Oppression

Overview I

Almost all companies in Ireland are private companies. This is now the default type of company under the Companies Act 2014. Almost all private companies are run by a relatively small number of shareholders, who are also typically directors.

Because of the scope for abuse of power by the majority / controlling shareholders and the relatively limited scope for recourse otherwise available, the Companies Act, 1963 introduced provision for application to the court for relief from oppression and from the disregard of the petitioning shareholder’s interests. English legislation had introduced an equivalent remedy some years earlier, albeit in different terms. For convenience below, “oppression” refers both to oppression and the disregard of the petitioner’s interests.

Overview II

The statutory provisions provide relief to members where the affairs of the company or the powers of the directors have been conducted or exercised, oppressively or in disregard of their interests as members. Where the court finds that there is oppression or that the affairs of the company are being conducted in disregard of the applicant’s interests, it has a range of remedies available.

An application based on oppression may be made in a wide range of circumstances. Classically, it arises in small closely held companies. The court may order the oppressor to buy the applicant’s shares. Less commonly, the applicant is ordered or enabled to buy the oppressor’s shares. It may order that the company buy its own shares back.  It may order that the company constitution/ memorandum or articles of association be varied.  It may order that the company be wound up.

Nature of Oppression I

A company may be run by the holder(s) of the majority of shares in a way that is abusive of the rights of the minority.  Any member of a company, who alleges that its affairs are being conducted in a manner oppressive to him, or to any other members including himself or in disregard of his interests as a member (by the majority of members or directors), may apply to the court for an order to remedy the position. If the court is satisfied that this is the case, there is considerable flexibility in relation to the orders it may make, in order to remedy the position.

The English cases have described the requisite conduct as burdensome, harsh or wrongful.  It has been otherwise described as a lack of fair dealing. Conduct may be oppressive, notwithstanding that it is not otherwise unlawful. Some cases in the UK on an equivalent wording, have suggested that oppression requires more than a single act.  In Ireland, it appears that a single act may be sufficient to constitute oppression.

Nature of Oppression II

Oppression and its consequent remedies may be available, notwithstanding that the conduct is unlawful and might be the subject of a derivative action or an action for the enforcement of individual rights. A remedy may be granted for oppression, notwithstanding that there may be an alternative remedy based on fraud or breach of another provision of law.

The advantage of an action for oppression is that the court has considerable scope to tailor the appropriate remedy.  In contrast, a derivative action may only declare the relevant rights and make the consequential declarations Moreover, it is for the benefit of the company.

What will constitute oppression or sustain a claim that the powers of the company or directors are being exercised in disregard of the interests of the applicant as a shareholder, will very much depend on the particular circumstances. The courts look at the position objectively in appraising whether the effect of the director/majority’s actions is, in fact, oppressive of the applicant.

Features of Oppression

Oppression commonly involves unfair or unscrupulous behaviour, lack of honesty,  harsh and burdensome conduct. It may involve the majority running the company in their own interests. It may, for example, involve them in diverting assets,  paying grossly excessive salaries and /or excluding the minority from meaningful participation in the company.

Most typically, oppression involves a continuing or prolonged state of affairs.  The more deliberate and sustained the course of action, the more likely it is to constitute oppression. Lack of good faith and concealment may be hallmarks of oppression.

Many cases of oppression/ disregard of interests involve the running and management of a company by the majority as if they had the sole interest in the company. For example, all profits may be used to pay their salaries. The minority may be excluded from any meaningful participation, actual or economic, in the company.

Individual transactions may have a severe adverse effect and may constitute oppression in themselves.  For example, the issue of new shares and rights in the company may constitute oppression of the existing shareholders in the particular circumstances.  The issue, although a single act, may have a significant impact in changing the balance of ownership of the company and depriving the minority of their legitimate interests.

A remedy on the basis of oppression/ disregard of interests need not necessarily be limited to a minority shareholder.  There may be circumstances where a majority shareholder is entitled to remedies based on oppression. This may occur where the minority shareholder has special rights which he can exercise in a manner which is oppressive.

Negligence and Intention

Oppression need not be fraudulent or unlawful. It is usually easier to prove oppression than fraud. The remedies for oppression are more flexible. There may be oppression,  notwithstanding that the directors are acting lawfully, and indeed exercising their powers in good faith, in what they consider to be the best interests of the company.

It is sometimes said that incompetence and mismanagement do not comprise oppression by themselves. Poor decision-making, inefficiency and carelessness, without more, are unlikely to constitute oppression.

Although the test for oppression is objective, it is more than merely negligent or careless conduct on the part of the “majority.”  Typically, it involves a deliberate course of conduct, although this need not necessarily be so.

Oppression may involve negligence or carelessness, with deliberate elements, which together deprive the applicant of his legitimate expectations. Where there is deliberate action which damages the interests of the company and the minority in order to benefit the majority controllers, there is likely to be oppression.

The exclusion of a shareholder from participation in the business by itself is unlikely to constitute oppression. Shareholders are not entitled to participate in management unless they have the appropriate voting rights.

In some cases, the exclusion of the minority from management or participation will constitute oppression. There must be some quasi-partnership or fiduciary relationship between the parties before exclusion from management or participation by itself,  would be sufficient to constitute oppression.

The Irish courts do not limit the statutory remedy to cases of oppression of the shareholder in his capacity as such. The remedy may be available to members in their capacity as such and as directors. Many smaller companies involve director shareholders and the Irish courts have been willing to grant orders where the oppression has arisen in the member’s capacity as a director.

Exclusion from Management II

An important consideration is the relationship or earlier relationship of the shareholders. There may have been a relationship of trust between the shareholders, similar to that in a partnership. The shareholders might have been partners prior to incorporation.  Partners owe fiduciary duties to each other.

A quasi-partnership arrangement may be found where there was a relationship based on equality, trust, and confidence or on a personal relationship between the shareholders. Where in the particular circumstances, the shareholders comprise a close group, for example, related parties, the remedy of oppression may in effect impose a quasi-fiduciary relationship between the parties to act in good faith.

Disregard of Interests I

The alternative basis for jurisdiction, which is a separate ground to “oppression,” but is commonly described under that umbrella, arises when the affairs of the company or the powers of the directors are being exercised in disregard of the member’s interest. It opens the door to the same range of flexible court orders as a finding of oppression.

To a significant extent, the ground overlaps that of oppression. The courts have often found that there may be oppression without deliberate or calculated conduct. In other cases, the courts have found that there has been both oppression and a disregard of the petitioner’s interests.

The oppression or disregard of interests must be the result of the conduct of the affairs of the company or the exercise of the powers of the directors. The conduct may be that of the shareholders in exercising their rights in general meeting and the directors. They may be the same parties or their nominee.

Interests are wider than purely legal rights. There may be a disregard of interests, even if the majority’s management of the company is not found to be oppressive. It need not be deliberate. It may arise where there is an objective disregard of the interests of the shareholders.

Legitimate Interests

Applications based on oppression and the disregard of interests may be based on the breach of legitimate expectations. In this context, it is quasi-equitable in nature. It may arise where parties have entered into participation in a  company on the basis an understanding that they would participate in management.

There may be an earlier relationship of mutuality, trust and confidence. It may be based on personal relationships.Such arrangements are not usually precise enough for estoppel to arise. However, broadly similar concepts are employed by the courts. The court may deem it unfair and inequitable to exclude a party who had initially participated in or had an expectation of participation in the company, on an equal or more favourable basis than would arise under his strict legal rights.

Although this is analogous to the application of equitable principles, it is not based on equitable principles, but on the statutory concepts of oppression and disregard of interests. The courts are prepared to place quasi-equitable restraints on the exercise the power, where the company has been based on personal relationships and understandings of mutual participation.

Effect of Shareholders Agreement

Parties commonly enter shareholders’ agreements to create mutual rights and duties to each other. Where a shareholder is promised certain rights, but they are not embodied in an agreement or shareholders’ agreement, the legitimate expectation in itself will not be enough to circumvent the absence of a contractual promise.

Shareholder agreements rarely provide for obligations of good faith. Typically, they provide mechanisms for enhanced participation by the minority shareholders. The courts may be reluctant to allow the remedy of oppression to circumvent contract law.

The existence of a shareholder’s agreement will not preclude the possibility of a remedy for oppression.  However, it may regularise the parties’ legitimate expectations, and its existence will be a significant factor for the court in deciding whether an order might issue on the basis of oppression.  Where the parties’ legitimate expectations are delivered under the shareholder’s agreement, the court is unlikely to find that there has been oppression.

There must be something in the entirety of the circumstances which makes the majority’ conduct oppressive or in disregard of the members’ interests.  The disregard of interests must be in the wider sense mentioned above,  rather than in the context of a specific arrangement or alleged agreement. The remedy is not available to circumvent the law of contract.

References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)   Ch 11  Courtney

Keane on Company Law 5th Ed. (2016) Ch. 26 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10^th Ed. (2016) P. and S. Worthington

Company Law in Context 2^nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law