30/07/2012

Minority shareholders can have very little power in a company and may be at the mercy of the majority shareholder who can appoint the board and make most of the major decisions for the company.  So what happens when that majority shareholder arranges for the company to do things which benefit the majority shareholder rather than the company itself?

The answer is that if necessary the minority shareholder can seek an order from the Court to wind up the company.

In a recent decision of Hillam v Ample Source International Limited (No 2) [2012] FCAFC 73, the Full Federal Court affirmed the trial judge’s decision to order the winding up of a company on the application of the minority shareholder.

The application was based on sections 232 and 233 of the Corporations Act.

Section 232 provides factors the Court will consider in making orders against a company if the company is acting in a way contrary to the interests of the members as a whole or "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members".

Section 233 then provides for a number of orders that can be made by the Court including "that the company be wound up".

In this case, the minority shareholder (25%) alleged the directors and other shareholders were conducting the affairs of the company in a manner that was oppressive and commercially unfair.  The allegations included, failure to provide information, meetings arranged with the minority shareholder given limited opportunity to attend and being excluded from the management of the company.

The issue was whether there had been oppression, unfairness and a lack of probity on the part of the directors representing the majority.

The appeal judges stated that winding up a company is not the perfect remedy but agreed with the trial judge that it was warranted in this case, quoting the trial judge’s reasons:

"I accept that an order that a solvent company be wound up is an extreme step and it is a less than perfect remedy: the full value of the company with its present interests may not be obtained.  But there is no offer to buy the shares of the minority or of the majority at a fair price while the liquidator can sell the assets on the open market and divide the proceeds, absent a sale of the company’s assets to one of the disputing parties."

So what are the lessons here?

1. Majority shareholders should not abuse their positions to the detriment of the company or the minority shareholders.
2. Minority shareholders should think carefully before taking their minority position in the company.
3. If there is a major dispute, all parties should be aware of the prospect that they could lose part or all of their investment with the winding up of the company.
4. Minority shareholders should carefully consider the grounds before applying for a winding up orders as such action needs to be warranted.
5. The shareholders in a company should have a shareholders agreement that better sets out the rights and duties of the parties to each other and may prevent abuses of power or conflict about the direction of the company.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.