Oppression of Minority Shareholders

Last updated on November 27, 2015

Minority shareholders, being shareholders with a non-controlling ownership of a company (i.e. holding less than 50% of a company’s voting shares), are susceptible to abuse or oppression by the majority or controlling shareholders.  Such vulnerability stems from the fact that minority shareholders do not have a definitive say in the conduct of the company’s affairs.

While the law provides minority shareholders with remedies against oppression under the Companies Act, several legal requirements must be met for relief to be granted.

 Section 216 of the Companies Act

Section 216 of the Companies Act provides for the protection of the minority shareholder’s right to be treated fairly against majority abuse.

Only shareholders who do not have control of the company, and are unable to remedy any prejudice or discrimination suffered, are entitled to apply for relief under section 216.

What Constitutes Oppression

The underlying criterion of section 216 is commercial unfairness. Although prejudice is an important factor, it is not an essential requirement. Oppression may manifest in the form of a single act or a course of conduct over a period of time.

Oppression typically involves the majority shareholders advancing their interests at the expense of the minority shareholders. However, alleged oppressive acts must arise from the conduct of the company’s affairs, and not a majority shareholder’s act in his or her personal capacity. Some examples of oppressive acts include:

  • Dilution of minority shares
  • Exclusion from management
  • Exclusion from profit participation
  • Loss of substratum (i.e. change in the fundamental basis upon which parties entered into the corporate relationship; e.g. change in the nature of the business)

However, where the alleged oppressive act is a corporate wrong to the company on top of being a personal wrong to a minority shareholder, a derivative action under section 216A of the Companies Act is more appropriate. Examples of such oppressive acts include:

  • Mismanagement
  • Misappropriation of company funds
  • Diversion of company assets

You can read more about bringing a derivative action under section 216A of the Companies Act in our other article.

Remedies

Depending on the overall circumstances, the court has the discretion to order any remedy which it deems fit to bring an end to the matter rightly complained of and is not constrained by what the applicant is asking for. These remedies are provided for under section 216(2) of the Companies Act:

Injunctive and directive relief

Where it is deemed appropriate in the circumstances, the court is entitled to order an injunction to direct or prohibit any act, or cancel or vary any transaction or resolution.

For example, the court may order for the company:

  • To hold or to refrain from holding a general meeting
  • To pass or to refrain from passing resolutions
  • To undo any improper transactions

Regulation of corporate affairs

Specific orders which add to, modify or vary the articles of association of a company may be given by the court where such orders would remedy past irregularities and allow the company to operate on a regular basis in the future.

Examples of specific orders include:

  • Appointment of board of directors chosen by the court
  • Setting the rule that the company’ bank accounts must be operated with the signatures of two directors

Damages

The court may order the wrongdoer to make good the loss sustained by the minority shareholder in the form of damages where it is clear from the evidence that such loss was the result of the wrongdoer’s acts.

If the cause and the quantum of the loss cannot be definitively determined, the court is unlikely to order for damages.

Buy-out

Where the company is deemed to be still viable, a possible remedy is an order for the purchase of the shares of the minority shareholder by the company.

On the basis that the company is a going concern, the shares of the minority shareholder will be valued on the date on which they were ordered to be purchased, subject to the overriding requirement that valuation should be fair and just on the facts of the case. What is fair and just is up to the court’s determination.

Winding up

A winding up of the company may also be mandated as an order of last resort for an oppression application.

Such a drastic measure is usually resorted to in a situation where the deadlock in the management has worsened to such an extent that other types of remedies would have little practical effect.

Order to commence proceedings in the name of the company

As briefly highlighted above, the court may order for a derivative action under section 216A of the Companies Act to be pursued where the alleged oppression is due to acts resulting in loss to the company. Any relief granted by the court will therefore be for the benefit of the company and not the individual shareholder.

Section 216A of the Companies Act does not apply to foreign companies.

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