Minority shareholder oppression may happen in situations when a majority shareholder(s) of a company misuses their control to oppress the interests of the minority shareholder(s). The Corporations Act provides a number of remedies to deal with the issue of minority shareholder oppression, with these remedies sometimes requiring the valuation of shares in a company. This article discusses the issue of minority shareholder oppression, how minority shareholder valuations can be used as part of a court ordered remedy for this issue, and the special considerations required for minority shareholder valuations in minority shareholder oppression cases.
What is Minority Shareholder Oppression
The Corporations Act specifically defines shareholder oppression as conduct that is either:
- Contrary to the interests of the members as a whole, or;
- Oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder or shareholders (whether as shareholders or otherwise).
An example of minority shareholder oppression could be conduct that involves transferring assets out of the company to entities solely operated by the majority shareholders or actions to diminish the value of the minority shareholdings. It is important to note that it is the role of the Court to determine whether the actions of a board constitute minority shareholder oppression.
The Court has a number of available remedies to deal with the issue of minority shareholder oppression. These remedies are contained in section 233 of the Corporations Act 2001 (Cth). One of these remedies allows for a majority shareholder to be ordered by the Court to buy out the interest of the minority shareholder. In circumstances where orders like this are made it is often a requirement for the parties to seek out an independent share valuation expert to determine the value of the shares.
Compulsory Buy-Out of Minority Shareholder – Valuation Implications
Independent experts who determine the value of shares for minority shareholder oppression matters must be conscious of a number of technical considerations when forming their valuation opinions. Most important of these considerations is that the valuer must value the shares as if there had been no oppression.
Typically this involves a valuer calculating the pro-rata value of the shares held by the oppressed minority interest. In other words, not applying a discount to the value of the minority holding by virtue of its lack of control and marketability as would often be done for other minority shareholding valuations.
Further, in situations where oppression has decreased the asset holdings of the subject company or lowered its income stream, the valuer’s role is to calculate the value of the shares under the hypothetical assumptions that these oppressive actions did not take place.
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Groves & Partners are expert valuers of businesses, companies and shareholdings. Our expert valuers include Chartered Accountants and Registered Business Valuers. We are experienced in preparing expert valuation reports for minority shareholdings to assist with minority shareholder oppression cases and have experience in attending court to provide verbal testimony.