MINORITY SHAREHOLDINGS: VALUATION IN AN OPPRESSION CONTEXT

By Dean Jones

Quite often a disagreement can occur between company shareholders which results in the board and the majority shareholders oppressing, ostracising or excluding the views of the minority shareholders, perhaps deliberately or perhaps inadvertently. Minority shareholders face difficulties in extracting themselves from this unfavourable, if not untenable, situation, for several reasons:

1. If the company was wound up, the value that a minority shareholder may be able to extract would be unlikely to reflect the true value of the shares. 
2. If the minority shareholder sought to sell its shares it may not result in a commercially satisfactory outcome. There may be a lack of a market for minority shares in a small proprietary company.  
3. Minority shares suffer from restrictions and disadvantages which are normally set out in the constitution, the key ones being the lack of control and the lack of negotiability of the shares; and
4. As a result, it is normal commercial practice and is clearly understood in the marketplace that minority shareholdings are discounted from their pro-rata value because of the risks and disadvantages associated with them.

What is the oppressed minority shareholder able to do in this case?

One remedy available to a minority shareholder in these circumstances is to make an application to the court pursuant to Sections 232 and 233 of the Corporations Act 2001 (Cth) alleging oppression and once oppressive conduct has been established, to seek an order for the company to compulsorily acquire or buy-out the minority shareholder’s shares. This order is commonly sought in oppression cases as it is the best way to achieve a clean break between the parties.

A key question is whether a discount should be applied to the minority interest in the valuation process?

The court has a broad discretion to do what is fair in the circumstances. This discretion extends to the selection of the methodology to be used in valuing the shares and the date for the valuation to be conducted. However, in most oppression cases, the court does not discount the value of the shares because to permit the majority to compulsorily acquire the minority interest at a price which reflects the effect of the oppressive conduct would only provide the majority with a perverse incentive to oppress. That is, the non-discount acknowledges the compensatory nature of the remedy.

The non-discount method is more likely to be applied in small companies where the relationship between directors and shareholders is in practice similar to a “quasi partnership” relationship.

If you are in a position where you need advice about a similar position, contact our experienced commercial lawyers and business lawyers before it is too late. For more information, please contact Eales & Mackenzie Commercial Lawyers Melbourne on (03) 8621 1000 or email advisors@emlawyers.com.au.The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.