A recent decision of the Supreme Court of Queensland shows how the Court considers applications for leave to bring proceedings on behalf of a company in a context where a minority shareholder also has an oppression claim.
More importantly, this case serves as a reminder to commercial litigation lawyers and their clients of the importance of critically characterising the dispute at the outset. Cases need to be shaped to make them fit as neatly as possible within favourable existing law, and most importantly, to make them intuitively attractive to a Court.
The plaintiffs were shareholders in a company that designed and manufactured fire collars and similar products for the building industry. They brought proceedings in the Supreme Court of Queensland seeking leave to bring derivative proceedings on behalf of the company.
The intellectual property for the company which was used to manufacture the products was held in a unit trust with a corporate trustee.
Each of the plaintiffs and the defendants were shareholders in the company and trustee company, and unitholders in the trust.
The directors were directors of the company and the trustee company.
During 2014 the first plaintiff’s employment with the company was terminated and the relationship between the parties began to deteriorate. From around this time the plaintiffs wanted to sell their shares and units.
The plaintiff’s specifically complained of the following conduct of the defendants:
- First, the plaintiffs said the defendants caused an improper capital raising by the trustee company, who then purchased and licensed back some of the company’s assets. The plaintiffs said this arrangement was on uncommercial terms with the impact of unfairly diluting their shareholdings.
- Second, the plaintiffs said the defendants incorporated a new company, and caused the company to supply the new company with products it would then sell overseas at a profit. The plaintiffs said the defendants caused the company to provide services to the new company on terms not beneficial to the company. This had the effect of diverting profit from the company to the new company, to the detriment of the plaintiff.
The Court’s decision
The plaintiffs sought leave pursuant to s 237 of the Corporations Act to sue the defendants including for breaching their contract with the company and breaching their duties to the company. They brought additional claims including for oppression pursuant to ss 232 and 233 of the Corporations Act.
The plaintiffs said their derivative claims were “strong”, and would be pursued at no cost to the company as they would fund and indemnify the company for any costs order. The Court noted the oppression claim would be brought in any event.
The real issue in dispute was whether the derivative suit was in the best interests of the company, in circumstances where the plaintiffs were also prosecuting an oppression claim.
For leave to be granted pursuant to s 237 of the Corporations Act the Court must be satisfied it is in the company’s best interests that leave be granted; not that it could be or is likely to be.
The Court noted it needed to consider whether the plaintiff could obtain relief from means other than forcing the company to litigate against its will.
While not determinative, the plaintiff’s statement of claim revealed the dispute was fundamentally a dispute between shareholders, rather than a case of illegal conduct by directors. A more appropriate means of litigating a dispute between shareholders is through oppression proceedings.
The Court noted authority that the alleged breaches of duty could be accounted for in the valuation of the plaintiffs’ shares in any buyout relief that might be available in the oppression claim.
The Court did not grant the plaintiffs leave to bring a derivative suit.
The Court considered it was not in the best interest of the company for a derivative suit to be brought where similar relief could be obtained by the plaintiffs by other means, and without involving the company in litigation. It was not shown by the plaintiffs that the oppression relief would be inadequate.
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