CASE OF THE MONTH: Allegation of oppression of minority shareholder rejected by the High Court
In Hamill -v- Vantage Resources Limited & Anor  IEHC 195, High Court, Binchy J, 20 March 2015 the petitioner claimed that he had been oppressed as a minority shareholder and that there had been a disregard of his interests as a member of the Company under Section 205 of the Companies Act 1963. The petitioner was a 30% shareholder in Vantage Resources Limited (the Company) and the second named respondent (Mr Martin) was the 70% shareholder. The petitioner sought an order for the winding up of the Company or alternatively, orders dividing the assets and liabilities of the Company or orders directing the sale/purchase of the parties' shareholdings.
The parties had signed a shareholder's agreement which included detailed provisions in relation to the transfer of shares in the Company namely a first refusal by the other shareholder together with a mechanism for determining the price of the shareholding in the absence of agreement.
When the petitioner joined the Company it was agreed that he would work on a part-time consultancy basis and he would provide his services through Aspect Consulting Limited (Aspect). In addition to consultancy fees it was agreed that he would be paid Directors' fees.
With the agreement of the petitioner the majority shareholder, Mr Martin incorporated Ecoview Ltd, as a subsidiary of the Company, as a vehicle for receiving his directors' fees.
The Company traded well up to 2010 but subsequently there was a decline in revenue and margins. The relationship between the parties began to deteriorate as Mr Martin began to consider the strategy that he felt the Company needed to adopt in order to address its decline in business and revenue, in early 2014.
The petitioner alleged oppressive behaviour by Mr. Martin including:
- The insistence of Mr. Martin that the petitioner should take up a full-time position within the Company;
- The termination of the Aspect Consultancy contract with the Company;
- The approach to a third party to become chairman of the Company;
- The purchase of a site at Foxrock in the name of the Company and with its funds, without the knowledge of the petitioner and
- The use of Company funds to purchase lands in Co Wicklow through Ecoview.
- The attempt to convene an EGM in August 2014 to approve banking facilities for the Company.
- The issue of injunction proceedings in September 2014, seeking to restrain the disclosure of material exhibited by the Petitioner in the proceedings.
The petitioner further claimed that the relationship between the parties was one of a quasi partnership based on mutual trust, good faith and confidence, and having regard to the breakdown of this relationship the Company should be wound up in accordance with Section 213 of the Companies Act.
The court noted that it was well established that “oppressive conduct” means the exercise of the powers of a company “in a manner burdensome, harsh and wrongful” to the petitioner and that an isolated act of oppression may meet the requirements of the section. The court further noted that the test to determine whether or not conduct can be considered to be burdensome, harsh and wrongful is an objective one. In relation to the disregard of the interests of a member the court noted that this may be established even where there has not been a finding of oppression. The fact that conduct is not in strict compliance with the requirements of the Companies Acts will not by itself be sufficient to establish oppression. Nor will mismanagement, inefficiency or carelessness in the management of the affairs of the Company necessarily amount to oppression. However, exclusion from management and non consultation with shareholders can constitute oppression.
The petitioner was not relying on any single act of oppression but submitted that the various acts of Mr Martin was conduct in disregard of his interests as a shareholder, even if no single act would suffice on its own. The Judge agreed stating that the conduct of that party as a whole should be considered when determining whether or not that conduct is in disregard of a shareholder's interests.
With regard to the request that the petitioner take up a full-time position with the Company the court accepted that, while Mr Martin was putting pressure on the petitioner which he found stressful, he was following an agreed strategy to grow the Company which he felt he could not do by himself. The court rejected the contention that this could, of itself, amount to oppression or conduct in disregard of his interests.
In relation to the termination of the Aspect consultancy the court noted that there had been communications back and forth between the parties and, in the circumstances, it was easy to see how Mr Martin could have been under a misunderstanding that led him to terminate the consultancy contract. In any event the termination was withdrawn by Mr Martin.
Complaint was made of the approach to a third party to see if he was interested in coming on board as chairman of the Company with a view to making it a more saleable prospect. The petitioner accepted that the third party would add value to the Company, however, he alleged that the position had been offered by Mr Martin to the third party without it being agreed between them. Ultimately the appointment did not proceed because of the petitioner's objections. The court accepted that Mr Martin was acting in furtherance of the interests of both the Company and its shareholders and that the approach was not so much an offer as an enquiry. Therefore, it held that this issue either by itself or in conjunction with other complaints of the petitioner, could not be considered to be conduct oppressive or in disregard of the interests of the petitioner.
The petitioner further complained that Mr Martin used Ecoview to purchase a property resulting in a substantial inter-company debt due by Ecoview to the Company. However this debt was offset by an asset on Ecoview's balance sheet and since this was a structure to which the petitioner agreed and by which he suffered no prejudice, it could not constitute a ground either of oppression or disregard of his interests.
In the judge's view the single most significant complaint that the petitioner had in relation to the conduct of Mr Martin related to the purchase by him of a site in Foxrock using €800,000 of company funds. Mr Martin explained that this was done for bridging finance reasons and it was accepted by the petitioner that they had discussed such a mechanism for acquiring a property. At the time of purchase Mr Martin informed the petitioner saying “I’ve got that site” and “the Company may make a few bob out of it”. At the time of purchase the Company had cash reserves of €1.1 million and the court noted that there was no suggestion that the use of the Company’s cash reserves caused the Company any cash flow difficulties. The court indicated that had Mr Martin failed to disclose this transaction at all to the petitioner, it would have no doubt at all but that he would be acting in disregard of the petitioner’s interests. However, the court was inclined to the view that the transaction should not be regarded as either oppressive or in disregard of the petitioner’s interests as the mentioning the fact of the transaction to the petitioner, even though giving only minimal information, afforded the petitioner the opportunity to ask questions and to object.
The court also rejected the petitioner’s complaints regarding the convening of an EGM to approve of banking facilities as in any way oppressive to the interests of the petitioner as it was urgent that the Company finalise agreement with its new bankers following the termination of its previous banking facilities.
With regard to the injunction application the court noted that Mr Martin became concerned that some of the documentation exhibited in the proceedings disclosed confidential company and accepted that in bringing the injunction application he was motivated by the best interests of the Company and did not intend to frustrate the proceedings or to oppress the petitioner.
Finally the petitioner argued that the Company constituted a quasi-partnership as he and Mr Martin had been friends before he became a shareholder in the Company and therefore there was a special relationship of trust and confidence between the parties. The court found that although the parties were undoubtedly entrepreneurs, they were not setting off to pursue a dream using the vehicle of a company as an expediency where the real nature of the relationship was more in the nature of a partnership. The court noted that the petitioner had invested in an existing company in a formal way by entering into a shareholders agreement which contained specific provisions in relation to the sale of shares by either of the parties.
In the circumstances the court was of the view that it would not be just and equitable to order a winding up of the Company where such express provisions existed. Indeed the court considered that it would be unfair if the express provisions of an agreement were overridden by the court in circumstances where the court did not find Mr Martin to be acting oppressively or in disregard of the petitioner's interests.
In the circumstances the application was dismissed.
For more information please contact Paula Mullooly at email@example.com.
Date published: 14 April 2015