Ever wondered just how oppressive majority shareholders can be to minorities without stepping over the line? Did you think that behaviour that was lawful and done for a proper business motive could not be oppressive? These issues were considered in the recent High Court of Australia case Campbell v Backoffice Investments Pty Ltd  HCA 25.
Campbell v Backoffice Investments Pty Ltd  HCA 25
The High Court of Australia recently handed down its decision in Campbell v Backoffice Investments Pty Ltd  HCA 25. The case is a timely reminder of shareholders' rights and remedies under the oppression provisions in Part 2F.1 of the Corporations Act 2001 (Cth) (Act).
Under section 232, the court may make an order under Part 2F.1, where conduct is "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity..."
The orders that a court may make are set out in section 233 and range from requiring a person to do a certain act, to having the company wound up.
In January 2005, Backoffice Investments (Backoffice), a company controlled by Mr Timothy Weeks, entered into a share sale agreement with Healthy Water (NSW) Pty Ltd (Healthy Water) and Sentinel Construction Managers (Sentinel), both controlled by Mr Douglas Campbell. Backoffice purchased one of the two issued shares in Healthy Water for A$850,000.
The shareholders agreement set out the rights and obligations of the shareholders, but did not provide an effective mechanism for resolving disagreements between Mr Campbell and Mr Weeks.
There were also services agreements between the parties under which Mr Weeks and Mr Campbell were to work as joint managing directors of Healthy Water. By April 2005, Mr Weeks and Mr Campbell had fallen out.
Initial Proceedings – Supreme Court Of New South Wales
In April 2005, Backoffice and Mr Weeks brought proceedings against Sentinel and Mr Campbell in the Supreme Court of NSW alleging, among other things, oppression by Mr Campbell.
Initially, the primary judge found in favour of Backoffice and Mr Weeks on the oppression claim and ordered that Mr Campbell repurchase the share in Healthy Water for A$853,000. By this time, a provisional liquidator had been appointed by the parties to dispose of the assets.
The judge found that Mr Campbell's conduct was oppressive to Backoffice due to the fact that he:
- refused to pay Backoffice's invoices unless Mr Weeks agreed to a reduction in his consulting fees, which the parties had agreed to only two weeks earlier, and a reallocation of his duties as a director
- changed a password to deny Mr Weeks access to Healthy Water's MYOB software
- refused to attend a board meeting with Mr Weeks, in order to prevent Mr Weeks, and Backoffice, from having any real management involvement in the company.
Appeal And Cross-Appeal To The Court Of Appeal Of The Supreme Court Of New South Wales
Mr Campbell and Sentinel then appealed to the Court of Appeal of the Supreme Court of NSW on the oppression decision. The court was divided but ordered that the appeal should be allowed. The court set aside the buy-back order of the trial judge and instead found Mr Campbell liable for misleading or deceptive conduct and awarded A$850,000 damages.
In reversing the trial judge's order on the oppression claim, the Court of Appeal made the following observations:
- the inability of the company to function as a jointly owned and managed entity was due to more than the conduct found to be oppressive
- the sale of the company's business and assets had been consensual. The agreement between the parties made a buy-back order unnecessary to bring the oppression to an end
- oppression requires more than mere nastiness. It is usually considered a vital element that the oppression caused prejudice or loss to the company
- a finding of oppression in a 50/50 held company, while rare, is not impossible and there is limited authority in Australia on this point.
Therefore, in the circumstances, it was held that it would not be just to require Mr Campbell to purchase Backoffice's worthless share.
Appeal To The High Court Of Australia
Mr Campbell and Sentinel then appealed to the High Court of Australia. During the course of the hearing, Mr Weeks and Backoffice sought special leave to cross-appeal to reinstate the order of the trial judge for the compulsory buyback of its share.
The High Court refused Backoffice's application for special leave to cross appeal.
The High Court noted that under an earlier form of companies legislation dealing with oppression of members, wrongful exclusion from participation in the management of the company was held to be a form of oppressive conduct. The High Court found that the current provision in section 232 of the Act should not be read more narrowly, and confirmed that wrongful exclusion from management may be a form of oppression.
The High Court also held that oppressive conduct (aside from its oppressive nature) does not need to be unlawful conduct. Accordingly, the fact that Mr Campbell's conduct was said to constitute breach of his or Sentinel's contractual obligations under the shareholders agreement, or a breach by Healthy Water of its obligations under the services agreement with Backoffice, did not preclude engagement of the oppression provisions.
The High Court found no reason to examine Mr Campbell's motives for acting as he did, as there can still be oppression on the part of a person who thinks he or she is acting rightly.
Any conduct of Healthy Water's affairs that was "oppressive to, unfairly prejudicial to, or unfairly discriminatory against" Backoffice was brought to an end on the appointment of the provisional liquidator. In those circumstances, no order should have been made under the oppression provisions of the Act, except an order for winding-up of the company.
- Wrongful exclusion from management may be a form of oppression (in some limited circumstances even in a 50/50 ownership entity) but the authority on this in Australia is limited.
- Oppressive conduct need not be conduct that is otherwise lawful. Conduct in breach of contractual obligations can also be classified as oppressive conduct.
- There is no need to examine the motives of a person alleged to have engaged in oppressive conduct - there can be oppressive conduct even when a person thinks he or she is acting rightly.
- When considering remedies for oppressive conduct, the High Court found that requiring the oppressive party to purchase the shares of the innocent party is not appropriate where the company is in provisional liquidation.
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.