The judgment of Solomon: majority versus minority

Removing minority directors - what intervention will a court provide in such a case?

Generally speaking our courts will not interfere in the internal affairs of companies. Of course, if claims are brought for negligence, or breach of duty the courts will evaluate that situation. Similarly, if shareholders allege that someone is acting oppressively in breach of section 246AA of the Corporations Law the courts may well intervene.

Recently, the Tasmanian Supreme Court was asked to intervene in a case where there was an attempt to remove the minority directors of a company. In the context of the dispute the court was asked to restrain the minority shareholders from voting in favour of these minority directors thus possibly preventing their removal. This case arose in the context of the oppression remedy.

The facts of Minecom Australia Pty Ltd & Anor v Mine Radio Systems Inc & Ors ((2000) 18 ACLC 248) were briefly these (as taken from the CCH report). Mine Radio Systems (Australia) Pty Ltd (MRS) was a company with two shareholders both of which were companies. One of the shareholder companies owned 501 shares and the other owned 499 shares in MRS. MRS had four directors, two representing the majority shareholder and two representing the minority shareholder. It appeared that the management of MRS was in the effective control of the minority directors.

As is not unusual in joint venture companies from time to time disagreements occur. Unfortunately, on this occasion the disagreements had far more serious repercussions and there was a significant falling out of the directors. The majority shareholder and its two directors proposed a general meeting to consider a motion to remove the other two directors representing the minority interests. It was claimed the majority believed there were financial and other concerns on how MRS was being run.

In dealing with this proposal the minority shareholder applied to the court for declarations and damages arising out of alleged oppression and breaches of duty by the majority director shareholders. It also applied for an interlocutory injunction to prevent the removal motion being voted upon until the separate proceedings brought by the minority for a declaration and damages had been considered by the court.

Slicer J of the Tasmanian Supreme Court rejected the claim. In the first place, because this was an interlocutory proceeding, the court was not likely to make a final decision. Secondly, and more importantly, he held that the majority shareholder was acting within its power in seeking to protect its interests in the company.

The case represents the kind of situation where there is a joint venture and parties cannot agree with each other on how the company is to be run. Where there are differences of opinion and one shareholder decides to seek a resolution of those difficulties by proceeding to activate its rights under the corporation's constitution and under the Corporations Law the courts will not intervene in the exercise of this corporate power unless there are very strong reasons to do so. Should the court in this case intervene to prevent the company holding its meeting and considering the resolution to remove the directors? The minority shareholders were suggesting that what was occurring was oppression and that if the meeting went ahead and they were removed this would then possibly amount to conduct which was oppressive or unfairly prejudicial conduct.

Slicer J in dismissing the claim made these comments:

"The majority shareholders claimed to acquire information within the province of the minority and any disadvantage suffered by the company will disadvantage the majority. ... In the circumstances of this case, the minority seeks to preserve its controlling position at the expense of the majority. Assuming that the [relevant company] will suffer detriment as a result of the intended action of the majority, the position remains that at this stage (that is at that of interlocutory proceedings), none of the [relevant defendants] has done anything which constitutes prejudicial conduct which cannot be met by the remedy of damages. It is likely that the minority shareholders will suffer prejudice by reason of loss of control but, on balance, that prejudice will not be to the detriment of the company as an entity." (at para 17)

In all of these circumstances the application for an injunction was dismissed.

The court made some interesting final comments on issues of corporate governance by suggesting that where a majority shareholder believes it will suffer loss as a result of the actions of others it is appropriate for it to seek financial or other information to establish the position that confronts the company. The majority felt that the minority were acting against the interests of the company and wished to take certain rights available under the constitution of the company in those circumstances.

The judge clearly had to make a decision of Solomon - in one way or another the dispute between the majority and the minority had to be resolved. There are different ways of achieving that. Winding up the company on the basis that deadlock had been reached may well be another basis for resolving such a dispute. Because the majority had no ability under law to obtain financial information from the minority the course of conduct that it was undertaking was perhaps the only way in which it could proceed. If that led to damages sustained by the individual minority directors or their shareholders then they have a claim in damages to seek a rectification of that situation.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.