Question

Alisha and Diva are the directors and shareholders in Flowers First Pty Ltd.  They have been having cash flow problems with respect to acquiring a third vehicle (with equipment) to expand their business.  They approach Ali to invest in Flowers First Pty Ltd.  Ali has offered to invest $100,000 into Flowers First Pty Ltd on the basis that he will be issued with 50 Ordinary shares in the company (equating to 20% of the Company).  At a general meeting of shareholders Ali is appointed non-executive director of the company.  

Flowers First Pty Ltd’s cash flow position has improved as a result of the investment from Ali, and substantial profits are earned in the following two years. Ali becomes aware that Alisha and Diva have increased their salaries as executive directors (CEO and CFO) and have also declared bonuses to themselves.  Ali becomes concerned that no dividends have been declared and at the next board meeting raises his concerns including his objection to the increase in directors’ salary.  Alisha and Diva took offence to this an actioned the following:

• At a directors meeting (no notice provided to Ali) a resolution was passed to assign a recent RSPCA contract to a new company formed by Alisha and Diva as the sole shareholders.
• Alisha and Diva then called a General meeting with shareholders (no notice provided to Ali) and resolved that Ali will be removed as director of the company.
• At the General Meeting of shareholders, the director’s decision to assign the RSPCA contract was ratified by the shareholders with a vote of 80% (Ali not being present).

Ali comes to you with the following questions. You are required to answer:

a)         Can Ali bring a personal or derivative action against Alisha and Diva, and what should Ali consider in making this decision?         

b)        If Ali brings a personal action, should he bring it under the general law or make an oppression claim under s 232 Corporations Act 2001 (CTH)?

c)         What remedies should Ali seek?

Answer 1

a)Ali will bring a derivative action against Alisha and Diva

Derivative action can be brought where there is shareholder oppression. This may occur where majority shareholders discriminate and make decisions for their own benefit while suppressing the minority shareholders. It dictates that the court should allow a derivative action where it is satisfied by those bringing the action that the relevant grounds required for an application have been established. In order to bring a derivative action suit, a shareholder must prove the following:

1. That shareholder is acting in good faith
2. That the action is in best interest of the company
3. It is unlikely the company would bring the action itself or take responsibility over the matter.

b)Ali should make an oppression claim

Oppression of the minority may occur where they are excluded from management, directors paying excessive remuneration, maliciously failing to pay dividends or expelling a member from the company. In order to prove shareholder oppression the minority shareholder must prove that the majority;

1. Engaged in conduct that is contrary to the interest of minority shareholders
2. Engaged in conduct that is oppressive, prejudicial and discriminatory towards the minority shareholders

c)Ali may seek the following remedies

1. He can petition for remedy on excessive remuneration which can be cured by the court ordering the directors to pay back the excessive remuneration to the company.
2. Reinstatement into being director
3. Ali should seek a remedy for shareholder oppression for malicious suppression of dividends with a mandatory injunction for the immediate and future payment of dividends.
4. Ali can seek rescission of the contract given to the company where Alisha and Diva are directors to be voided by the court and any payments made returned to the company