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Increase in “Oppressive Conduct of Affairs” Cases for Employee Shareholders
An “oppressive conduct of affairs” is increasingly being pleaded in the courts by minority members (shareholders) of companies. This is occurring through the use of provisions within the Corporations Act 2001 (Cth) dealing with an “oppressive conduct of affairs,” which allows members to obtain orders from a court where their interests are being oppressed unfairly by the conduct of the company.
The number of cases which have sought these types of orders about “oppressive conduct of affairs”, have steadily increased since the 2001. Until 2013, the number of cases considering the section remained around 10 per year. From 2014, that number jumped up to around 30 per year. Last year it jumped significantly to 50 cases.
In the area of employment law, there now appears to be a growing trend to utilising these provisions even if only tentatively and unsuccessfully.
In a recent decision handed down on 8 August 2023, the Federal Court determined that Vitruvian Investments Pty Ltd (Vitruvian) had oppressed Mr Ahmad Sharif’s interests when it cancelled his share allocation.
The shares, which were to be 15% of the total share allocation, were to be provided under his employment contract. Mr Sharif had been performing work as CEO and Co-Founder under that employment contract. While Mr Sharif’s shares were cancelled, Vitruvian also undertook a capital raising, which Mr Sharif was not able to participate in. The capital raising had the effect of diluting Mr Sharif’s shares, if they were to be reinstated.
Vitruvian claimed that Mr Sharif misled and deceived it into entering into the employment contract. As such, it wanted an order from the Court that it didn’t need to comply with the contractual term to provide the shares to Mr Sharif and that its cancellation of the shares was valid.
Ultimately, the court found that there was an oppressive conduct of affairs, and made an order that a company which had been issued an equivalent of 15% of the total share allocation as part of the capital raising, was to transfer its allocation to Mr Sharif. This resolved both the issue of the cancellation of the shares as well as the dilution issue.
Companies should be mindful of taking action against employee minority shareholders in response to perceived wrong doing on the part of the employee or minority shareholder, as they will have potential recourse under these provisions.
Michael Nguyen, Senior Associate
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9 March 2018