Oppression remedy bites hard Law Reporter

Giving co-shareholders and owners an equal share in management.

The oppression remedy is being used more and more these days in family disputes or other disputes in companies where a minority shareholder but a person who is expected to participate in the management is frustrated. A recent decision of the New South Wales Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd & Ors ((2001) 37 ACSR 672) is a classic example of the courts intervening to assist a minority shareholder. We set out the facts in a little detail from the Butterworths Law Report to give you a flavour of the way in which the courts will intervene. The appellant was a company under the control of Bob Bosnjak which, with other family members, was a shareholder in the first respondent. The first respondent was the holding company of a group of related companies that operated Westbus Group, the largest private bus company in Australia. The appellant held 2/7 shares in the Westbus Group. Other family members, notably Jim and Carol Bosnjak, held the balance of the shares.

The appellant sought relief in the courts on the basis of oppression, relying upon what was then section 260 of the Corporations Law (now see section 246AA of the Corporations Act). After the death of their father and group founder in 1979, Bob and Jim Bosnjak worked for Westbus and, with their mother Anda, devoted their time to remedying problems within the group and setting its future direction. After Anda's death in 1992, tension developed between the brothers. In 1993 Carol Bosnjak was appointed as a director of the first respondent, while Bob Bosnjak was overseas. Carol Bosnjak habitually voted with Jim Bosnjak. Together, Jim and Carol Bosnjak held 57 percent of the shareholding in the first respondent. Bob Bosnjak and his company were increasingly alienated from decision-making in the respondent company. From 1988 onwards Bob Bosnjak unsuccessfully made proposals that the assets of the business should be split between family members. Various matters were relied upon by the appellant in support of its claim of oppression and breach of fiduciary duty, including that Jim and Carol Bosnjak had used the first respondent's resources and information to obtain a lucrative bus services contract for National Bus Co Pty Ltd (NBC), a company controlled and owned by them. The appellant further alleged that Jim Bosnjak had capitalised on an opportunity known as "Transcard", acquiring a 50 percent interest in an international venture without disclosing his interest to Westbus.

At first instance Young J held that the first respondent's affairs were conducted in a manner oppressive to the appellant company. He also ordered that Jim and Carol Bosnjak should account for breaches of their fiduciary duties in respect of the deals involving NBC and Transcard. The court then made a series of orders which the appellant was unhappy with because they allowed some flexibility in the way in which Jim and Carol Bosnjak and their companies might respond to the oppressive conduct. Whilst the court recognised that oppression existed the appellant, Fexuto Pty Ltd and its controller Bob Bosnjak, believed that the orders were not general enough to them in light of the findings of fact. They argued that the court should have ordered a split of the assets of the respondent company or that alternatively the appellant company Fexuto should be permitted to purchase the relevant shares of Jim and Carol Bosnjak in the respondent company. The court should also have ordered an account of the profits derived from the relevant ventures. The respondent company and Jim and Carol Bosnjak cross appealed against the substantive findings as well as the orders made.

The New South Wales Court of Appeal (Spigelman CJ, Priestley and Fitzgerald JJA) allowed the appeal brought by Fexuto and Bob Bosnjak and dismissed the cross appeal. In allowing the appeal the court ordered that more substantive orders in favour of the minority shareholder should be made although as we note below the wishes of Bob Bosnjak were not all fulfilled. In the court's view Westbus Group was in effect a corporate partnership between the members of the Bosnjak family. The brothers could be classified as partners who traditionally made joint decisions about their family business. The structure had been set up on the basis of a principle of equality between the brothers and their families. Bob Bosnjak was therefore entitled to take an equal part in the direct management of the companies. In reaching this conclusion the court applied a series of famous cases in which closely held family companies were treated as though they were quasi partnerships with the relevant members having responsibilities towards each other as though they were equal partners.

However, the court did not agree with the suggestion that Bob Bosnjak had in fact a right of veto in relation to the way in which the affairs of the company were being conducted. For such a conclusion to exist would have required the proof of an understanding that the majority shareholders in the company (which normally have control) would have such a right specifically qualified. There was no evidence of such an understanding. The fact that Bob and Jim were the only active participants in the management of the company did not by itself create a right of veto or a legitimate expectation of such a right. In the court's view in a quasi partnership of this kind the existence of a right to veto could only be inferred on the basis of appropriate documents or evidence that was quite clear. But, the court did find that the affairs of the Westbus Group were conducted in a manner that was oppressive and unfairly prejudicial to Bob Bosnjak and Fexuto. The relevant events that saw Jim and Carol Bosnjak have more and more control marked the end of what the court described as "consensus-style management in the company". Furthermore, the exploitation of certain commercial opportunities that came the Westbus Group's way were also oppressive and contrary to the interests of the appellant company Fexuto which was a one-third shareholder.

The court also made findings that there had been breaches of duty on the part of Jim and Carol Bosnjak. In reaching these conclusions the court relied on a series of equally famous cases which underpin many of the principles of company law. It may be appropriate in a future issue of this journal to discuss in greater detail some of those issues. The judgment is a very lengthy one – it occupied over 100 pages of the Butterworths Company Law Reports. It represents a significant discussion of how closely held family corporations should be run and how effective the oppression remedy will be in these types of companies. This will alleviate the need for minority shareholders to use the new representative action now available in the Corporations Act to pursue such claims. The case is, in my view, important enough to merit a special leave application to the High Court. It is unclear whether the High Court would grant leave because of the significant findings on the facts of the trial judge and the acceptance of those facts by the Court of Appeal.

In relation to the orders made by the court at first instance the Court of Appeal did allow some variation in favour of Bob Bosnjak. However, the judges could not agree on all aspects of the orders that should be made. One grouping of the court wanted the assets of the respondent company to be divided up in some respects and another grouping of the court did not believe that other assets should be divided up. However, all members of the court agreed that Fexuto should have an option to sell its shares in the relevant company and that the shares should be valued for that purpose on the basis that had been set out by the judge. This basis would give Bob Bosnjak a reasonable return on his shares in the company.

Disclaimer

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.