What constitutes as oppression of minority shareholders and what are the remedies?

Minority shareholders are shareholders with a non-controlling stake in the company. It refers to the shareholders with voting rights but the number of shares that they hold are insufficient to have a say in the company’s affairs. In most cases, this refers to 50 per cent of the company’s voting shares.

Shareholders with voting rights are invited to general meetings with the purpose of voting for company matters. Such company matters requiring shareholders votes are matters such as the appointment of directors or the allotment of new company shares. In some cases, the shares held by one individual or a group of individuals may be insufficient to influence the decision and the shares held by the majority shareholder or shareholders may be enough to pass matters through. Certain matters, if passed, may be detrimental to these minority shareholders. Thus there is a provision in Section 216 of the Companies Act that protects the interest of minority shareholders.

Oppression is usually in the form of the majority shareholders taking advantage of their position at the expense of the minority shareholders. The common oppressive acts are:

• Dilution of minority shareholders
• Not distributing profits of the company to minority shareholders
• Not involving the minority shareholders in the management of the company
• Changing the business nature of the company and the terms of the business relationship between all parties

 

Section 216 of the Companies Act reads as such:

Personal remedies in cases of oppression or injustice

216.—(1)  Any member or holder of a debenture of a company or, in the case of a declared company under Part IX, the Minister may apply to the Court for an order under this section on the ground —

(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or

(b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).

(2)  If on such application the Court is of the opinion that either of such grounds is established the Court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and, without prejudice to the generality of the foregoing, the order may —

(a) direct or prohibit any act or cancel or vary any transaction or resolution;

(b) regulate the conduct of the affairs of the company in future;

(c) authorise civil proceedings to be brought in the name of or on behalf of the company by such person or persons and on such terms as the Court may direct;

(d) provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself;

(e) in the case of a purchase of shares by the company provide for a reduction accordingly of the company’s capital; or

(f) provide that the company be wound up.

(3)  Where an order that the company be wound up is made pursuant to subsection (2)(f), the provisions of this Act relating to winding up of a company shall, with such adaptations as are necessary, apply as if the order had been made upon an application duly made to the Court by the company.

(4)  Where an order under this section makes any alteration in or addition to any company’s constitution, then, notwithstanding anything in any other provision of this Act, but subject to the provisions of the order, the company concerned shall not have power, without the leave of the Court, to make any further alteration in or addition to the constitution inconsistent with the provisions of the order; but subject to the foregoing provisions of this subsection the alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company.

(5)  A copy of any order made under this section shall be lodged by the applicant with the Registrar within 14 days after the making of the order.

(6)  Any person who fails to comply with subsection (5) shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $1,000 and also to a default penalty.

(7)  This section shall apply to a person who is not a member of a company but to whom shares in the company have been transmitted by operation of law as it applies to members of a company; and references to a member or members shall be construed accordingly.

 

Thus if a minority shareholder feels that he or she is being oppressed, he or she can bring the matter to the Court. The Court can then instruct the company based on one of the options in 216(2). The court can:

1. Order the passing or cancellation of resolutions
2. Order the holding or cancellation of general meetings
3. Regulate company affairs in the future
4. Order a reduction of share capital
5. Provide for the purchase of shares or debentures of the company by other members or holders of debentures of the company or the company itself
6. Order the company to be wound up

 

Oppression can happen if a company’s share structure is not carefully thought out. In fact, shareholder disputes are common. In addition to having a company’s share structure well thought out, shareholders should also enter into a shareholders’ agreement to regulate the conduct and dealings of the terms of engagement between the various shareholders.