific workplace laws, any arrangements in place for assessing compliance with the specific workplace laws, whether there are any complaints related arrangements in place, and the extent to which compliance with the specific workplace laws is encouraged or required by the franchisor or holding company

Minimum Employment Terms and Conditions in Australia

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Employers who wish to sponsor skilled employees from overseas are, in summary, required under the subclass 457 scheme to provide terms and conditions which are at least equivalent to those which an Australian citizen or permanent resident would achieve performing the same work at the same location.  This is an ongoing requirement not least because it is a 457 sponsorship condition, and severe sanctions can result in non-compliance.  Its primary purpose is to prevent the undercutting of the local Australian labour market, protect overseas employees from exploitation, and maintain integrity in the scheme. In Australia, the employment relationship is governed or affected by a number of different parameters, all of which are variable depending upon the circumstances: Applicable Federal, State and/or Territory legislation: These include the Fair Work Act 2009 (Cth). The Fair Work Act establishes the National Employment Standards. Industrial instruments: There are various awards and statutory agreements / enterprise agreements which may impact upon the minimum terms and conditions with which an employee must be provided (for example by amending or adding to the National Employment Standards, and setting minimum wages for particular occupations). Contract of employment: This is agreed between the employer and the employee. Terms are both express and implied into the contract: Express terms: These are usually the written terms and conditions of the employment contract but may include terms and conditions which have been agreed verbally and also provisions of internal employment policies and any other terms (if they have been incorporated into the contract by reference for example). Implied terms: Terms can be implied into the employment relationship through custom, and the common law also implies terms into every employment relationship. Importantly, the contractual terms cannot override or detract from legislation and so the contract needs to provide terms and conditions which are at least equivalent to the terms and conditions required by applicable law (referred to under points 1 and 2 above). It is therefore important to be mindful of the tasks and functions of the occupation in question (and any changes from time to time which may alter the nature of the role), and the minimum requirements which are prescribed by the law for that particular occupation. In addition, the obligation upon 457 visa employer sponsors is broader in the sense that market salary rate conditions (not merely the requirement to pay a minimum wage) are also relevant, and market salary rates may fluctuate from time to time.

How to Manage an Employee’s Performance & Associated Disciplinary Action

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1          ISSUE You have an employee who is under-performing in their work or behaviour and you wish to manage their performance and monitor it moving forwards. You may consider that a failure to improve in accordance with set guidelines should result in some form of disciplinary action[1]. In doing so it is important to consider various factors. This article does not cover situations where immediate dismissal as a result of serious / gross misconduct is appropriate. 2         CONSIDERATIONS 2.1       The terms of the employment contract and any relevant industrial award You need to consider the terms of the relevant employment contract and any other relevant provisions which may apply as a result of an applicable award. These may dictate part of the process which must be undertaken and/or the available disciplinary actions the breach of which may result in an unfair dismissal claim. 2.2       Policy and procedure for dismissal & adherence to policy Ensure that you have in place a policy which covers performance management procedures and adhere to them. Contact us for assistance in this regard. 2.3       Unfair dismissal – Part 3-2 of the Fair Work Act 2009 (Cth) (Act) Protected employees: National system employees are protected against “unfair” dismissal if they have completed at least 6 months of employment and a modern award or enterprise agreement applies to them. Alternatively if they have worked for more than 6 months for the employer and their income is less than the high income threshold then they will also be protected[2]. Unfairness: A person has been unfairly dismissed if: the person has been dismissed[3]; the dismissal was harsh, unjust, or unreasonable[4]; the dismissal was not consistent with the Small Business Fair Dismissal Code; and the dismissal was not a case of genuine redundancy[5]. Harsh, unjust or unreasonable: The Fair Work Commission can take into account any matter that it considers relevant but “must” take into account the following in deciding whether or not the dismissal was harsh, unjust, or unreasonable: (a)       whether there was a valid reason for the dismissal related to the person’s capacity or conduct (including its effect on the safety and welfare of other employees); (b)      whether the person was notified of that reason; (c)       whether the person was given an opportunity to respond to any reason related to the capacity or conduct of the person; (d)      any unreasonable refusal by the employer to allow the person to have a support person present to assist at any discussions relating to dismissal; (e)       if the dismissal related to unsatisfactory performance by the person, whether the person had been warned about that unsatisfactory performance before the dismissal; (f)       the degree to which the size of the employer’s enterprise would be likely to impact on the procedures followed in effecting the dismissal; and (g)       the degree to which the absence of dedicated human resource management specialists or expertise in the enterprise would be likely to impact on the procedures followed in effecting the dismissal. Therefore, be upfront (don’t ambush), reasonable, clear, give warning(s), and allow the employee to have a support person present during discussion(s). Listen to the employee before making a decision. Small businesses & unfair dismissal: Importantly, employers who employ fewer than 15 employees are covered by unique provisions contained in the Small Business Fair Dismissal Code. Furthermore, employees who have worked for less than 12 months for small business employers are not eligible to make a claim for unfair dismissal. Otherwise, small business dismissals which comply with the Small Business Fair Dismissal Code are deemed to be fair. 2.4       General protections provisions – Part 3-1 of the Act – adverse action and workplace rights Briefly, a person must not take adverse action against another person in relation to the exercise of a workplace right by that other person. The term “workplace right” is very broad in scope and includes, without limitation any process under a workplace law e.g. cashing out leave, making flexibility arrangements, taking parental leave, taking industrial action, temporary absences etc etc. The term “adverse action” is also similarly broad, and includes, without limitation, dismissal or the alteration of the employees position to the employees prejudice. Employees are also protected from coercion and undue influence as well as misrepresentation about workplace rights. So, seek advice, and make sure your reasons for disciplining are only performance related. 2.5       Bullying – Part 6-4B of the Act Behaving unreasonably towards the employee where that behaviour creates a risk to health and safety could also constitute bullying. However, reasonable management action carried out in a reasonable manner does not constitute bullying. 2.6       Discrimination legislation – protected attributes Ensure that you do not implement your performance management program in an inappropriate manner where the employee has a protected attribute[6] to minimise the risk of falling foul of anti-discrimination legislation. 2.7       Proportionality of the disciplinary action Any performance management program should be closely monitored. The disciplinary action taken should be proportionate to the conduct of the employee. Record and confirm everything in writing. ……………………………… [1] For example in the form of a warning or dismissal [2] s.382 of the Act. See also ss383 and 384. [3] Either terminated by the employer or because the employee was forced to resign because of the employers conduct. See s.386 of the Act for further details. [4] See s.387 of the Act [5] See s.389 of the Act [6] Race, colour, sex, sexual preference, age, physicial or mental disability, marital status, family or carer’s responsibilities, pregnancy, religion, political opinion or national extraction or social origin.