Recently, the Victorian Supreme Court handed down their judgment in Pacific Dairies Limited v Orican Pty Ltd [2019] VSC 647 (Pacific Dairies). The case illustrates the unwillingness of Courts to interfere in cases where conduct of a company’s directors is poor or inadequate, but not actively oppressive to a shareholder.

Statutory Basis for Shareholder Oppression Claim

Shareholder oppression is enshrined in section 232 of the Corporations Act 2001 (Cth) (Corporations Act).

Examples of shareholder oppression in respect of a company that may be committed by a director include:

(a)   withholding information from a shareholder without cause;

(b)   exclusion of a shareholder from management of or involvement with the company; and

(c)    diversion of a legitimate corporate opportunity for the company to themselves or another associate of theirs.

If the Court finds that oppression of shareholders has taken place, then they may exercise broad powers to rectify the issue under section 233 of the Corporations Act, including:

(a)   winding up the company;

(b)   modifying the company’s constitution;

(c)    reducing or increasing the share capital of the company, or directing that a sale be made from one shareholder to another; or

(d)   appointing a receiver or receiver and manager over the company’s assets.

In circumstances where the winding up of the company is sought, the factors in section 461 of the Corporations Act are applicable. In making its decision, the Court may consider:

(a)   whether directors have acted in their own interests when managing the affairs of shareholders;

(b)   if an act or proposed act would be oppressive or unfairly prejudicial to the interests of a shareholder or class of shareholders;

(c)    whether the company is unable to pay its debts; and

(d)   whether it would be just and equitable that the company be wound up.

Facts of the Case

Pacific Dairies Limited (Company) was in a weak financial position, making heavy net losses year upon year since 2015. Their plans to expand into the Oceania market and create a regional dairy group had failed, and in 2016 their shares were suspended from trading on the ASX. The Company was then delisted from the ASX on 20 May 2019 as a result of having a suspension for a continuous period of over three years.

Despite the above, the directors of the Company resolved to:

(a)   continue to seek finance to reposition the Company in the market and proceed with the planned expansion;

(b)   pay themselves directors’ fees of over $200,000 each, in circumstances where net losses of over $1.5 million over two consecutive financial years had accrued to the Company; and

(c)   issue additional shares to themselves while not offering those shares to any other shareholders as ‘consideration for fees payable’, since the Company did not have the cash resources to pay the directors’ fees.

Mr William Clarke, the former CEO and shareholder of just over 1% of the equity in the Company, accordingly brought an application under section 232 of the Corporations Act seeking an order for:

(a)   the removal of the current directors of the Company; and

(b)   setting aside the issue of shares and options to the directors and their related entities.

Mr Clarke did not request that the Court wind up the Company on just and equitable grounds in accordance with section 461 of the Corporations Act.

Decision

Sifris J noted that:

(a)   payments of fees to directors can be oppressive where the fees are paid improperly and are excessive without any bona fide basis for their calculation; and

(b)   the issue of shares by a company can constitute oppressive conduct.

However, the Court held that the Company’s conduct did not constitute oppression under section 232 of the Corporations Act.

His Honour stated that the issue of shares to the directors of the Company was not oppressive, as those amounts were owing to the directors in consideration for their services.

He noted that the Company had received advice that the conversion of debt to equity was appropriate rather than continuing to accrue debts, and that that conversion had occurred at a fair rate in line with the Company’s share price.

His Honour also considered that an impending annual general meeting of the Company (which the directors had opposed) should be allowed to proceed before the Court will interfere and make the orders sought by Mr Clarke.

Conclusion

Pacific Dairies demonstrates the restrictiveness of the Corporations Act for shareholders to obtain recourse for alleged unsatisfactory director conduct. As shown in this case, Courts will defer to the mechanisms for shareholder democracy within a company’s constitution or the replaceable rules under the Corporations Act rather than make orders that circumvent those corporate governance methods.

It is possible that the outcome of Pacific Dairies may have been different if Mr Clarke had also applied separately for the company to be wound up on just and equitable grounds under section 461 of the Corporations Act, as the Company could also have been said to be trading insolvently and the Court would no doubt have had regard to this factor when making its decision.