Exclusion, information restriction and exit frustration: A case study in minority shareholder oppression – Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533

The Federal Court’s decision in Jolan Pty Ltd v Essential Investments Pty Ltd (No 2) [2021] FCA 1533 (Jolan) is a significant reminder that shareholder oppression claims are assessed by reference to the overall commercial fairness of the conduct in question, rather than whether individual acts are technically lawful.

The case demonstrates how a series of decisions, each potentially defensible in isolation, may collectively amount to oppressive conduct under sections 232 and 233 of the Corporations Act 2001 (Cth).

Background

The plaintiff, Jolan, sought orders under section 233 of the Corporations Act 2001 (Cth) (the Act) to remedy the oppression, unfair prejudice, and unfair discrimination against it as a minority shareholder of the first defendant, Essential Investments Pty Ltd (Company), pursuant to section 232(e) of the Act.[1]

The Company was the holding company of three subsidiaries, Essential Coffee Pty Ltd (Essential Coffee), Essential Coffee (NZ) Limited (Essential Coffee NZ) and Essential Brands Group Pty Ltd (Essential Brands) (together the Group).[2] Its primary business was the supply of coffee machines and consumables, particularly coffee beans.[3]

Mr Todd Hiscock, who was employed in the business and a trusted friend of Mr James McWilliam, had approached Mr McWilliam to invest in the business. Mr Hiscock had told Mr McWilliam various things prior to June 2016, including that:[4]

• Mr McWilliam should invest $1 million towards the $5 million purchase price of the business;
• the investment would be “short term” with an Exit Event within two (2) years that would double Mr McWilliam’s investment;
• Mr McWilliam would get a paid executive position within the business paying $150,000 per annum; and
• Mr McWilliam would be entitled to a board seat, as one of the top five shareholders.

On 16 June 2016, Jolan was incorporated and used by Mr McWilliam and his wife, Mrs Nikola McWilliam, as the vehicle to invest $1 million in the Company and Jolan became one of its top five shareholders. In July 2016, Jolan entered into a shareholders’ agreement which required all shareholders to exercise their powers to achieve an “Exit Event” within two years. Further, under the agreement, Jolan had certain contractual rights to appoint a director to the board of the Company.[5]

Subsequently, Mr McWilliam was appointed as a director of the Company pursuant to a nomination by Jolan and commenced his role as a paid executive director of Essential Coffee in July 2016.[6]

However, there had only been one active campaign to sell the Company during June 2019 to September 2019. When it became obvious that an Exit Event would not be achieved in the short term, Jolan took steps to attempt to sell its shares in the Company.[7] In parallel with this process, Mrs McWilliam, who was a practising solicitor, replaced Mr McWilliam as Jolan’s nominated director on the board of the Company in March 2020. Mrs McWilliam had raised some concerns about corporate governance issues with the board’s processes, which ultimately led to her resignation in November 2020, following a notice being issued to shareholders with a resolution proposing that she be removed as a director of the Company.[8]

Jolan appointed Mr McWilliam in her place.[9] However, Mr McWilliam was removed as a director of the Company in February 2021 after the Company’s solicitors wrote to him making various allegations concerning events which had occurred years earlier, many of which were incorrect.[10] Mr McWilliam was also removed as a director of Essential Coffee.[11]

These events led to a breakdown in the McWilliams’ relationship with the Company and its directors and shareholders, and resulted in the McWilliams being excluded from participating in the management of the Company and their proposed sale of Jolan’s shares to a third party being impeded. Jolan had not had its nominated director on the board of the Company since June 2021.[12]

Legal principles

The grounds for court order are found in section 232 of the Act, which provides that the Court may make an order under section 233 of the Act if the conduct of the company’s affairs, or an actual or proposed act or omission by or on behalf of the company, or a resolution or proposed resolution of the members of a class of members of the company, is “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity”.[13]

For the purpose of sections 232 and 233 of the Act, the “affairs” of a body corporate are described broadly under section 53 of the Act, which includes the formation, membership, business, transactions and dealings, property, profits and liabilities of the company; the internal management of the body; the ownership of shares in the body; the powers of persons to exercise voting rights; and the circumstances of the acquisition or disposal of shares in the body.[14]

The expression “oppressive to, unfairly prejudicial to, or unfairly discriminatory against” under section 232(e) of the Act is concerned with conduct that involves “commercial unfairness” or “a departure from the standards of fair dealing, or where a decision has been made so as to impose a disadvantage, disability or burden on the plaintiff that, according to ordinary standards of reasonableness and fair dealing, is unfair”.[15] It is a compound expression that “does not involve separate tests for the elements within it”.[16]

The test of unfairness requires an objective assessment.[17] The question is “whether objectively in the eyes of the commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the conduct or decision fair”.[18] As such, “whether or not the conduct is oppressive will not depend upon the motives for what was done. It is the effect of the act that is material”.[19]

Furthermore, the Court stated that the “conduct can contravene section 232 of the Act even if it is lawful, in good faith or compliant with the company’s constitution”.[20] The “failure to comply with reasonable requests for information to which a party is entitled is capable of constituting oppression”.[21] In addition, “it may be oppressive to alter internal business operations such that information which had previously been provided is no longer given, particularly where it would prevent the minority from having any relevant input into the business”.[22]

Key findings

The Court stated that all of the allegations made in the Statement of Claim fell within the scope of the affairs of the Company, within the meaning of section 232 of the Act.[23] Although it was the combined effect of the totality of the conduct which constituted the oppression, the oppression as established by Jolan was grouped into the following categories by the Court:[24]

• Exclusion from management: Jolan’s exclusion from management by the removal and eventual barring from appointment of its appointed directors to the board of the Company;
• Restricting access to information: The removal of Mr McWilliam from the board of Essential Coffee coupled with the cessation of the provision of information about the subsidiaries to the directors of the Company. Also, the imposition of restrictions placed on the information provided to directors of the company and able to be provided by those directors to the shareholder which appointed them;
• Impeding the sale of shares: The withholding from Jolan of information to enable Jolan to sell its shares to Mr Egan and so exit the Company and the passing of resolutions which placed restrictions on information able to be provided to purchasers;
• Failure to pursue the agreed exit strategy: The failure to take steps to achieve the Exit Event, including a refusal to engage with potential offers to purchase, and the decision to defer any possible sale for at least 12-18 months after certain criteria are satisfied (the timing of which is also uncertain).

Exclusion from management

Pursuant to the terms of the shareholders’ agreement, Jolan was entitled to participate in the management of the Company and the business by being able to appoint a director to the board of the Company.[25] However, in the circumstances, Jolan was deprived of its entitlement to participate in the management of the Company and the business due to the repeated removal of the McWilliams from the board of the Company.[26] The Court determined that, on any objective analysis, this was “plainly unfair and discriminatory against Jolan”, which was treated differently to the other major shareholders, who were permitted to appoint their first choice of director to the board of the Company”.[27]

Restricting access to information and impeding sale of shares

(i) Failure or refusal to provide information and impeding the sale of Jolan’s shares

Firstly, by failing or refusing to provide all the information requested by a potential purchaser Mr Egan, Jolan was impeded in its attempt to sell its shares in the Company.[28] It was not unreasonable for a potential purchaser to request to see the information before making a significant investment in a private company, after Jolan had taken steps to ensure that a Confidentiality Deed Poll was executed.[29] Furthermore, although the resolutions which limited the information provided to potential purchasers purported to apply equally to all shareholders, they were passed in circumstances where Jolan was the only shareholder attempting to sell its shares in the face of the failure to achieve an Exit Event and where Jolan was excluded from the management of the Company.[30] The Court determined that on any objective analysis, “the treatment of Jolan was unfair and discriminatory”.[31]

(ii) Jolan’s diminished access to information about the business

Secondly, the Company failed to provide Jolan with information which was relevant to its participation in the management of the business and the value of its shareholding.[32] Under the shareholders’ agreement, Jolan had a contractual entitlement to receive certain financial and any other information it may reasonably require in relation to the business or financial condition of the Company or the subsidiaries.[33] However, in around December 2020, the Company ceased to receive information relating to the business, which coincided with the removal of Mr McWilliam as a director.[34] Furthermore, in March 2021, a restriction was imposed on its directors not to distribute any documents received in their capacity as directors to third parties.[35] The Court determined that, on any objective analysis, this was unfairly prejudicial and discriminatory to Jolan, as it became the only shareholder that did not receive or have access to the information, and that “this conduct only served to compound the commercial unfairness of removing Jolan’s appointed director to the board of the Company”.[36]

Failure to pursue agreed Exit Event

The Court found that the shareholders’ agreement demonstrated that the parties to the agreement had become shareholders on the agreed basis that their investment was not a long term proposition, and that each shareholder had undertaken to exercise its powers with the purpose of achieving a sale of all or substantially all of the shares in the Company, or an asset sale, or a merger or an initial public offering within a period of two years from the date of the shareholders’ agreement.[37]

However, the shareholders’ agreement was entered into more than five years ago. During that time, there had only been one active campaign to sell the Company. When Mr McWilliam requested that the item “Sale of Business as a whole” be added to the agenda for the board meeting on 31 March 2020, Mr Hiscock omitted this item from the agenda.[38] Further, when Mr McWilliam moved a motion at a board meeting on 18 January 2021 to have the Company publicly listed for sale within six months, it was voted down.[39] The Court found that the Company and the board’s refusal to take active steps to sell the Company was unfairly prejudicial to Jolan because Jolan’s substantial share capital had been “locked up” in the Company for the foreseeable future, and the only way to release it was to sell its minority stake.[40]

Outcome

The Court held that on any objective analysis, the combined effect of the totality of the conduct of the affairs of the Company has been “oppressive to, unfairly prejudicial to or unfairly discriminatory against Jolan in its capacity as a member of the Company within the meaning of section 232 of the Act”.[41]

Importantly, the Court approached the case holistically. While some individual acts may not independently have justified relief, their cumulative effect demonstrated a pattern of commercial unfairness toward the minority shareholder.

The decision is a useful illustration of the breadth of the oppression remedy and the Court’s willingness to intervene where the practical operation of a company’s affairs departs from the commercial expectations underpinning the parties’ relationship.

Key Takeaways for Companies and Shareholders

The decision highlights several practical considerations for companies, directors, and investors:

Shareholder agreements matter

Courts will closely examine the commercial expectations created by shareholders’ agreements, particularly where investors are promised participation rights, access to information, or a pathway to liquidity.

Lawful conduct can still be oppressive

Compliance with a constitution or formal legal powers does not necessarily prevent a finding of oppression if the practical outcome is commercially unfair.

Minority participation rights should be treated carefully

Excluding minority shareholders from management or restricting access to information may expose companies and directors to oppression claims, especially in closely held private companies.

Exit mechanisms should be meaningful

Where investors enter a business on the basis of a contemplated exit strategy, prolonged inaction or conduct that frustrates exit opportunities may become relevant in an oppression claim.

Courts assess conduct cumulatively

Oppression claims are rarely determined by a single event. Courts will examine the totality of the conduct and its practical commercial effect.

………………..

This article is intended as general information only and does not constitute legal advice. Specific advice should be obtained in relation to particular circumstances.

[1] Jolan at [1].

[2] Jolan at [2].

[3] Jolan at [3].

[4] Jolan at [4] and [6].

[5] Jolan at [7]-[9].

[6] Jolan at [10].

[7] Jolan at [11]-[12].

[8] Jolan at [14].

[9] Jolan at [188].

[10]Jolan at [15].

[11] Jolan at [15]-[16].

[12] Jolan at [15]-[17].

[13] Jolan at [27]; and section 232 of the Act.

[14] Jolan at [28]; section 53(a), (c), (e), (f), and (h) of the Act; and Hylepin Pty Ltd v Doshay Pty Ltd [2021] FCAFC 201 at [123].

[15] Jolan at [30]; Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; 96 ASCR 1 at [178]; and Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30; [2020] FCA 1370 at [24].

[16] Jolan at [29].

[17] Jolan at [32].

[18] Jolan at [30] and [32]; Hylepin Pty Ltd v Doshay Pty Ltd (2020) 148 ACSR 30; [2020] FCA 1370 at [24]; and Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9].

[19] Jolan at [32]; and Catalano v Managing Australia Destinations Pty Ltd (2014) 314 ALR 62; [2014] FCAFC 55 at [9].

[20] Jolan at [34]; and Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [176].

[21] Jolan at [36]; and Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451; [2002] NSWSC 13 at [198]; Re Ledir Enterprises at [194]-[197] and [199].

[22] Jolan at [37]; BAM Property Group Pty Ltd (as trustee for BAM Property Trust) v Imoda group Holdings Pty [2019] FCA 1192 at [72]-[74].

[23] Jolan at [28].

[24] Jolan at [23].

[25] Jolan at [312] and [315].

[26] Jolan at [349]-[350].

[27] Jolan at [349].

[28] Jolan at [351].

[29] Jolan at [352].

[30] Jolan at [357].

[31] Jolan at [355].

[32] Jolan at [351].

[33] Jolan at [358].

[34] Jolan at [359].

[35] Jolan at [360].

[36] Jolan at [359] and [361].

[37] Jolan at [362]-[363].

[38] Jolan at [366].

[39] Jolan at [369].

[40] Jolan at [371].

[41] Jolan at [374].

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This article is general information only and does not constitute legal advice. You should obtain advice specific to your circumstances before acting. Liability limited by a scheme approved under Professional Standards Legislation.