Minority Shareholders Rights

19 January 2025 in Business Law | 6 min read | skip to FAQs

This article discusses minority shareholders rights in a company and how they may be oppressed by majority shareholders. We discuss what constitutes oppression of the minority shareholders and provisions in the Corporations Act 2001 (Cth) (the Act) which function to protect minority shareholders from oppression.

Definitions

Minority shareholders include persons holding a share or shares in a company that form less than 50% of the company’s total share capital. Generally speaking, a majority shareholder that owns more than 50% of the company’s share capital also holds a higher percentage of voting rights, subject to the class of shares held, and is therefore significantly influential in the operations of the company. This is due to the voting and other rights and powers that accompany each class of shares. Put simply, where all shares are of the same class, such as ordinary shares, holding more shares in a company results in more votes.

Background to Protection from Oppressive Behaviour

It is unfortunately reasonably common that minority shareholders can be subject to oppressive behaviours by the majority shareholders. This can occur by way of oppressive conduct, either intentionally or not. The Corporations Act 2001 (Cth) contains provisions intended to protect minority shareholders from these oppressive behaviours. These sections, 232, 233 and 461, are examined in detail below.

It is noteworthy that there may be a company constitution that alters the rights of the shareholders. This may also contain protections for minority shareholders. In this case, both the Act and the company constitution must be interpreted in conjunction with one another. However, even though the company constitution may alter the rights of the shareholders, the Act places limitations on the extent to which this can be done.

In the absence of a company constitution and shareholders agreement the Act provides what is called replaceable rules for the governance of the company.

Definition and Scope of Oppression of the Minority

In short, problems arise where majority shareholders use their influence for their own gain rather than for the company’s benefit. This oppression is defined by the Corporations Act 2001 (Cth) as conduct that is 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. The Act uses the term “member” for what is perhaps more commonly referred to as “shareholder”.

Case law has provided further guidance on the definition and scope of oppressive behaviour. Early cases from the 1950s found that oppressive behaviour included behaviour that was burdensome, harsh and wrongful, and a visible departure from the standards of fair dealing that every shareholder who entrusts their money to the company is entitled to rely.

More recently the largely accepted definition involves behaviours lacking the degree of probity which the shareholders (members) are entitled to expect, or those that are unfairly prejudicial or discriminatory and exceed mere prejudice or discrimination, and usually requires some departure from a reasonable standard of fairness.

Protecting Minority Shareholders – Sections 232, 233, & 461

There are certain circumstances of oppression where the law and the Courts may intervene, utilising the Court’s powers to protect minority shareholders in multiple ways, including to:

1. Limit the excessive use of power by the majority;
2. Implement punitive measures for previous conduct; and/or
3. Remedy oppression experienced by minority shareholders.

Section 232 of the Act

Section 232 outlines the grounds for obtaining a Court order in relation to shareholder conduct that deviates from the best interests of shareholders as a whole. As canvassed above, this section provides detail as to what constitutes oppressive conduct and is vital in the protection process as it expressly prohibits these behaviours and provides statutory remedies to those oppressed minority shareholders. Those definitions of oppression outlined above are drawn from both statute and common law. However, the Act is silent on conduct that is not considered oppressive. For this, we turn to case law. In this context, it is important to note that not all instances of minority shareholder loss, damage, or distaste meet the threshold of oppressive behaviours that the Act prohibits. In the case of John J Starr Real Estate Pty Ltd v Robert R Andrew A’asia Pty Ltd (1991) it was confirmed that the mere subordination of the wishes of the minority by the exercise of the voting power of the majority was not in and of itself oppressive.

Section 233 of the Act

Where section 232 outlines the grounds for the Court to make an order, section 233 of the Corporations Act 2001 (Cth) outlines the actual orders that the Court can make. If a Court determines that a minority shareholder has been oppressed and that remedies are justified, the Court will turn to section 233 of the Act in the Court’s deliberation of an appropriate remedy. Orders that the Court can make include:

1. that the company be wound up;
2. that the company’s existing constitution be modified or repealed;
3. regulating the conduct of the company’s affairs in the future;
4. for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;
5. for the purchase of shares with an appropriate reduction of the company’s share capital;
6. for the company to institute, prosecute, defend or discontinue specified proceedings;
7. authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
8. appointing a receiver or a receiver and manager of any or all of the company’s property;
9. restraining a person from engaging in specified conduct or from doing a specified act;
10. requiring a person to do a specified act; or
11. any order that it considers appropriate in relation to the company.

There are certain exceptions and variations to the above for corporate collective investment vehicles. Some further restrictions apply as follows.

Section 461 of the Act

As briefly mentioned above, the Court retains the power to order that a company be wound up where it determines that the affairs of the company are being conducted in a way that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member (shareholder) in a manner that is contrary to the interest of the members as a whole (section 461(1)(f) of the Act) or simply that the Court is of the opinion that it is just and equitable that the company should be wound up (section 461(1)(k), this may arise where disputes between shareholders have hindered or prevented the proper operation of the company.

By explicitly prohibiting certain behaviours in section 232, and granting express powers to the Court to deal with such behaviours in sections 233 and 461, the Act provides a broad protective blanket that shields minority shareholders. Being aware of the law regarding shareholder behaviour is of paramount importance to both the minority and majority. Majority shareholders must be aware of the limits on their behaviour because contravention can lead to dire outcomes for the company and its stakeholders. Minority shareholders must be aware of their rights, knowledge of these provisions enables minority shareholders to ensure that they are protected from oppressive behaviour, among other things.

Key Takeaways

The protection of minority shareholders rights in a company from oppressive behaviour by majority shareholders is legislated in the Corporations Act. Put simply, oppression is considered as behaviour contrary to the interests of shareholders as a whole, or in the best interests of the company or unfairly prejudicial or discriminatory to individuals. The legislation primarily functions to limit excessive use of power by the majority shareholders and remedy oppression towards minority shareholders. Section 232 outlines the grounds for the court to make an order, section 233 outlines the actual orders that the court can make and section 461 retains the court’s ability to wind up the company if the actions hinder the proper operation and best interests of the company.

How can BSM Sydney Lawyers assist you?

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