Oppression of minority shareholders and the doctrine of fraud on the minority.

Sometimes courts control an abuse of power because the holder of the power occupies a
fiduciary position — one in which the holder is expected to act for the benefit of others.
Directors occupy a fiduciary position in relation to the company and, as has been seen in Ch
8, courts will prevent directors using their powers for improper purposes. In that case the
basis for control is, in general, that the directors may use their powers only for the benefit of
the company as a whole. By contrast with directors, shareholders holding majority control
do not stand in a fiduciary position to the company or to minority shareholders and they do
not exercise any of their powers in a fiduciary character.1

Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 504; [1939] ALR 124 :

The power of alteration is not fiduciary. The shareholders are not trustees for one another,
and, unlike directors, they occupy no fiduciary position and are under no fiduciary duties.
They vote in respect of their shares, which are property and the right to vote is attached to
the share itself as an incident of property to be enjoyed and exercised for the owner's
personal advantage.

It would be unacceptable if directors, under a fiduciary duty as such, could avoid their duty
by simply approving their own conduct in their capacity as majority shareholders.
While shareholders are not subject to a fiduciary duty in exercising their voting rights as
such, it is arguable that the controllers of a company should be subject to a duty as
controllers which qualifies their rights as members. American courts have long recognised
that controllers are subject to a fiduciary duty not dissimilar from the duty of directors.2

The onus of showing that the majority's decision constitutes an abuse of power rests on the
person alleging it: Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR
666 at 702; (1975) 1 ACLR 219; (1975–76) CLC ¶40–238 per Mahoney JA. However,
where the action of the majority consists of an amendment of the constitution of the
company to expropriate the shares of the minority, or valuable proprietary rights attaching
to the shares, then the onus of proof lies on those supporting the amendment to show that it
is valid: Gambotto v WCP Ltd (1995) 182 CLR 432; 127 ALR 417; 16 ACSR 1; 13 ACLC
342 .
It appears that an action to challenge a decision of the majority on the ground of abuse of
power may be brought by any member. Even a member who lacks voting power in the
circumstances may initiate proceedings to challenge the majority's decision: Pavlides v
Jensen [1956] Ch 565 . The proceedings may be brought on behalf of a class of members
similarly affected, but (with one exception) the action should not be brought as a derivative
action to assert a right belonging to the company. This is because the abuse of power
affects the member's personal equitable rights and the member is therefore entitled to take
action in his or her capacity as member. The exception is where the plaintiff complains about
the majority's decision not to sue, and seeks to maintain the action on behalf of the company
as a derivative action.

When a majority in a meeting is shown to have abused their power the resolution is void,
whereas when directors abuse their power the transaction is voidable. The reason for the
difference is that the directors have a principal, the company, which can elect to affirm the
transaction. Where the majority abuses its power, there is no principal which can cure the
invalidity.

Related companies

An issue which has arisen from time to time is to what extent the “conduct of a company’s
affairs” can include the affairs of a related company. The issue is not settled although the
majority of courts have decided that the affairs of a company can include the affairs of its
subsidiary or the affairs of its parent company.

On one side is the broad approach of the court in Lucas‘ case combined with the comments
of the court in Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588; 2 ACSR 553; 8
ACLC 900 . In Dernacourt (at ACLC 921) the court stated that in an appropriate case the
conduct of a parent company, or of such of its directors who happen to be directors of the
relevant subsidiary, towards its subsidiary, may constitute conduct in the affairs of that
subsidiary. The court also stated that the conduct of a subsidiary, or of some or all of its
directors who are also directors of the parent company, may constitute conduct in the affairs
of the parent company.

Similarly, in Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279; 5 ACLC 184 , the court
was prepared to find that business dealings with a subsidiary were in the affairs of the parent
company due to a common board of directors. In IceTV Pty Ltd v Ross [2008] NSWSC
1321 at [13], the court stated it accepted that the affairs of a company can include the affairs
of its subsidiary and that a company can oppress a shareholder “through the acts of its
subsidiary, particularly a wholly-owned subsidiary”. In Ubertini v Saeco International Group
Spa (No 4) (2014) 98 ACSR 138; [2014] VSC 47 at [504] and [532], the court held that
certain conduct of the parent company in relation to its subsidiary was conduct in the affairs
of the subsidiary. See also Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC
324; [1958] 3 All ER 66; 3 WLR 404 . On the other hand, Young J in Morgan v 45 Flers
Avenue Pty Ltd (1986) 10 ACLR 692; (1987) 5 ACLC 222 was unwilling to find that the
conduct of a director of a subsidiary could be construed as conduct in the affairs of the
parent company, despite the parent company having appointed the director.

It is oppressive for the Director of a company to unfairly withhold dividends from a

shareholder

Oppressive for a director to deny access to information.

Use of company funds to defend oppression proceedings is in itself oppressive

Doctrine of fraud on the minority