The Court orders a majority buy-out of the company’s shares by the minority shareholder

The Court orders a majority buy-out of the company’s shares by the minority shareholder

By Drazen Kozaric, Special Counsel[SOURCE]

In the recent decision in Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136, the Supreme Court of Victoria in a rare twist made an order under section 233 of the Corporations Act 2001 (Cth) (“the Act”) permitting a minority shareholder to buy out the majority’s shareholding, as it was appropriate in the circumstances and the justice of the case so required.

The facts of the case

The case concerned a claim of Slea Pty Ltd (Slea) that Mislave Pty Ltd (Millsave) and Mark Haron, which were majority shareholders, engaged in a conduct that was prejudicial, discriminatory and oppressive against Slea within the meaning of s.232 of the Act. As noted by the Court, to be oppressive conduct for the purposes of s.232 of the Act, there must be commercial unfairness to a member or members of the company.

In May 2008, Mr Tsialtas, who controlled Slea, was asked to resign as a director of the Connective companies and he did so. At the time, Slea held 33.33% of the shares in the company. Slea alleged that it was the subject of the following oppressive conduct by the majority shareholders after Mr Tsialtas resigned as a director:

  1. Failure to pay dividends;
  2. Inappropriate retention of dividends;
  3. Inappropriate payment of directors’ fees;
  4. Inappropriate recording of directors’ fees;
  5. The decision not to provide further drafts of the shareholders’ agreement;
  6. Conduct to remove Slea as a shareholder;
  7. Active participation in and funding of litigation (against Slea);
  8. Withholding of financial records;
  9. Obstructing Slea’s attempts to sell its shares to a third party and attempting to buy Slea’s shares for a significantly reduced price;
  10. Trying to dilute Slea’s shareholding through a restructure and sale of the business to Macquarie Bank without Slea’s knowledge (the Court set the sale aside as part of this decision); and
  11. Attempting to deprive Slea of its right to seek relief in the oppression proceedings by way of an attempted sale of the Connective Companies to a third party.

The decision

The Court agreed that there was oppressive conduct in breach of s.232. It further stated that it is not for the board of directors to expend company’s funds in a dispute relating to who controls the company, citing Vinelott J in Re Kenyon Swansea Ltd :

“The directors concerned no doubt have very strong feelings as to the person they would like to see in control of the company and able to appoint and remove its directors including themselves. But they are not entitled at the expense of the company to take part in a dispute as to whether [one shareholder’s] shares should be compulsorily acquired by [another shareholder] or by the company.”

The Court also noted that “a buyout by a minority may be justified where the conduct of the majority shareholder demonstrates unfitness to exercise control over the company, to the extent that allowing them to remain in control would be damaging to the company or its business, or would pose a serious risk to the public”. Whilst the Court did not find that the majority shareholders control of the company posed any risk to the public, it did find that the company’s directors “had been dishonest and deceitful in their oppressive conduct’ and engaged in ‘serious blameworthy conduct’”. Millsave and Haron have since appealed the decision.

Key takeaways: Courts can under section 233 of the Act make an order that a minority shareholder buys out majority shareholders if it is appropriate in the circumstances and the justice so requires (i.e. there is a serious breach of section 232 of the Act). Companies and their directors are not entitled to take part in disputes about who should control the companies at the expense of the companies.

This publication is provided for information purposes only and is not (and should not be relied upon as) legal advice. Each individual circumstances differ. Please contact us if we may help you with your circumstances.

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