Competing Buy-Out Remedies for Corporate Oppression – The Consequences of Majorities Behaving Badly

Matthew Lenhoff, Zafra Legal and David Skender, Elisian

Key Points

• A dilemma arises where, in a corporate oppression action, each of the disputing parties seeks relief to buy out the other party. Both remedies may have the effect of resolving the dispute but a choice needs to be made between who should buy out whom.
• Where the disputing parties consist of a majority and a minority group of shareholders, the usual order is that the majority be permitted to buy out the minority. The rationale for the usual order is that the minority can only insist that the venture should proceed in accordance with what was understood or that the minority should get back the capital invested.
• The proposition was advanced most strongly by Spigelman CJ in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd[1] (Fexuto). In that case, his Honour held that the remedy of allowing a minority to acquire the shares of a majority was extraordinary and virtually unprecedented. His Honour also held that only a systematic course of improper conduct on the part of the majority would justify an order that the minority acquire, by compulsion of the court, the shares of the majority. In the same case, a divergent view was expressed by Fitzgerald JA who rejected the notion that there is some special inhibition on the court’s power to order shareholders engaged in oppression to sell their shares because they constitute a majority. There was no majority view on this particular point.
• The dissonance between the two views was recently addressed by the Supreme Court of Victoria in Slea Pty Ltd v Connective Services Pty Ltd (No 9)[2] (Slea v Connective). In that case, Robson J preferred the view taken by Fitzgerald JA in Fexuto rather than that taken by Spigelman CJ. Robson J considered that the court must grant relief that would best remedy and put an end to the oppression found in all the circumstances of the particular case. Consistently with principles of interpretation from the High Court, his Honour rejected the notion that there is a judge-made test which needs to be satisfied before a minority may buy out the majority.
• Despite the approach taken in Slea v Connective, it is doubted whether there is likely to be any change in the outcome of cases of this kind. This is because regardless of which approach is taken, the fact that a minority is a minority is likely to remain a significant factor against the making of an order permitting the minority to purchase the majority’s interest.

1. Introduction

Where the conduct of a company’s affairs, certain acts or omissions of the company or a resolution, or proposed resolution, of members or a class of members is either contrary to the interests of the members as a whole; or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members,[3] a court has the discretion to award different types of relief under section 233(1) of the Corporations Act 2001 (Cth) (Act).[4] One example of the relief that may be ordered is an order for the purchase of any shares by a member.[5]

A dilemma arises where each of the disputing parties holds shares in the company and each party seeks relief to buy out the other party. Which shareholder should be permitted to buy the other shareholder out?

The Supreme Court of Victoria has recently considered this issue in Slea v Connective and reviewed previous cases on the topic. The case is timely given the lack of judicial guidance on the point since the seminal decision of Fexuto.

2. The evolution of a general rule before Slea v Connective

Historically, where the disputing shareholders consist of a majority and a minority group, it has been relatively rare for a court to order that the minority be permitted to buy out the majority. Until the recent decision in Slea v Connective, there has been a relatively consistent line of case authority to support the making of a “usual order” to permit the majority to purchase the minority’s interest.[6] These cases supported the conclusion that the usual order was only to be departed from in very limited circumstances.

This proposition was most strongly expressed by Spigelman CJ in the New South Wales Court of Appeal in Fexuto. His Honour held that the remedy of allowing a minority to acquire the shares of a majority to be “extraordinary, and virtually unprecedented”[7] and that “[i]t is only a systematic course of improper conduct on the part of the majority that would justify an order that the minority acquire, by compulsion of the court, the shares of the majority.”[8]

However, this view was not embraced by other members of the court in Fexuto. In particular, a strongly divergent view was expressed by Fitzgerald JA who stated:

The Chief Justice has described an order allowing an oppressed minority to purchase an oppressor-majority’s shares in a corporation as “extraordinary”. In his Honour’s opinion:

166 It is only a systematic course of improper conduct on the part of the majority that would justify an order that the minority [be entitled to] acquire, by compulsion of the court, the shares of the majority...

I do not accept that there is some special inhibition on the court’s power to order shareholders engaged in oppression to sell their shares because they constitute a majority. What order is practically just will depend on the particular circumstances of each case. Majorities should not be encouraged to think that oppression is unlikely to have any more adverse consequence than an obligation to purchase the oppressed minority’s shares, which might well suit the majority’s purpose. Further, it might not be practically just to force a minority “partner” who was oppressed and unfairly prejudiced by majority “partners” who breached fiduciary duties and acted against the interests of the members as a whole and who no longer want to be members of the “partnership” either to sell his interest or remain in “partnership” with a stranger.[9]

The remaining member of the court, Priestley JA, agreed with the Chief Justice that the minority should not be permitted to buy out the majority but for reasons of fairness based on the facts of the case.[10] Accordingly, there was no support by a majority of the court for the views expressed by Spigelman CJ in this context.

Until the decision in Slea v Connective, the divergence between the views expressed by Spigelman CJ and Fitzgerald JA in Fexuto did not appear to attract any significant judicial scrutiny. Although it has been asserted that the test as stated by Spigelman CJ does not appear to have been adopted subsequently in Australia,[11] reference was made to it with apparent approval by the Western Australian Supreme Court in Patterson v Humfrey.[12] Despite Fitzgerald JA’s comments, cases continued to largely approach an order for a minority to buy out a majority as something unusual or which would require special circumstances before such an order would be made.[13]

In contrast, there did not appear to be any express acceptance of the position taken by Fitzgerald JA. Despite this, Robson J in Slea v Connective regarded Fitzgerald JA’s position to have been supported by two cases.[14] The first was Munstermann v Rayward[15] which acknowledged that an oppressor could be ordered to sell it shares to the oppressed party but did not refer to any qualifications.[16] The second was Ample Source International Ltd v Bonython Metals Group Pty Ltd (No 6)[17] (Ample Source) in which an order for a minority buy-out was denied because it was not responsive to the specific findings of oppression (rather than with reference to Spigelman CJ’s test). However, in Ample Source, it was expressly acknowledged that an order for a minority to buy out the majority was an unusual order.[18] Neither case made any express reference to the judgment of Fitzgerald JA in Fexuto.

The views expressed by Spigelman CJ in Fexuto appear to have been based on the existence of only two previous reported authorities where a minority was permitted to buy out a majority.  Each of those cases involved sporting clubs and was described by Spigelman CJ as involving “exceptional circumstances”.[19]

The first case in this regard was Re a Company (No 00789 of 1987); Ex parte Shooter[20] (Ex parte Shooter). That case concerned a company which ran an English football club, the shares of which had no material value. The importance of the shares was the control they gave over the affairs of the company and club. The oppression concerned a failure to lay accounts before members, a failure to hold general meetings with the effect of depriving the company of a proper board and auditors; and the convening of invalid extraordinary general meetings for the purpose of either issuing further shares in the company or removing a director hostile to the majority shareholder.[21] Although the conduct of the majority shareholder was not considered to have been in bad faith, he was considered to be unfit to control the company. As a consequence, Harman J considered it was appropriate that he be ordered to divest his shares to the minority.

The second case referred to by Spigelman CJ was Re Brenfield Squash Racquets Club Ltd[22] (Re Brenfield). In that case, the oppression concerned, among other things, an option agreement which, if exercised, would result in the sale of the company’s premises. The option holder had also entered into agreements with the majority shareholder which provided for certain benefits to flow to the majority shareholder if the option was exercised. This was deliberately concealed from the minority shareholders. The majority shareholder also caused the company to provide a charge over the company’s property to secure the indebtedness of the majority shareholder for doubtful benefit to the company. However, it was significant that the majority shareholder had entered into a shareholders’ agreement with a right of pre-emption by which it would be deemed to have given notice of its intention to sell its shares to other shareholders if it ceased to trade or was unable to pay its debts. There was evidence that the majority shareholder was in an unsatisfactory financial position such that the right of pre-emption may have crystallised. This was a factor which was borne in mind when the court concluded that the minority should buy out the majority.[23] The court accepted that the remedy granted may be comparatively unusual.[24]

An explanation for Spigelman CJ’s approach was offered in Fedorovitch v St Aubins Pty Ltd (No 2) (Fedorovitch).[25] In that case, Young J traced back the origin of the oppression remedy to section 210 of the English Companies Act 1948. His Honour noted that the purpose of that section was to provide relief in circumstances where the minority had invested their capital in a project which was being employed oppressively against them, yet they could not recover their capital because it was locked into the venture. The aim of the section was therefore to either stop the oppression or wind up the company so that the venture's capital could be released.[26]

At the time Fedorovitch was decided, the oppression remedy was contained in section 246AA of the Corporations Law. However, Young J considered that the aim of section 246AA was essentially the same as its English counterpart, namely to permit the minority to free its capital in circumstances of oppression.[27] The aim was not to punish the majority (who was almost invariably the oppressor), provide compensation or enable the making of the profit that ought to have been made had the venture been successful.[28] Young J concluded that all that the minority can really insist on is either that the venture should proceed in accordance with what was understood or that the minority should get back the capital invested.[29] This was considered to be the reason why, ordinarily, the proper order is that the majority (the oppressor) buy out the minority (the oppressed).[30]

Earlier in Fedorovitch, Young J also considered Ex parte Shooter and Re Brenfield as support for his Honour’s conclusion that there was a general rule in this regard which should only be departed from in exceptional circumstances.[31] Both of those cases were considered to be exceptional, with Re Brenfield being considered “a little hard to understand”.[32]

Young J considered that the most succinct formulation of the general rule was contained in Wilton-Davies v Kirk[33] (Wilton-Davies), a decision of the Chancery Division of the English High Court. In that case, Judge Weeks QC was faced with a dispute between two groups of shareholders who each held 50% of the company. Judge Weeks QC stated that:

If there had been a great disparity of holding I would have formed a prima facie view that the majority should, as usually occurs, buy out the minority, but there is a difficulty where there is equality and it is not obvious which side should buy the other side out.[34]

A further factor which is likely to have influenced Young J’s judgment in Fedorovitch was the objective to achieve uniformity in the interpretation of the oppression remedy. In this regard, Young J stated:

… the court must bear a few things in mind when making an order under this section. The first is that the section is fairly common in the Common Law world and the approach to the section has been relatively uniform. It is important in the public interest that that uniform approach continue to be followed, so that shareholders and their legal advisers and accountants will be able to advise them.[35]

Aside from the two exceptional cases referred to in Fedorovitch and Fexuto, there have since been at least two others.

At around the time Fexuto was decided, Seimer v Paragon Oil Systems Ltd[36] came before the High Court of New Zealand. In that case, the plaintiffs invested in the relevant company in return for a minority shareholding. The second defendant was the majority shareholder. The plaintiffs sought orders for the transfer of certain shares in the company held by the other defendants. By the time the proceeding came on for hearing, the company was in receivership, the second defendant was in liquidation, the third defendant had her defence struck out and there was no appearance for her, and the fourth defendant recently died with leave being granted for the executrix of his estate to withdraw. There were effectively no defendants before the court at the hearing. The plaintiffs were personally exposed in that they guaranteed the lease of the company’s business premises and were trying to rescue their investment in circumstances where they were the only parties who could advance the company. Hammond J stated that an order for divestiture of the shares from the majority was not a “usual” order and that usually a minority seeks to exit the company. However, because the majority shareholder was in liquidation, that option was not available.[37] No reference was made in the decision to any of the earlier cases discussed above concerning which shareholder should be permitted to buy out the other.

In 2009, the English High Court was again required to consider this issue in the context of competing unfair prejudice petitions brought under section 994 of the English Companies Act 2006. In Oak Investment Partners XII Ltd Partnership v Boughtwood,[38] the minority was a purely commercial investor holding preference shares reflecting about 30% of the issued capital of the company. 68% of the issued capital was held by the inventor of the technology which the company was created to exploit. Despite this, Sales J ordered that the majority shareholder/inventor sell his shares in the company to the minority investor.

In coming to this conclusion, no reference was made to the earlier decisions of that Court in Wilton-Davies, Ex parte Shooter, or Re Brenfield. Rather, the focus of the decision was upon the gravity of the oppressive behaviour of the majority shareholder which supported the exercise of the court’s discretion to order that his shares be sold to the minority.[39] Further, in that case, both disputing parties brought petitions for relief that they be permitted to buy the other shareholder out. Sales J commented that:

This is an atypical order to make, since it is more usual that the petitioner is seeking an order that his interest be bought out by the respondent.[40]

No other statement of principle on this topic was referred to by his Honour. The decision was later upheld on appeal to the English Court of Appeal.[41] Again, no reference was made to the decisions in Wilton-Davies, Ex parte Shooter, or Re Brenfield. Rather, the matter appears to have been treated as a fact-based case involving a discretionary balancing exercise.[42] The Court of Appeal described the majority shareholder’s conduct as follows:

[The majority shareholder] started the trial at a major disadvantage as a result of his disgraceful, and inexcusable, conduct of 24 June 2008 whereby he sought, and for a month achieved (and, had he had his way, it would have been for longer), practical control of the group so that he could run it his way and renege on what he had agreed with his quasi-partner. His conduct was underhanded and unconstitutional, it was damaging to the group and its business and it marked the final destruction of any element of continuing trust and confidence that might still have existed between the quasi-partners. His attempts to explain and justify his conduct added up to nought. The judge rejected his ‘conspiracy’ defence and he abandoned it before us. He claims to have acted on advice, but has not disclosed it. He claims to have been entitled to act as he did with a view to escaping the imposition on him of the SCDC offer, but I am not persuaded that in objecting to that offer he was doing other than reneging on what he had earlier agreed so as to promote his own personal interests above those of the group. The point had been reached when the group could not afford not to accept the SCDC offer and his deliberate frustration of it was probably the most direct cause of PML’s subsequent collapse into administration.[43]

On this basis, the Court of Appeal found that the decision at first instance was “unassailable”,[44] “inevitable” and “unchallengeable”.[45]

In addition to the above exceptions, there is a case in South Africa in which a minority at first instance was permitted to buy out a shareholder which commanded a majority. However, this was later overturned on appeal.

In Bayly v Knowles,[46] (Bayly) the Supreme Court of Appeal of South Africa reversed a decision at first instance of Horn J in the South Gauteng High Court (Johannesburg) which permitted a minority shareholder (the respondent) holding 31.67% of the issued capital of a company to purchase the shares of another shareholder holding the same percentage of shares (the appellant). Although the appellant held a minority interest also, the appellant was aligned with another significant shareholder and together they constituted the majority. The Supreme Court of Appeal considered that the matter ought to be approached on the basis that consideration ought to be given to all shareholders (including those not involved in the dispute) and that the respondent commanded a majority.[47] The order made by the trial judge was considered to have had the effect of transforming the interests of the remaining shareholders from a de facto majority into a minority.[48] In other words, the effect of the trial judge’s decision was therefore to permit a minority to buy out a majority.

In reversing the trial judge’s decision, Heher JA[49] (with whom the other members of the court concurred) referred to the following remarks of Hoffman J in Re a company (No 006834 of 1988), ex parte Kremer:[50]

I think it must be very unusual for the court to order a majority shareholder actively concerned in the management of the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority shareholder at a fair price.

Because the respondent had made a fair offer for the purchase of the shares, the trial judge’s decision was overturned. Consequently, Bayly cannot ultimately be an example of an exception to any general rule.

There are also cases where a 50% shareholder has been permitted to buy out the other 50% shareholder.[51] In some of those cases, the oppressed party was permitted to buy out the oppressor.[52] In others, the oppressor was permitted to buy out the oppressed party.[53]

However, in a number of other cases, a minority has unsuccessfully sought a buy-out order.[54]

For completeness, reference is also made to what at first glance appears to be an unusual decision of the Supreme Court of Western Australia in which this issue was resolved by means of a competitive bid process.[55] In effect, orders were made permitting the group offering the highest bid being entitled to purchase the other group’s shares.[56] However, this result was achieved by consent of the parties.[57] There was no reference in the judgment to the usual order in cases of this type or case authorities supporting it as discussed above. It is unclear as to what factual circumstances would need to exist to justify such an outcome on a contested basis. The approach would appear to conflate the issue of who should buy out whom with the question of how much should be paid. Traditionally, these issues have been dealt with separately. Conflating them would create the risk that the oppression remedy becomes no more than a judicially administered auction with the outcome being determined by the highest bidder.

It follows that prior to the decision in Slea v Connective and based on the known reported decisions to date, there were only four final decisions where a minority has been permitted to purchase a majority interest on a contested basis.

3. The Slea v Connective decision

Slea Pty Ltd (Slea) was a one third minority shareholder in Connective Services Pty Ltd and Connective OSN Pty Ltd (Companies). The remaining two thirds of the Companies were held by Millsave Pty Ltd and Mr Haron. The Companies carried on the business of mortgage aggregators.

The case involved a long history of significant oppressive conduct by Millsave Pty Ltd and Mr Haron which had the aim of attempting to purchase Slea’s minority interest at a depressed price.[58] More specifically, the oppression concerned:[59]

1. A failure to pay dividends and the inappropriate retention of dividends so as to (i) drive down the value of Slea’s shares so that they could be purchased more cheaply; and (ii) encourage Slea to accept the existence of a binding agreement to transfer some of its shares for no or little upfront payment in circumstances where there could be a tax liability.[60]
2. Inappropriate payments to directors and inappropriate recording of directors’ fees as unsecured related party loans. The payments were considered to be unjustifiably lavish.[61] The recording of the fees as loans had the effect of shifting a tax liability which would normally be met by the directors to the companies.[62]
3. A strategy, implemented by various means, to remove Slea as a shareholder at a depressed price.[63]
4. A restructure whereby the business of the Companies was transferred to subsidiaries to enable the circumvention of pre-emptive rights provisions in favour of Slea and to sell equity in the Companies to a third party, Macquarie.[64] That transaction resulted in Slea’s commercial interest in the business of the Companies being reduced from one third to one quarter.
5. The adoption of provisions in the constitution of the relevant subsidiary which were prejudicial to Slea.[65]
6. Misleading or deceptive conduct by silence in the failure to disclose to Slea the restructure and sale to Macquarie prior to the execution of a settlement deed with Slea.[66]
7. The funding by the Companies of more than $12.5 million in legal fees and their participation in the litigation against Slea.[67] That amount did not include the costs of the trial itself. Those costs were a significant proportion of the Companies’ net profit for the relevant periods. Slea was effectively bearing a significant portion of those costs as a shareholder.
8. The withholding of financial records.[68]
9. The directors of one of the Companies initiating a sale process to sell the business of the Companies or shares in the relevant subsidiary for an improper purpose shortly prior to the trial. The purpose was to prevent the court from making orders in the proceeding to rescind the restructure and limit the relief available to Slea to monetary compensation.[69]

After a detailed consideration of the relevant authorities, Robson J referred to the High Court decision of Campbell v Backoffice Investments Pty Ltd[70] (Campbell v Backoffice) in which French CJ held that sections 232 and 233 of the Act are to be read broadly and the “imposition of judge-made limitations on their scope is to be approached with caution”.[71] Robson J also referred to the joint judgment of Gummow, Hayne, Heydon and Kiefel JJ in Campbell v Backoffice in which it was held that “the power given to the court by section 233(1)(d) should not be hedged about by implied limitations.”[72]

Robson J also considered that the exercise of the discretion to award relief under section 233 is dependent on the findings as to the type of oppression in the specific case and the relief must be that which is best suited to putting an end to that oppression.[73]

His Honour considered that the approach to be adopted is for the court to direct its attention to granting relief that would “respond, and put an end to, the specific oppression found”[74] and is “appropriate and would best remedy the oppression found in all the circumstances of the particular case.”[75] His Honour rejected the notion that there is a judge-made test which needs to be satisfied before a buy-out order by a minority of a majority interest can be made.[76] Further, the order granted should be the least intrusive option consistent with making an appropriate order and achieving the justice that the case requires.[77]

Finally, Robson J accepted that a buy-out by a minority may be justified where the conduct of the majority shareholder demonstrates unfitness to exercise control over the company, to the extent that allowing the majority to remain in control would be damaging to the company or its business, or would pose a serious risk to the public.[78]

In applying these principles, Robson J considered that an order permitting Slea (the minority) to purchase the shares held by Millsave Pty Ltd and Mr Haron was appropriate.[79] The factors which led to this conclusion included the following:

1. A significant factor is that if the majority were permitted to buy out the minority, the majority’s oppressive conduct would be rewarded and its aim would be achieved.[80] It would be “unfair and inequitable” that the burden of the sale should fall on Slea as the innocent party.[81]
2. If the majority were permitted to buy out the minority, it would not relieve the oppressive conduct of the majority reducing Slea’s minority interest from one third to one quarter through an oppressive restructure and sale but instead would compound it by further reducing its interest to zero.[82]
3. Robson J’s finding that the directors of the Companies had been dishonest and deceitful in their oppressive conduct and that their behaviour of conspiring to oppress Slea with the object of buying Slea’s shares at less than their true value was serious blameworthy conduct.[83] Robson J considered them to be unfit to act as company directors, and to have repeatedly displayed a willingness to act dishonestly, consciously refused to comply with court orders, destroyed relevant documents, failed to comply with discovery obligations, deliberately concealed information and twice invoked the court’s processes for a collateral purpose and as a vehicle for oppression.[84]
4. The majority shareholders demonstrated a willingness to sell the business of the Companies to a third party in circumstances where Slea wished to keep its one third interest.[85]
5. A director of the Companies was found to have deliberately lied in giving evidence about the explanation as to why the sale process was embarked upon.[86]
6. The majority had embarked upon a decade long campaign to eliminate Slea as a shareholder and inflicted financial hardship on Slea in the hope of acquiring Slea’s shares cheaply.[87]
7. The majority conducted themselves on the basis that the Companies’ assets were their personal assets.[88] An example of this was using moneys of the companies to fund their own legal costs.

Robson J considered the statements of Spigelman CJ in Fexuto that an order permitting a minority to buy out a majority is “extraordinary, and virtually unprecedented”[89] and that “[i]t is only a systematic course of improper conduct on the part of the majority that would justify an order that the minority acquire, by compulsion of the court, the shares of the majority”[90] to be erroneous or at the very least, highly problematic.[91] Rather, the approach of Fitzgerald JA, which did not impose any special inhibition on the court’s power to order shareholders engaged in oppression to sell their shares because they constitute a majority, was preferred.[92]

An attempt was made to reconcile the approach taken with the rationale for the general rule advanced by Young J in Fedorovitch. Young J considered that the rationale for the general rule that the majority should be permitted to buy out the minority was that all that the minority can really insist on is either that the venture should proceed in accordance with what was understood or that the minority should get back the capital invested.[93] For this reason, minority buy-outs have been considered punitive or expropriatory because it exceeds the aim of the relevant legislative section.[94]

However, Robson J in Slea v Connective considered that while this rationale may explain why a majority buy-out is the usual order, it should not operate to impose some restriction on the words of the statute or the general guiding principle that the remedy should respond, and put an end to, the specific oppression found.[95] The justification for this approach was derived from a related concept referred to in the decision of Lord Hoffmann in O’Neill v Phillips.[96] In that case, Lord Hoffmann indicated that where the alleged oppressor has made a reasonable offer to the minority, then the exclusion of the minority from management will not be unfairly prejudicial and proceedings commenced by the minority in this regard may be struck out.[97] Robson J noted that the application of this principle in Australia was qualified by the New South Wales Court of Appeal in Tomanovic v Global Mortgage Equity Corporation Pty Ltd[98] (Tomanovic). Among other things, the Court of Appeal in Tomanovic referred to High Court guidance given in regard to the inappropriateness of reading provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.[99] The Court of Appeal concluded that while a majority offer to purchase the minority’s interest might remedy some but not all types of oppression, the onus was on the party making the offer to establish that, because of the offer, there was no oppression.[100]

In Slea v Connective, Robson J considered that this statement of the Court of Appeal in Tomanovic could apply equally to a court ordered buy-out in that it may remedy some, but not all types of oppression. Accordingly, because such an order may not necessarily remedy all types of oppression, the “general rule” should not be construed to impose any restriction on the words of the statute.[101]

Accordingly, Robson J concluded that while the authorities establish that the usual order is for the majority to buy out the minority, a buy-out in favour of the minority, which is invariably the oppressed party, may be made where such an order is appropriate and the justice of the case is satisfied by such an order.[102]

4. Implications of the Slea v Connective decision

To a large extent, Robson J’s approach in Slea v Connective conforms the interpretation of sections 232 and 233 of the Act in this context with more modern approaches to statutory interpretation. Opposing the development of a potentially restrictive generalised rule[103] in favour of a purely discretionary approach based on resolving the oppression does appear to be more consistent with guidance given by the High Court.[104] In this regard, the reasoning appears difficult to challenge as a matter of principle.

Is there a practical difference to the outcome?

Despite Robson J’s approach, it remains to be seen whether its application will make any real difference in the frequency of cases in which minorities are permitted to buy out majorities. This is particularly so if Young J’s rationale for the (perhaps former) general rule is accepted. Young J’s rationale is that all that the minority can really insist on is either that the venture should proceed in accordance with what was understood or that the minority should get back the capital invested.[105] The rationale appears to reflect that the minority knowingly became a minority without the right to ever control the company. If the rationale is accepted, then the fact that a minority is a minority ought to be a significant factor against the exercise of a discretion to award the minority a right to buy out the majority.

In Slea v Connective, while Robson J rejected the notion of a judge-made test overlaying the discretion afforded by section 233 of the Act, his Honour appeared to accept the validity of Young J’s rationale. Relevantly, Robson J stated:

… while the rationale behind the general rule may explain why a majority buy-out is the usual order, it should not operate to impose some restriction on the words of the statute and the general guiding principle that the remedy should respond, and put an end to, the specific oppression found.[106] [Emphasis added]

Arguably, this statement suggests that the application of Robson J’s approach should not lead to any significant change in the outcome of cases in this area. One way in which Robson J’s approach may be followed without resulting in a significant change to those outcomes is offered below.

In cases where the disputing parties each seek relief to buy out the other party, the approach of granting the most appropriate relief to put an end to, or best remedy, the specific oppression will require a choice between, at least, two alternative buy-out remedies.[107] Under Robson J’s approach, discretionary factors for and against each remedy will need to be balanced. If Young J’s rationale is observed, the mere fact that the minority is a minority should be a significant discretionary factor against a buy-out by the minority of a majority. If so, then something significant would need to exist to overcome that factor for a minority to succeed in obtaining an order that it may purchase the majority interest. Evidence of exceptionally bad oppressive behaviour by the majority may well be that overpowering discretionary factor which is capable of tipping the balance in favour of a minority.

If this analysis is correct, then Robson J’s approach is capable of reaching the same outcome as could be reached by the approach taken by Spigelman CJ. Instead of extraordinarily bad oppressive behaviour being an element of a test which must be satisfied, it is instead a significant discretionary factor which has the ability to counteract other significant discretionary factors, such as the fact that a minority is a minority.

The outcome of Slea v Connective is consistent with this conclusion. The oppressive conduct in that case was extraordinary both in terms of its gravity and in the various forms in which it existed. Using the words of Spigelman CJ, the facts as found by Robson J did amount to a systematic course of improper conduct on the part of the majority. Even if Spigelman CJ’s approach was adopted, it would be difficult to argue that the outcome should be different on the basis of the facts as they were found.

If a majority’s oppressive behaviour must be extraordinary before a minority will be permitted to buy out a majority, then arguably, majorities may engage in lesser forms of oppressive behaviour and still be permitted to buy out the minority.[108] This proposition is reflected in the cases referred to above where oppressors have been permitted to buy out the interests of the oppressed. This is also consistent with the notion that an order requiring the majority to sell is punitive or expropriatory[109] and that is not consistent with the purposes of the section.

Accordingly, although the approach adopted by Robson J may be difficult to challenge, it may not necessarily result in any change to the frequency of cases where a minority is permitted to buy out the majority.

The buy-out order which brings an end to the oppression

In Slea v Connective, Robson J considered that the court should grant relief which, among other things, puts an end to the oppression.[110] However, faced with competing buy-out proposals from a majority and minority group, it is possible that either buy-out proposal would put an end to the oppression. For example, if the root cause of the oppressive behaviour is a conflict between the majority and the minority, a buy-out by either the majority or the minority of the other is likely to put an end to the conflict and therefore the oppression. Even though the majority might be responsible for the oppressive behaviour, a buy-out by it of the minority’s interest may be at least one of the potential remedies which would bring the oppression to an end.

Accordingly, to determine which of the competing buy-out remedies should be granted in such a case, a deeper inquiry is needed. Presumably, this is why Robson J also referred to relief which would “best remedy”[111] the oppression found (rather than merely to bring it to an end). This requires consideration to be given to various other discretionary factors which might impact on the issue. An example of a factor which may influence the choice of remedy in this context is, as was the case in Slea v Connective, whether the remedy granted would reward the majority for its oppressive behaviour. Other factors may also be relevant, such as whether the relevant party (either directly or through its representatives) is fit to manage the company.

In circumstances where the majority is the oppressor (which is often the case), the important question is likely to be whether the gravity and type of oppression by the majority was sufficient to tip the balance in favour of an order that the minority be permitted to buy out the majority. Simply focusing on which remedy brings an end to the oppression in isolation may not be sufficient to resolve this question where a buy-out by either party at fair value will bring the conflict, and the likely oppression, to an end.

The significance of being rewarded for oppressive conduct

The issue of the majority being “rewarded” for its oppressive conduct was considered to be a significant factor in Slea v Connective.[112] It may also have influenced the approach taken by Fitzgerald JA in Fexuto when his Honour stated:

Majorities should not be encouraged to think that oppression is unlikely to have any more adverse consequence than an obligation to purchase the oppressed minority’s shares, which might well suit the majority’s purpose.[113]

However, a question arises in relation to what is an impermissible “reward” in this context.

It is accepted that in some cases, majorities may have engaged in oppressive conduct with no desire to buy out a minority and at all times being content with the prospect of the minority retaining its interest. In such a case, an order requiring the majority to purchase the minority’s interest could not be considered a reward for the oppressive behaviour.

At the other end of the spectrum, there is the case of Slea v Connective, where the majority had embarked upon a decade long campaign to eliminate Slea as a shareholder and inflicted financial hardship on Slea in the hope of acquiring Slea’s shares cheaply. In that case, the majority was, by its oppressive conduct, trying to achieve something which it later sought to achieve in a court proceeding. In other words, the conduct in relation to the majority’s efforts to acquire the minority’s interest was in itself, oppressive. Accordingly, it is easy to understand why Robson J considered that permitting the majority to buy out the minority in that case would be improperly rewarding the oppressive conduct.

Between these two scenarios, there may be others where the majority has the intention of buying out the minority but its oppressive behaviour stops short of a scheme designed to do so for less than fair value. This middle ground scenario is more likely to arise if, in response to the allegations of oppression, a majority makes a buy-out offer to the minority to resolve the dispute. As the existence of such an offer may be relevant to the question of whether there is oppression in the first place,[114] majorities may be induced to make such offers (on an open basis) as a means to defend their positions.

In this type of case, would an order permitting the majority to buy out the minority be an impermissible reward for the majority’s oppressive behaviour?

It is not entirely clear from Robson J’s decision as to what other instances of oppressive conduct should result in an order permitting a majority to buy out a minority being considered an improper reward.

For example, it is unclear whether Robson J’s decision would have been different if the efforts of the majority to purchase the minority’s interest in Slea v Connective were at fair value. In Slea v Connective, Robson J acknowledged that if a buy-out order in favour of the majority was made, it would not be at an under value.[115] However, notwithstanding this fact, his Honour considered that such an order would be an impermissible reward for the majority’s oppressive behaviour. In the authors’ view, the position might have been different if the majority did not embark upon a scheme to obtain the minority’s interest cheaply, but rather sought to offer what it reasonably considered to be a fair price on fair terms.

Although it is not entirely clear how far the concept of being improperly rewarded by being granted a buy-out order will extend, the likelihood of a buy-out order in favour of a majority being considered an impermissible reward may be low where the efforts of the majority to purchase the minority’s interest is not in itself oppressive. This may be particularly so if the efforts to acquire the minority interest are carried out in a way which addresses (or reverses) the impact of the (alleged) oppressive behaviour.[116]

5. Conclusion

The Slea v Connective decision brings consistency to the interpretation of sections 232 and 233 of the Act in line with principles of interpretation from the High Court. It addresses the dissonance between the positions adopted by Spigelman CJ and Fitzgerald JA’s in Fexuto and provides some clarity on how to approach cases where the disputing parties each seek relief to buy out the other party.

The decision also attempts to remedy the perceived injustice of a “usual order” which might have the effect of encouraging a majority to behave oppressively in order to acquire a minority shareholder’s interest with the approval of the court.

For all of these reasons, the approach taken in Slea v Connective appears to have considerable force.

However, it remains to be seen whether this approach will result in any real difference to the outcome of oppression cases involving a contest between buy-out remedies.

If any significance is to be attributed to the concept that all the minority can really insist on is either that the venture should proceed in accordance with what was understood or that the minority should get back the capital invested, then buy-outs in favour of a minority should continue to be exceptional. This is because regardless of whether the court conducts a discretionary balancing exercise (Robson J’s approach) or whether it grants a “usual order” unless extraordinary circumstances exist (Spigelman CJ’s approach), the fact that a minority is a minority is likely to continue be a significant factor against the granting of an order that a minority may buy out the majority.