Scottish Co-op case revisited in Australia

Professor Bob Baxt reviews an interesting example of how the oppression remedy may be used in court cases involving international holding companies with difficult directors in an Australian subsidiary.

Section 232 of the Corporations Act 2001, which provides a remedy for oppressive, unfairly prejudicial or unfair conduct between shareholders (members of companies) has become an increasingly popular remedy in disputes involving companies.

While it is fundamentally a remedy available to shareholders (members) of companies against other shareholders (members), it is often used as a second “prong” - but sometimes as a first “prong” - in a separate action against the directors of a company who are also shareholders for alleged breaches of duty.

The claims are quite different, as the Supreme Courts of New South Wales, Victoria and Queensland have emphasised in recent judgments.

The oppression remedy can also be used where there is a dispute within a group of companies, especially where there is an international corporation as the holding company which finds difficulty in persuading the Australian directors of its subsidiary to conduct the affairs of that subsidiary company in a particular way.

The recent decision of the Victorian Supreme Court in Ubertini v Saeco International Group SpA (No. 4) [2014] VSC 47 provides an interesting example of such a case. It also reflects much of the learning that was enunciated by the House of Lords in the famous case of Scottish Co-operative Wholesale Ltd v Meyer [1959] AC 324. 

The facts were not particularly complex, but were very detailed. Georgio Ubertini and Ubertini Investments (UI) became the major shareholders in an Australian subsidiary company (Saeco Australia), established by Saeco International Group SpA. This holding company, a manufacturer of coffee machines, subscribed for 60 per cent of the shares in Saeco Australia. The balance was taken up by Georgio and UI. Over a period of time, difficulties arose between the Australian and international investors.

Georgio and UI alleged that Saeco International interfered in an oppressive and unfair manner with the wishes of the Australian shareholders in several ways - in particular, when the local shareholders wanted to dispose of their shares in the Australian company. They also alleged that a number of other incidents and actions amounted to oppressive, unfair or prejudicial conduct.
Saeco International, in turn, alleged that the Australian shareholders had also engaged in oppressive conduct.

The Australian plaintiffs argued that:

• Certain fees and actions taken by Saeco International’s separate wholly owned subsidiary (Saeco Strategic Services) in relation to certain brand management arrangements, which were permitted to be adopted in Australia, were contrary to section 232 of the Corporations Act (ie. oppressive).
• Saeco International’s refusal to supply Saeco Australia with a new range of coffee machines amounted to a breach of section 232 of the Act.
• A refusal by Saeco International to accept the return of seven containers of stock, or to give the Australian company credit for that stock, also breached section 232 of the Act.
• Certain demands made by Saeco International and two of its other wholly owned subsidiaries, in relation to a range of matters concerning the Australian operations, were contrary to section 232 of the Act.

More specifically, and of greater significance to the Australian shareholders, were their contentions that Saeco International, by appointing administrators over the Australian subsidiary before solvency questions were relevant, was positioning Saeco International to obtain a much better value for its Australian business without paying an appropriate sum to the plaintiffs.

It was alleged that this amounted to oppression under section 232 of the Corporations Act.

The appointment of the administrators of Saeco Australia apparently occurred at a time when the company was not insolvent. This raised serious concerns for
the Australian shareholders.

The appointment also arguably placed Saeco International in an advantageous position with respect to the attempts by Georgio and UI to sell their shares in Saeco Australia. The plaintiffs argued that the “appointment of the administrators was a ruse to seize control of the business without having to pay out the minority shareholdings” (see case [264]).

The plaintiffs also argued, successfully, that these actions, if allowed to continue would have permitted the business of Saeco Australia to become wholly owned by Saeco International, leaving the Australian shareholders with no residual value in the business. Their shares would have been reduced to a nominal value.

Justice Elliott ruled that by resolving to appoint administrators, Saeco International had in effect enabled itself to obtain the full value of its Australian business without paying appropriate compensation, thus establishing oppressive conduct.

Justice Elliott further confirmed that the primary purposes for appointing the administrators was not to deal with questions of solvency, but rather to enable Saeco International to achieve its desired outcome of securing control of the Australian business. In his view, Saeco International “achieved by design, an outcome which deprived the minority shareholders, including the plaintiffs, of receiving any value for their shares” (at [352]).

A further successful claim by the Australian shareholders related to the conduct of nominee directors appointed by Saeco International to the Australian subsidiary. They argued that the nominee directors had not acted in the best interests of Saeco Australia, especially after the appointment of the administrators over the company, who in turn acted against the interests of the Saeco Australia in favour of Saeco International.

Justice Elliott ruled that Saeco International had failed to establish that its nominee directors of the Australian company were acting in a commercially fair way. In the court’s view, De Gregorio, the managing director of Saeco International who had been appointed a director of Saeco Australia, was entitled to pursue a solution to the disagreement between the relevant shareholders that was in accord with the interests of Saeco International, as long as this did not conflict with his duties as a director of Saeco Australia. But he ruled that the course of conduct pursued by him amounted to him acting only in Saeco International’s interests and that this was aimed at hurting the interests of Georgio and UI by depriving them of an appropriate payment for their minority shareholding in the Saeco Australia.

Furthermore, Justice Elliott held that another nominee director, Egan, had engaged in conduct that was commercially unfair. Egan had initially been retained by Saeco International to replace Georgio as managing director of Saeco Australia. In this capacity as a director of Saeco Australia, Egan was required to assist Saeco Australia in resolving its dispute with the parent company.

However, it turned out that Egan was in constant communication with Saeco International’s lawyers  regarding the dispute and how best to obtain control of the Australian business.

In addition, Justice Elliott ruled that shortly after the appointment of the administrators, Egan had resigned as a director of Saeco Australia so as to enable him to act officially in the interests of Saeco International, unfettered by any obligations to Saeco Australia.

In the view of Justice Elliott, this particular conduct was not appropriate in the context of the relationship between the holding company and its Australian subsidiary.

Saeco International had been successful in establishing that the Australian shareholders had taken steps to prevent the holding of meetings of the board of directors of Saeco International. It had been shown that the affairs of Saeco International were generally conducted very informally. Georgio admitted that he was “not willing to voluntarily attend the board meeting where a proposal for removing him as managing director might be put” (at [409]).

The court ruled that although there were genuine reasons from time to time why Georgio did not need to attend proposed meetings, Georgio was clearly acting to avoid board meetings being held. Nevertheless, the court did not believe that this was of sufficient seriousness to warrant a remedy being awarded.

Saeco International argued that the Australian plaintiffs, even if they were successful in their arguments, should only be rewarded by the winding up of Saeco Australia.

Justice Elliott held that to make such an order would be to allow Saeco International to succeed in its strategy. Rather, he ruled that the appropriate relief was that Saeco International should be ordered to purchase the Australian shareholders’ shares in the Australian company. In that context, he referred to the House of Lords decision in the Scottish Co-operative case.

In that case, Scottish Co-op had established a subsidiary company together with two individuals who owned a licence to manufacture rayon cloth. A few years later, Scottish Co-op sought to purchase from those individuals their shares in the subsidiary at a price that was arguably less than their true value. That offer was rejected and the Scottish Co-op adopted a policy of transferring the business of the subsidiary (which it controlled) to a new department within its own organisation. This forced down the value of the subsidiary’s shares.

The House of Lords ruled that the actions of Scottish Co-op was oppressive and that the two individuals were entitled to relief by way of the compulsory purchase of their shares by Scottish Co-op.

Lord Keith of Avonholm ruled: “The company was in substance, though not in law, a partnership consisting of the Society and the [two individuals] with the consequence that there should be the utmost good faith between the constituent members” (quoted at para 361 of the Australian case).

It is interesting to note that the solution Justice Elliott formulated in Saeco is very similar to that adopted by the House of Lords.  Cases relying on oppression where there are a number of companies in a corporate group are rare in Australia. For this reason, the Saeco case represents an interesting example of how the oppression remedy may well be used in this particular context if international disputes of this kind occur.