Can two wrongs make a right? Dealing with company deadlock through statutory oppression

Often in the early stages of establishing a company resources are pooled and liabilities are met equally. As a result, directors agree to divide the company in half with each getting 50% of the shares with a view to working together amicably for the foreseeable future. However, as the business matures disputes can break out and because of the 50/50 structure all it takes is for one director to put their foot down and the company is placed into deadlock. So, what can shareholders do in this situation?

 

Previously, we considered how an action for statutory oppression under section 232 of the Corporations Act 2001 (Cth) (the Act) could play out in the context of a dispute within a family run business, and that article can be found here.

In this week's article, we will continue our focus on statutory oppression but slightly shift our focus to a different context in which oppression is often claimed. Namely, when two (or potentially more) directors, who are also both equal shareholders with equal voting rights ('further referred to as the 50/50 company') have a dispute which leaves the company in deadlock.

In this context, it is not uncommon for directors to assert that the other director (i.e. the other 50% shareholder) is engaging in oppressive conduct contrary to section 232 of the Act and that the Court should make appropriate orders under section 233 to bring the oppressive conduct to an end. The question then, is how would a Court deal with oppressive conduct in the context of a deadlock in a 50/50 company?

Well firstly, can we talk about it?

Before we dive into the case law, it's important to keep in mind that alternative dispute resolution may be helpful and, in some instances, highly effective in resolving on-going deadlock in a commercial and cost-effective manner, as opposed to outright litigation.

Often in these circumstances, parties may not be willing to talk to each other but given the opportunity to come to the table and air out their grievances in a controlled manner, the parties may be able to solve their dispute without costly litigation, keeping in mind not only the cost to business but also the personal cost in failing to break the on-going deadlock.

How would a Court deal with deadlock and a claim of statutory oppression pursuant to Section 232?

Assuming negotiations have proven inconclusive and parties cannot reach an agreement, the next likely step is that the parties proceed to Court to assert that the company's affairs are being conducted in a way which is either:

(1)   contrary to the interests of the members as a whole (s 232(d)) or

(2)   oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or members (s 232(e))

As noted in the previous article concerning statutory oppression, section 232(d) and section 232(e) operate distinctively from each other1 and for the purposes of this article we will remain focused on 'oppressive' conduct under s 232(e) as it relates to a 50/50 company stuck in deadlock.

Difficulty in oppression proceedings and 50/50 companies  

Generally, the conduct which section 232 is dedicated towards is behaviour where the unfairness results from the abuse of majority power or control.2 Therefore, in the context of a 50/50 company, both shareholders are not necessarily the majority or the minority so there is a question as to whether two people of "equal strength of character" can in fact engage in oppressive conduct against each other since neither holds a majority.

However, after a series of decisions3 the principle which emerged was stated in Munstermann v Rayward 4 namely, that:

A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used (Patterson v Humfrey [2014] WASC 446 at [52]-[53] (Le Miere J). [22]

Justice Stevenson's statement of principle does not on the face of it preclude findings of oppression when neither party can be attributed with engaging in "strong arm-tactics". In fact, in Beaumont v Peel (2019) Justice Black recognised that when a deadlock leaves the board unable to conduct its affairs with the appropriate decision-making capacity, this may still constitute oppression in the absence of fault on the part of any party.5

The breakdown between the parties has to be more than transient, for instance, a 'breakdown in communications does not by itself give rise to an inference of oppressive conduct on the part of either of the joint directors'6 and neither will the breakdown of the relationship between the parties without a consequential inability to manage the company's affairs in a proper manner.

So where does that leave us?

Ultimately, what constitutes oppression is broad but as a general rule the Court must be satisfied that 'objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors would consider the matter would not have thought the decision fair'.7

What will constitute oppressive conduct will be determined on a case-by-case basis given the differing circumstances which may lead up to the deadlock in a 50/50 company, and this in turn may impact the relief that the Court would be willing to grant in any claim involving oppression.

For example, in Catalano v Managing Australia Destinations Pty Ltd 8 which involved a company in deadlock, the Court determined that both parties had engaged in mutually oppressive conduct and that if the parties could not reach a commercial resolution, a liquidator would be appointed.

In contrast, in Munstermann v Rayward the Court ordered that the director, which was found to have caused the deadlock, should sell his shares to the other shareholder at their fair market value. The director’s conduct included bullying, attempting to increase his own salary and reducing the salary of the other director, refusing to authorise financial statements and budgets and then resigning his directorship.

What if neither of us are at fault, can oppression still be made out?

Sometimes the relationship between directors may simply just breakdown which could result in a deadlock. In these circumstances, is it necessary to show fault on the part of either director to be successful in a claim of oppression?

The short answer is no. In Beaumont v Peel 9 the Court agreed to make consent orders to reconstitute a company board to cure a deadlock in absence of any identifiable fault by either party other than a breakdown of the relationship. The Court noted that:

"where the board is in deadlock, unable to conduct its affairs with appropriate decision-making by the board, and with no apparent means of resolving that deadlock. That does not require any finding of fault on the part of [either party] … a breakdown of the relationship is not necessarily sufficient to establish oppression, but here, as I have noted, the breakdown of the relationship is combined with a consequential inability to manage the company's affair in a proper manner".10

Therefore, in the absence of any fault by either party the Court can make orders which cure the deadlock in order to facilitate the company returning to normal operations. In Beaumont that meant ordering the board to be reconstructed but if this order is inappropriate the Court may also order the company to be wound as an option of 'last resort' pursuant to section 233(1) of the Act, along with a whole suite of orders contained in section 233(1).

Moving forward

The key takeaway is that oppression is capable of being alleged by a shareholder in a 50/50 company but what will constitute oppressive conduct will vary depending on the facts of the given situation and what conduct gave rise to the deadlock.

We at McCabe Curwood have extensive experience in dealing with corporate oppression claims and regularly advise on either future proofing company constitutions or shareholder agreements to reduce the likelihood of deadlock.


1 Turnbull v National Roads and Motorists Association Ltd (2004) 50 ACSR 44 [34].
2 Wayde v NSW Rugby League (1985) 180 CLR 459 [472].
3 Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 [433]; Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104 [321] (Young JA); Patterson v Humfrey [2014] WASC 446; 103 ACSR 152.
4 Munstermann v Rayward [2017] NSWSC 133 [22].
5 Beaumont v Peel [2018] NSWSC 95 [13].
6 Patterson v Humfrey [2014] WASC 446; 103 ACSR 152 [207].
7 Morgan v 45 Flers Avenue (1986) 10 ACLR 692 [704].
8 Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55.
9 J E Beaumont v D M Peel [2018] NSWSC 95.
10 J E Beaumont v D M Peel [2018] NSWSC 95 [13].

Contributors

Danyal Ibrahim Senior Associate
Andrew Gouveia Law Graduate