Valuation of Minority Interests in Shareholder Oppression Claims

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

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

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