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Taking Advantage Of Minority Shareholders Can Land You In Hot Water

We recently secured a $1.5 million dollar compensation payout for a minority shareholder who was denied dividends.

Minority shareholder rights in Australia should not be ignored.  While majority shareholders can effectively control a company, they are required to consider the interests of all minority shareholders.  It is illegal for majority shareholders to discriminate against or oppress minority shareholders.

Management of a Company

The Board of Directors is responsible for managing a company.  However, if one or more shareholders own over 50% of the shares, they can usually remove the Board and effectively control the company.

If a shareholder has less than 50% of the shares in a company, they have more limited rights and are considered a “minority shareholder”.

Minority Shareholders

Minority shareholders are often overlooked or even exploited by majority shareholders.  This can be the case even where each shareholder has an equal number of shares but 2 or more shareholders vote as a “block’.  For example, where there are 5 equal shareholders but 3 of those shareholders vote together.

You should check the company constitution and any shareholder agreement to know exactly what rights minority shareholders have.  In some cases, a shareholder agreement will give minority shareholders veto powers over key decisions.

However, even in the absence of powers in the shareholder agreement, a minority shareholder has some basic shareholder rights protected by the Corporations Act.  Those rights include:

  1. To attend, speak and vote at shareholder meetings;
  2. shareholder access to company records (provided they are genuinely required); and
  3. The right not to be taken advantage of, or ”oppressed”, by the majority shareholders

What is Oppression of Minority Shareholders?

The definition of “minority shareholder oppression” is inherently vague.  The legislation says that it is illegal for majority shareholders to act in a way which is:

  • Contrary to the interests of the shareholders as a whole;
  • Unfairly prejudicial to a shareholder; or
  • Discriminates against a shareholder.

Where a minority shareholder takes legal action, the Court will look at the conduct of the majority, how it impacts the minority, any other relevant factors and make a decision.

Some common examples of shareholder oppression include:

  1. Payment of excessive remuneration or bonuses;
  2. Restriction of participation in meetings or management;
  3. Denial of access to information;
  4. Denial of dividends without good reason;
  5. Use of company funds for personal purposes; and
  6. Uncommercial transactions for the benefit of the majority shareholder.

If the Court is satisfied the majority shareholder has acted improperly it has wide powers to order the majority shareholder rectify the conduct, payment of damages, or the winding up of the company.

So, while majority shareholders have significant power, that power must be exercised in a way that is not unfair to minority shareholders.   Getting the balance wrong can quickly destroy the value in the company and be costly to all those involved.

It is always helpful to get early legal advice if you are in any doubt about potentially oppressive behaviour.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.

At Taurus Legal Management we have an experienced team who can answer your questions and put you on the right track, enabling you to focus on the business and to sleep easy.  Contact us on (03) 9481 2000 or at info@tauruslawyers.com.au.

Posted by Taurus Legal Management