Author
Josh Jefferies
Hazelbrook Legal's Disputes and Litigation Partner, Josh Jefferies, unpacks a recent shareholder dispute with an outcome few would have predicted.
A recent decision from the Supreme Court of New South Wales in a shareholder oppression case produced an interesting outcome. Two director-shareholders of a Canberra engineering and consulting firm tried to force out a third using a resolution framework generated by an AI chatbot.
Relying on that framework, the pair told their co-shareholder and director that the majority had lost confidence in him and presented him with an AI generated performance management plan, treating him as an employee rather than a director. He responded, correctly identifying himself as a director. The pair did not change course, sidelining him from management decisions and denying dividend and bonus payments.
The Court agreed with the plaintiff, finding that the AI generated advice had approached the issue as one of employment law, rather than the proper relationship between directors and shareholders under Australian law. The Court found that the conduct was oppressive of the third shareholder’s rights.
An unusual remedy: sale of the whole company
Section 233 of the Corporations Act 2001 (Cth) gives the Court broad discretion to make any order it considers appropriate once oppression is found. Common remedies include regulating future conduct or having one shareholder buy the other(s) out. In this case, neither side's valuation evidence satisfied the Court, which meant a more orthodox order – the majority buying out the minority at a fixed price – couldn't be priced. The evidence before the Court was that this was effectively impossible. No one wanted the alternative either: winding up a business that was still viable and profitable, which the Court only orders as a last resort.
That left the Court to reach for a power that exists in oppression cases but is used only sparingly: appointing a receiver to sell all the shares in the company to a third party.
Courts in Australia, and as I'll come to, in England, can make this order, but overwhelmingly prefer the simpler route of a buyout.
Because valuation here proved intractable, there had been a significant breakdown in trust, the expert valuation evidence was deficient, and the majority claimed to be unable to buy out the minority, the Court went further afield, considering a Singapore International Commercial Court decision, where a similarly rare order was made after an earlier buyout order proved unworkable.
How England compares
In my previous life, I spent many years practising as a commercial litigator in England and a significant part of my practice included corporate disputes. There, the equivalent of Australia's oppression regime is governed principally by Part 30 of the Companies Act 2006 (UK). Under section 994, a member may petition the court where a company's affairs are being conducted in a manner unfairly prejudicial to some or all of its members. Section 996 then gives the court broad discretion to grant relief, including regulating the company's affairs, restraining specific conduct, or ordering the purchase of a member's shares.
In practice, courts on both sides of the world reach for the same default. The order made in the overwhelming majority of successful petitions, in England as in Australia, is a share purchase order, requiring the majority (or the company itself) to buy the petitioner's shares at fair value. The minority can alternatively be ordered to buy the majority’s shares. A sale of the company as a whole to an outside buyer is available under section 996 too, but is rarely ordered.
This recent case produced a salutary lesson – any decent lawyer would have advised that this was a director duties and shareholder oppression issue, not a question of employment law. They set out to force their co-director/shareholder from the company. Instead, now it is likely a receiver will sell it out from under them — a rare result, but not a uniquely Australian one.
It will be interesting to see if English and Australian Judgments follow this route more often in similar circumstances.
You can read more about this case at: https://www.caselaw.nsw.gov.au/decision/19f4576e915b81d74704594b
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