In this interesting case an oppressor shareholder was ordered to buy out the oppressed shareholder.

Equal shareholders were deadlocked. One Shareholder, the plaintiff, asked the court that the other be required to sell its interest or buy the plaintiff’s interest. The defendant had the daily management of the company. The court found oppression and ordered that the oppressor shareholder buy out the plaintiff at fair value. Adjustments were made to place the oppressed in the position as if there had been no oppression.

The case was Patterson v Humfrey [2014] WASC 446.  It was held that there was no reason why oppression for the purposes of s 232 of the Corporations Act 2001 (Cth), cannot occur to a 50% shareholder.

Facts

Mr Patterson and Mr Humfrey held shares equally in Skybow Holdings Pty Ltd and were the only directors of the company. There was an irretrievable relationship breakdown which led to Mr Patterson bringing proceedings against Mr Humfrey.

The court was not impressed with Mr Humfrey or his conduct, finding him to be an untruthful witness, dishonest, and that he had engaged in oppressive conduct. There were multiple instances of oppressive conduct where the oppressor, Mr Humfry, preferred his own interests to those of the company and the members as a whole, affecting the assets of the company.

The plaintiff wanted the court to order that Mr Humfrey, the oppressor defendant, sell to him, because the plaintiff was concerned that Mr Humfrey would delay finding the funds. However, the court ordered the reverse, that the oppressor buy out the oppressed

Decision

The courts said that the purpose of a buyout order, as for any under section 233, is not to compensate for the oppressed party’s loss but rather to separate the oppressed from the oppressor.

The court gave three reasons that the oppressor buy out the oppressed:

• the purpose of the section is to release the oppressed from the company if they find that because of the opponent's oppression they can no longer have their capital invested in it;

• The defendant Mr Humfrey has managed the company from its inception, while the plaintiff had become almost a passive investor; and

• The defendant was required to maintain a 20% shareholding in another development through the company for his own company to continue as project manager and exclusive selling agent, which entitlement would be put at risk if he had to sell, and with no corresponding benefit to the plaintiffs.

The mechanism for the buyout was practical. The court ordered that the Court Registrar take an inquiry to determine the purchase price of the defendant’s shares, based on:

• an expert’s valuation of the net assets of the company; but

• with adjustments to the balance sheet (that is to the assets and liabilities) to place the oppressed in the position as if there had been no oppression. 

Once the purchase price was reported by the Court Registrar, the defendant would have 28 days to purchase the shares, in default of which the plaintiff could purchase the defendant’s shares at the same price within 28 days.

The case demonstrates how relief for oppressive conduct is not limited to minority shareholders. Even equal shareholders, that are deadlocked, can get orders to adjust the company assets, and to buy or sell out an interest at fair value.

What should you do?

You should have a shareholder agreement and constitution that sets out how shareholder deadlocks will be resolved.

Contact Peter McNamara today for advice on avoiding and resolving shareholder deadlocks.