In corporate law in Commonwealth countries, an oppression remedy is a statutory right available to oppressed shareholders. It empowers the shareholders to bring an action against the corporation in which they own shares when the conduct of the company has an effect that is oppressive, unfairly prejudicial, or unfairly disregards the interests of a shareholder. It was introduced in response to Foss v Harbottle, which had held that where a company's actions were ratified by a majority of the shareholders, the courts will not generally interfere.
Contents
- Introduction in the United Kingdom
- Scope
- Jurisprudence
- Extent of application
- Comparison with derivative actions
- Application in Australia
- References
It has been widely copied in companies legislation throughout the Commonwealth, including:
Introduction in the United Kingdom
An oppression remedy, intended to operate as an alternative to winding up a company, was adopted as s. 210 of the Companies Act 1948, which declared:
210. (1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in a case falling within [s. 169(3)], the Board of Trade, may make an application to the court by petition for an order under this section.
(2) If on any such petition the court is of opinion—the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise.In the Companies Act 2006, the relevant provision is expressed in s. 994 (and the Secretary of State has similar authority under s. 995):
994. (1) A member of a company may apply to the court by petition for an order under this Part on the ground—
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.Conduct that is considered to constitute "unfair prejudice" has been given a broad interpretation, which can include:
The conduct is not confined to a specific group. In Re HR Harmer Ltd, Jenkins LJ noted that the definition is "wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure." Therefore, it can cover the actions of:
Scope
Canadian legislation (both federally and in all provinces other than Prince Edward Island) provides for a broad approach to the oppression remedy. In Peoples Department Stores Inc. (Trustee of) v. Wise, the Supreme Court of Canada noted:
48. ...The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction. One commentator describes the oppression remedy as “the broadest, most comprehensive and most open-ended shareholder remedy in the common law world.”
In the CBCA, s. 241 states:
241. (1) A complainant may apply to a court for an order under this section.
(2) If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliatesthat is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.(3) In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,A "complainant" is deemed to be a current or former registered security holder, a current or former director or officer, the Director appointed under the CBCA, or "any other person who, in the discretion of a court, is a proper person to make an application under this Part." In that regard, it can include a creditor of the corporation, but not every creditor will qualify.
Jurisprudence
In BCE Inc v 1976 Debentureholders, the Supreme Court of Canada stated that, in assessing a claim of oppression, a court must answer two questions:
Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty. This is defined as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen". Following BCE, the Court of Appeal of British Columbia noted that "breach of fiduciary duty ... 'may assist in characterizing particular conduct as tending as well to be 'oppressive', 'unfair', or 'prejudicial'". More recently, scholarly literature has clarified the connection between the oppression remedy and the fiduciary duty in Canadian law:
Upholding the reasonable expectations of corporate constituents is the cornerstone of the oppression remedy. Establishing a breach of the tripartite fiduciary duty has the effect of raising a presumption of conduct contrary to the reasonable expectations of a complainant.
Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform.
Extent of application
Applications to the Court have been successful where:
- there was lack of a valid corporate purpose for the transaction;
- the corporate and its controlling shareholders failed to take reasonable steps to simulate an arm's length transaction;
- there was lack of good faith on the part of the corporation's directors;
- there was discrimination among shareholders which benefited the majority to the exclusion of the minority;
- there was a lack of adequate and appropriate disclosure of material information to minority shareholders; and
- there was a plan to eliminate a minority shareholder.
The types of behaviour that such actions encompass have included the diversion of corporate profits, the personal use of such profits by a controlling shareholder, the exclusion of the applicant from the corporation's operations, and changing the proportionate holdings by different shareholders.
The remedy can extend to a wide variety of scenarios:
The court's discretion is not unlimited, as the Court of Appeal of Newfoundland and Labrador observed in 2003:
Comparison with derivative actions
Oppression claims are separate from derivative actions, but the two are not mutually exclusive. However, a derivative action claim can only be instituted by leave of the court, as it is brought by a complainant to sue on behalf of the corporation for a wrong done to the corporation, and any successful claim is binding on all shareholders. This is in contrast to the oppression remedy claim, where a complainant sues on behalf of himself for a wrong he suffers personally as a result of corporate conduct.
In 2015, the Ontario Court of Appeal dismissed an oppression remedy claim, because the claimant was only seeking recovery of funds for the benefit of the corporation. As a result of the discussion within the judgment, the following general principles can be drawn for determining which remedy is more appropriate:
- To claim oppression, a plaintiff must plead that they suffered personal harm distinct from that suffered by the corporation itself.
- The focus of the oppression remedy is on the effects of the impugned conduct on the complainant, not on the corporation.
- If the relief sought is for the benefit of the corporation, then the action will most likely have to be brought as a derivative action, and leave will be required.
- The causes of action overlap where the corporation is small and closely held, and where the impugned conduct directly affects the complainant in a way that differs from the effects on other shareholders. In such cases, a claim may be brought either as a derivative action or a claim for oppression.
Application in Australia
S. 234 of the Corporations Act 2001 provides that the following can apply for an order seeking relief for oppressive conduct:
S. 232 states that the conduct of the company's affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution or proposed resolution by all, or by a class, of the shareholders, must be:
in order for an application to be considered.
The oppression remedy, together with the option available for winding up a company and ASIC's use of the public interest ground in that regard, has received greater exposure and legal development since the onset of the global financial crisis.