Grego v Copeland – “oppression” – recent example of conduct constituting shareholders oppression

Yesterday’s decision by Ferguson J of the Victorian Supreme Court in Grego v Copeland & Ors [2011] VSC 521 provides a good, classic illustration of what will amount to “shareholders oppression”, for the purposes of s 232 of the Corporations Act 2001 (Cth). As there can be divergent views as to what constitutes oppression, what goes far enough to “cross the line”, it is worth a quick review of this case.

The company in question, Jimmi Dexta Pty Ltd, engaged in the artwork design and supply of runners and shoes from 2004. The shareholdings and directorships of the company changed over time, but in the relevant period it was effectively a “corporate partnership” between 4 men, most of whom played an active role in the business. Mr Grego, the plaintiff, was the owner/director responsible for artwork and sampling, and he would travel to China to source supplies and wholesalers.

By May 2006, fractures in the parties’ relationships had appeared. The conduct Mr Grego complained of, which was held to constitute oppression, included –

(a)  a demand made in May/June 2006 to Mr Grego that he inject $160,000 into the company or else he would be removed as a shareholder and director. (He was subsequently removed as a director and his employment was terminated);

(b) failing to hold any meetings of members to which he was invited since June 2006;

(c) improperly excluding him from participation in management of the company; which was worsened by also –

(d) failing to make him a reasonable offer for  his shares;

(e) incorporating a new company and diverting assets of the company to it;

(f) failing or refusing to honour the company’s financial obligations towards him in his capacity as an employee. (This related to Mr Grego’s use of a personal American Express card for corporate purposes, and the company’s refusal after a certain point in time to reimburse him.);

(g) incorrectly characterising certain payments as shareholders’ loans, when in truth they were capital contributions, thereby reducing the value of shares and prejudicing Mr Grego [at 27-45 and 51].

Mr Grego also argued for an additional ground of oppression, that of denying him access to information about the company’s affairs. However this was held not to be proven. [at 26]

On appeal from a decision of an Associate Judge, Ferguson J upheld the decision at first instance, that oppression had been established. Her Honour held that it resulted from the cumulative effect of the conduct in question [at 5].

Her Honour summarises the relevant principles [at 47], observing that whether conduct is unfair or oppressive in a commercial company is assessed objectively through the eyes of a commercial bystander. Her Honour notes that conduct will be considered in its context, and while separate instances of conduct on their own may not be unfair, cumulatively they may constitute oppression.

It is not entirely clear from the judgment, but it appears that her Honour concluded that certain of the grounds listed above were on their own enough to constitute oppression, and certain grounds could only be characterised as oppressive when taken cumulatively together with the other grounds.

Others may take a different view, but on my analysis of the judgment, in particular the passage at [56-60], her Honour’s conclusions are these –

  • grounds (c) and (d) – the Associate Judge had held that taken together these two are enough, on their own, to constitute oppression [at 50]. This is consistent with authority (see Lord Hoffman in O’Neill v Phillips & Ors [1999] UKHL 24; [1999] 2 All ER 961). However her Honour appears to take the view [at 56-60] that it is the conduct described in grounds (c)-(g), taken together cumulatively, which amounts to oppression,
  • grounds (e), (f) and (g) – these on their own might not have amounted to oppression, but considered objectively in the context of the other conduct of the defendants, leads to a conclusion that there had been oppression,
  • ground (b) is only referred to in passing earlier in the judgment, but is not discussed by her Honour, and
  • ground (a)  is referred to curiously by her Honour at the end of paragraph [5] and again as an “in addition” matter at [60] and [75], as an additional ground, after holding that the other grounds taken together clearly constitute oppressive conduct. Her Honour remarks that this was unreasonable, but it is not entirely clear as to her Honour’s position. It is possible that her Honour’s intended meaning is that this conduct on its own, without needing to be taken cumulatively with the other grounds, constituted oppression.

Unsurprisingly, the defendant shareholders argued that their actions had been reasonable and within power. They argued that Mr Grego had not been performing well as an employee, that he was not bringing in any income to the company, that the relationship between Mr Grego and his co-directors had broken-down, and that accordingly it was in the best interests of the company that he be removed and that they had done so properly [at 53].  Their arguments were unsuccessful.

Ferguson J agreed with the orders of the Associate Judge for the purchase of Mr Grego’s share at a price of $32,142.86, for procurement of the release of the guarantee that he gave in favour of the NAB and for payment of the American Express card liability and interest [at 6].

In relation to the often contentious issue regarding the appropriate date for the valuation of the shares, there was two valuations in evidence. Predictably, the defendants argued for a later date, at which time the evidence indicated the value of the shares was negligible. However her Honour agreed with the Associate Judge’s date of 30 June 2007, that contended for by the plaintiff Mr Grego. Not all oppressive conduct had occurred by that date, but by that time the demand of $160,000 had been made, Mr Greg’s employment had been terminated, he’d been excluded from participation in management, no meaningful offer had been made by the other shareholders for his shares. [See 62-73] See the leading authority on this issue, the Victorian Court of Appeal’s decision of Foody v Horewood & Ors.

All in all, quite a typical case of oppression factually, and an interesting judicial assessment of what is enough to constitute oppression, for the purposes of s232 of the Corporations Act 2001 (Cth).

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