Shareholder oppression: flexible approach of the Irish courts
In the recent case of Mascarenhas v Karim and Anor, the Court of Appeal upheld a High Court finding of shareholder oppression under section 212 of the Companies Act 2014 (the 2014 Act). However, the Court found that the trial judge had incorrectly concluded that the beneficial ownership of shares in the company had been transferred by virtue of the controlling conduct of the non-shareholding party. Most notably, the Court found that shareholder oppression proceedings under section 212 can be brought against individuals even where they are neither a director nor a member of the company.
Background – the High Court proceedings
This case involved an English language school in Dublin founded by a married couple, Mr Karim and Ms Sultana, who were not involved in the day-to-day running of the business. Mr Karim did not own any shares, nor was he a director of the company. Ms Sultana was the registered shareholder of 85 shares. The daily affairs of the company were conducted by Mr Mascarenhas (Mr M), who in 2014 was given 15 shares and appointed as a director of the company. Following recalculations in the High Court, the Court found that, while Ms Sultana was the majority shareholder, she was not the 85% owner, as she portrayed herself. Instead, she was the beneficial owner of only 57% of the shares and Mr M owned 43%.
The key point of contention between the parties related to Mr Karim asking for a number of loans from the company in 2015, which spiralled into further disputes, all related to Mr Karim's perceived right to use company finances. In the High Court, Mr M argued that Mr Karim was a beneficial owner of shares in the company as a basis for suing him under section 212. Action under section 212 is open to any member of a company who complains that the affairs of the company are being conducted or the powers of the directors are being exercised "in a manner oppressive to him or her or any of the members (including himself or herself), or in disregard of his or her or their interests as members".
The High Court concluded that Mr Karim was the beneficial owner of his wife's shares due to his intimate involvement in the company's affairs (since relations with the directors had broken down). Mr Justice Jordan characterised the conduct of the two founders as a “ruthless pursuit of their agenda to extract cash at all costs from the company", and granted relief against oppression to Mr M.
Court of Appeal
The Court of Appeal (judgment by Ms Justice Costello) overruled the High Court on the question of the beneficial ownership of Ms Sultana's shares. The Court did not find sufficient evidence to conclude that Mr Karim had a beneficial interest in his wife’s shares.
Key factors in coming to this conclusion included:
- Neither Mr Karim nor Ms Sultana asserted at any point that he was the beneficial owner of the shares. It was raised only by Mr M as a basis for suing Mr Karim for oppression.
- The registered owner of shares should be regarded as the beneficial owner of the shares unless there is evidence to the contrary, and in this case, there was no such evidence.
- Mr Karim's “pattern of bullying behaviour”, which included sending emails in Ms Sultana’s name, was in no way indicative of beneficial ownership.
The judgment contains an extensive exploration of the law surrounding shareholder oppression in Ireland. Costello J reaffirms the position that conduct must amount to oppression before a grant of relief can be made. Oppressive conduct will generally involve the company’s authority being exercised contrary to the interests of members in a manner that is “burdensome, harsh or wrongful”.
In this case, it was held that there was ample evidence to support the High Court's conclusion that Mr Karim was purporting to conduct the affairs of the company and purporting to exercise the powers of the directors of the company in a manner oppressive to Mr M.
Costello J found that Mr Karim implemented a “clear scheme” designed to force Mr M to comply with his requirements. Mr Karim (with assistance from Ms Sultana) conducted a “ruthless campaign” against Mr M, which included threats to discredit him and the business, as well as “baseless personal attacks” on Mr M and other company officers. While Costello J acknowledged that Mr M was not without fault in the breakdown in relations between the parties, she agreed with the High Court that this was largely as a result of the conduct of Mr Karim and Ms Sultana.
The Court held that it was unnecessary to conclude that Mr Karim was a beneficial owner of shares in order to hold him liable under section 212. It was necessary, the Court concluded, for section 212 to operate in situations such as these, as otherwise the protections of the provision could be evaded. Mr. Karim’s argument that, because he was neither a shareholder nor a director, and not involved in the day-to-day management of the company, section 212 could not apply to him, was "untenable”. The Court found that, at all times, “Mr. Karim behaved as though he was a director or a shareholder, or both, of the company”. He could not evade the provisions of section 212 simply by “operating without any entitlement” (i.e. without a formal status in the company) or through proxies.
Relief from oppression
Section 212 is a useful remedy where shareholder relationships in a company have broken down. Where oppression is found, the court has wide powers in terms of the remedies open to it, although the usual remedy tends to be an order for the purchase or sale of either party’s shares. The other orders which a court may make include an order directing or prohibiting any act, or cancelling or varying any transaction, and an order for the payment of compensation.
By way of relief from oppression in this case, the Court of Appeal upheld the High Court order that Mr M be given the option to purchase Ms Sultana's shares at a valuation fixed upon by the Court. The Court noted that "one of the few matters upon which all parties agreed was that mutual trust had completely broken down and they could no longer work together". It was therefore necessary that either Mr M acquire the shares of Ms Sultana or Ms Sultana acquire the shares of Mr M. The Court decided that it was appropriate to order that Mr M could purchase Ms Sultana's shares. It is rare to see an outcome such as this in shareholder oppression cases whereby a minority shareholder (Mr M) is given the option to buy out a majority shareholder (Ms Sultana), but the Court had compelling reasons for reaching this decision:
- Mr M had succeeded in his case – it would be "very unfair" to force out the victim of oppression and "something most compelling would be required to overcome this obstacle to such an order".
- He was the "key man in the company’s affairs".
- He had experience in running a language school while Ms Sultana did not.
- He had the support and loyalty of the senior staff.
- He was living and working in Dublin while Ms Sultana lived and worked in London and Bangladesh.
- While Ms Sultana was the majority shareholder with 85%, she was the beneficial owner of only 57% of the shares and Mr M owned 43%.
Scope of section 212 proceedings
This case demonstrates the scope of protection against shareholder oppression under the 2014 Act. Typically, such cases are taken against shareholders or company directors, but the Court of Appeal’s decision demonstrates the importance attached to the behaviour and actions of the individual accused of oppression and the role they choose to play in the company. Companies should be aware that an individual cannot evade section 212 simply because they have no ownership stake or official managerial role in the company.
Beneficial ownership of shares
The case also illustrates the reluctance of the courts to derive a beneficial interest in company shares from conduct, if this conduct is not accompanied by clear intention to transfer the interest. If a party acts in a manner which implies that shares are theirs, the court may not impute a beneficial interest. If a beneficial ownership arrangement is desired, this should be explicitly recorded and documented.
For further information, please contact Michelle McLoughlin, Knowledge lawyer, Anne O'Neill, Senior Knowledge Executive, or any member of A&L Goodbody's Corporate and M&A team.
Date published: 30 March 2022