Take that! Court turns the tables on oppressors by ordering majority buy-out

The Supreme Court of Victoria recently handed down its much-anticipated decision in Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136.

In a judgment spanning 453 pages, Robson J upheld the claim of Slea Pty Ltd (Slea) that Millsave Pty Ltd (Millsave) and Mark Haron (Haron) (collectively Majority Shareholders) had engaged in conduct that was ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ the interests of Slea, within the meaning of s232 of the Corporations Act 2001 (Cth) (Act).

In an unusual twist, the Court declined to order a minority buy-out of Slea’s shares by the Majority Shareholders.

Instead, the Court made orders requiring the Majority Shareholders to sell their shares in Connective Services Pty Ltd and Connective OSN Pty Ltd (collectively Connective Companies) to Slea.

The facts

The Connective Companies carried on a mortgage aggregation business which was established in 2003 by Sofianos Tsialtas (a director of Slea) and Glenn Lees (a director of Millsave).

From 2006 onwards, when Haron entered the business, the shareholders of the Connective Companies were Slea (33.33%), Millsave (50%) and Haron (16.67%).

In 2008, Tsialtas left the business and became an employee of Liberty Financial (Liberty).

Although resigning his directorship of the Connective Companies, Tsialtas retained his directorship of Slea, which retained its one-third shareholding in the Connective Companies.

The instances of oppressive conduct alleged by Slea against the Majority Shareholders, and against Haron and Lees in respect of their conduct as directors the Connective Companies, included (allegedly):

1. Obstructing Slea’s attempts to realise fair value for its shares by selling to a third party, instead offering to buy Slea’s shares for a dramatically reduced price.
2. Attempting to dilute Slea’s shareholding in the Connective Companies from 33.33% to 25% through a restructure and sale of the business to Macquarie Bank without Slea’s knowledge (which Robson J set aside as part of this decision).
3. Diverting profits from the business through payment of excessive remuneration and benefits to Haron and Lees.
4. Withholding payment of dividends to Slea by concealing the fact that dividends had been declared.
5. Attempting to deprive Slea of its right to seek relief in the oppression proceedings by way of an attempted sale of the Connective Companies to a third party (which did not go ahead).

Court’s finding of oppressive conduct

In upholding Slea’s claims that s232 of the Act had been contravened, the Court found that Millsave and Haron had conspired to financially ‘starve out’ Slea with the object of buying Slea’s shares at less than their true value.

Court’s remedy for oppressive conduct

In turning its attention to how it should remedy the oppressive conduct, the Court noted that s233 of the Act gave it wide discretion to make an order which ‘is appropriate in all the circumstances of the case, and the justice of the case so requires. Such an order would relieve the oppression and deny the oppressors the fruits of their oppressive conduct’.

In the unusual circumstances facing the Court, Slea was opposed to a buy-out of its shares in the Connective Companies, and instead sought orders from the Court that would entitle Slea to purchase the shares of the Majority Shareholders.

At the same time, Slea was open about the fact that it was receiving financial support from Liberty and that, if the relief it sought was granted, Slea would ultimately on-sell to Liberty the shares which it acquired from the Majority Shareholders in the Connective Companies pursuant to the Court’s orders.

While noting that a minority buy-out order is the more usual remedy for oppression, the Court referred to cases where a ‘majority buy-out order’ had been made, including where ‘the majority shareholder demonstrates unfitness to exercise control over the company, to the extent that allowing them to remain in control would be damaging to the company or its business, or would pose a serious risk to the public’.

The Court did not make any finding that the Majority Shareholders’ control of the Connective Companies posed any risk to the public, however the Court found the current directors of the Connective Companies ‘had been dishonest and deceitful in their oppressive conduct’ and engaged in ‘serious blameworthy conduct’.

The Court then considered that, if a minority buy-out order were granted (as contended for by the Majority Shareholders) the ‘oppressive conduct would be rewarded and its aim achieved through a buy-out of the minority’.

Having regard to those circumstances, the Court determined that a majority buy-out order (ie Slea buying out the Majority Shareholders) was the most appropriate remedy for this case.

Comments

The more typical remedy in cases of shareholder oppression is for the Court to order a buy-out of the oppressed party’s shares for a price which places them in the position they would be in had the oppression not occurred.

This decision highlights (however) that each case will be treated on its own facts. If conduct is found to have occurred that is contrary to s232 of the Act, a wide discretion is conferred on the Court under s233 to make orders which the Court considers just and equitable to relieve the oppressive conduct.

Whether the Court has overstepped applying its discretion on the facts of this case may soon become a question for the Court of Appeal with Millsave and Haron having recently commenced an appeal against the decision.

If you would like further information on the Court’s decision, or require advice on shareholder oppression, please contact a member of our Litigation & Dispute Resolution team.

References
1. Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136 – including [1781]-[1786] and [1808]-[1810].
2. https://www.mpamag.com/au/news/general/connective-shareholders-to-appeal-court-ruling/408884