Australia: 'Trapped Leavers' - The Risk of Having to Buy Back the Equity of Sacked Managers

Last Updated: 14 July 2012
Article by Anthony Addison and Kieren Parker

Terminated managers normally pack up their desks. Now, they may also be able to cash in their chips. In a recent case1 two sacked managers of a private company obtained orders that forced the majority shareholder to buy back their equity at fair value. Private Equity firms should consider the significance of this decision when putting in place a management equity package.

The facts

Wain and Murchie (Drapac Managers) were managers of Drapac Group, founded by Michael Drapac. From 2004 to 2006 the Drapac Managers acquired equity interests in certain companies and trusts of the group, along with other executives. No formal shareholders agreement was entered into, however Drapac and the executives discussed the proposed terms of such an agreement over a number of years.

The relationship between the Drapac Managers on the one hand and Drapac on the other soured during 2009. Wain was subsequently terminated in October 2009, whilst Murchie resigned in December 2009, claiming his employment was untenable. Both brought proceedings for declarations of oppressive conduct, and orders that Drapac or the Drapac Group acquire their equity interests.

The law – oppressive conduct

The scope of and remedies for oppressive conduct are set out in the Corporations Act. Section 232 provides, in part, that a court may step in if the conduct of a company's affairs is commercially unfair to a member – that is, oppressive to, unfairly prejudicial to, or unfairly discriminatory against, the member. Section 232 also provides that a person can be affected by commercial unfairness in a capacity other than as a member – for example, as in this case, as an employee. A court can make any order it considers appropriate, including an order for the purchase of shares or (as a last resort) winding up.

The decision

The Victorian Supreme Court found that there was oppressive conduct towards the Drapac Managers. With respect to Wain for example, after their relationship had broken down, Drapac used his power as the majority shareholder to terminate Wain and unfairly exclude him from management. No offer was made by Drapac to acquire the Drapac Managers' equity. In the Court's view the fact that their equity was "trapped" when they would no longer be part of the management team "bore all the hallmarks of oppression".

The Court ordered Drapac and a company he controlled to acquire the equity held by the Drapac Managers at fair value.

Does this decision impact on private equity?

This is one of those areas of the law in which the courts are at pains to stress that each case must be assessed on its own facts, however frustrating that might be in predicting how the law might apply in the future.
Notwithstanding, the case puts "leavers" from MBOs or MBIs firmly at the centre of those scenarios under which exclusion from management may constitute oppressive conduct. The Court characterised the Drapac Group as a "quasi-partnership", an arrangement under which persons contribute their capital based on mutual confidence and on the understanding that they will take part in the management of the company.

Although the investment structure in the Drapac case was not a private equity investment as such, almost all private equity investments would be treated as quasi-partnerships for these purposes. Further, the size of a manager's shareholding is not determinative – the Court rejected a submission that Murchie's shareholding of 3.5% was too low to constitute a quasi-partnership.

Would the outcome have been different if a shareholders agreement was in place? Perhaps. If a clause in such an agreement provided that, if a manager loses their job, their shareholding would continue pending a decision by the board to buy back their shares, the court may have upheld the clause. However, the Courts prefer to focus on the conduct of the majority shareholder and the commercial reality of that conduct on the leaver, rather than the underlying agreement. In a prior case2, the NSW Supreme Court placed little significance on the provisions of a shareholding agreement that enabled the oppressed shareholder in that case to sell shares to third parties, as the shares would probably not be saleable to anyone other than the majority shareholder at something like fair value (if at all).

How does the case affect private equity investments?

  • The most obvious consequence is caution in drafting the leaver provisions of a shareholders agreement. PE firms might normally wish to have the right, but not the obligation, to acquire the shares of a leaver. This is particularly so for a "bad" leaver, who may use the sale proceeds to capitalise a competing business. In such cases, PE firms should recognise the risk of an oppression claim if the equity of a leaver becomes trapped.
  • For an employee who is a minority shareholder, the case does not set a high threshold to establish that conduct is oppressive. The Court found that Wain's termination of employment was not based on proper grounds. Even more remarkably, Murchie's continued employment was found by the Court simply to be "untenable". Clearly, a breakdown in personal relations can be one of the factors that leads to oppression, even if part of the reason for such a situation is the conduct of the manager.
  • The Courts have recognised the difficulty in determining "fair value". For example, what is the relevant date to determinate fair value? Are the appropriate records available as at this date? Is "fair value" the value the shares would have had but for the oppressive conduct? Notwithstanding, courts have wide powers to remedy oppression, and may override any valuation provisions contained in shareholders agreements if oppression is found.
  • It is conceivable that a leaver could attempt to use the oppression remedy when a buy back is already underway – to force a change in the buy back price, from say cost to fair market value.
  • Finally, certain equity arrangements may assist in limiting or hindering an employee's claim of oppression as a shareholder. Such arrangements may have other limitations though in establishing a management incentive package, so PE firms should balance these against the risk of an oppression claim.


1 Wain & Ors v Drapac & Ors [2012] VSC 156
2 Tomanovic and Anor v Global Mortgage Equity Corporation Pty Ltd and Anor (2011) 84 ACSR 121

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Kieren Parker
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.