Shareholder oppression: when does it exist?

What is shareholder oppression?

We are often asked to advise clients who are minority (or 50%) shareholders of companies and who have had a breakdown of relations with the majority (or other 50%) shareholders. In such cases, lawyers will ask for (a) list of every action done by the majority which it is alleged amounts to conduct which is oppressive and (b) evidence of those actions. The purpose of the exercise is to examine whether the case falls within section 212 of the Companies Act 2014 as one of oppression or disregard of the client's interests as a shareholder. Most company shareholders have at least heard of the "oppression remedy" contained in the legislation nut they are unsure whether a court would uphold their view that they are being "oppressed". We also come across clients who are certain that they have been oppressed to whom we have to break it (gently) that the law simply does not support that view.

While the meaning of what precisely constitutes oppressive conduct will ultimately fall to be decided on the specific facts of each case, it is worth examining some of the situations in which the term has been considered by the courts.

1: Breakdown in relationships between co-owners

This is the classic oppression scenario where two co-owners (normally but not necessarily 50% shareholders) experience a breakdown in personal relations and this spills over into their business relationship. One of the parties often feels they are more entitled to own the business than the other, often because he/she has "done all the work" or "knows how to run a business". There is often a stalemate, the company cannot pass resolutions, one owner is suspended, dismissed or ignored as a director, sometimes locked out of the company premises, prevented from accessing the company finances or instructing company personnel. Such cases normally result in findings of oppression by the court (Re Charles Kelly Ltd [2011] IEHC 349).

2: Directors raising their salaries or allotting shares to themselves

Where the directors are the majority shareholders and they raise their salaries or allot additional shares to themselves, this will not necessarily amount to oppression if there was some tangible benefit to the company, such as an injection of new capital by them (Re Jermyn Street Turkish Baths Ltd [1971] 3 All ER 184). However, such actions can potentially result in other successful actions such as the breach of their fiduciary duties, misfeasance and so on.

3: Destructive conduct by the majority shareholders

Where the majority engage in acts which are clearly intended to damage the company or which clearly do damage the company, regardless of intent, such acts will be held to be oppressive. Thus, where the majority make statements to the effect that "the company has served its purpose", this can be relied upon as evidence of an intend to engage in oppressive conduct (Meyer v Scottish Co-Operative Wholesale Society Ltd [1959] AC 324).

4: Negligence by the majority shareholders-directors

Conduct will not be considered to be oppressive for the sole reason that the majority shareholders made a decision of which the minority disapproves – the procedure is not to be used as a means of usurping the powers of the majority shareholders or the directors. The fact that the directors made a decision which was wrong in the sense that it was negligent will not normally be enough (Re Elgindata [1991] BCLC 959). But a consistent pattern of mismanagement may result in a successful action for oppression (Re Sam Weller and Sons Ltd [1989] 3 WLR 923).

5: Criminal acts by the majority shareholders

Syphoning company funds into a personal account has been held to amount to oppression (Re Skytours Travel Ltd [2011] IEHC 517) as has forging the name of the other director on company documents (Re Rollville Ltd [2011] IEHC 79).

6: Bad faith

Whether or not conduct amounts to oppression will be determined by objective standards – there is no requirement that the respondent should have acted in a manner which he knew to be oppressive or that he should have intended for his conduct to be oppressive (Re Irish Visiting Motorists Bureau (7 February 1972, unreported) HC). Therefore, it is not necessary to prove bad faith on the part if the majority, but such proof is more likely to result in a finding of oppression.

7: Good faith

Following on from the previous point, conduct which is done in good faith can nevertheless be oppressive. Where the majority shareholders of an ailing company voted to transfer the entire shareholding to another company in order to keep the former afloat, this was held to be oppressive to the shareholders of the first company even though it was being done in good faith (Re Emerald Group Holdings Ltd [2009] IEHC 440).

8: Dismissal of director

The oppressive conduct can include acts which amount to unfair interference with a person's rights as a director. This may include a situation where the majority vote to dismiss a director from his role (Re Murph's Restaurant Limited [1979] ILRM 141) where the Court was prepared to find that dismissal of a director could constitute oppressive conduct, although it was more appropriate on the facts of the case to make an order winding up the company after a complete breakdown of trust between its owners).

9: Breach of pre-emption rights

The breach of a shareholder's right of first refusal in the case of share transfers is generally considered not to amount to oppression or disregard of interest (Re Leeds United plc [1997] BCC 131).

10: Allotment of shares

Allotting new shares does not normally amount to oppression or disregard of interest even if it results in the dilution of the minority's shareholding. However, where the allotted shares are undervalued and are issued in full knowledge that the minority shareholders cannot afford to buy them, this may constitute oppression (Re a Company No 007623 of 1984 [1986] 2 BCC 99191).

11: Isolated acts of oppression

A single act or decision by the majority can be considered to be oppressive of the minority shareholders or in disregard of their interests as shareholders. There is no requirement that there should be a series of acts or that the act should be ongoing ath the time the proceedings are issued (Re Williams Group Tullamore Ltd [1985] IR 613).

Conclusion

The usual legal disclaimer that the above observations are illustrative only and should not be relied upon as gospel applies doubly in the case of articles about section 212 oppression. No other area of company law is as sensitive to the specific facts of a case as this. The above situations are some of the common threads which run through the case law but they should be viewed as guidance at best. Whether or not a particular case amounts to oppression for the purposes of section 212 will depend on its own facts and it is therefore necessary to seek legal advice. Apart from the fact that most lawyers experienced in this area are able to assess the existence of oppression on a "I know it when I see it basis", it is also worth obtaining an objective opinion when there may be other, more appropriate remedies available.

Author: Mahmud Samad BL
Publication date: 23rd November 2023

CORPORATELEGAL