Can the majority get the Court to force the minority to consent to a major transaction?

Introduction

At the end of last month the Supreme Court gave an important decision (Baker v Hodder [2018] NZSC 78) on the relief available to majority shareholders where the minority withheld to a major transaction.

Sadly, the case involved a family farm in which the parents held 70% of the shares and the daughter and her husband the remaining 30%. The proposed sale of the farm was a major transaction for the company (and required a special resolution of the shareholders under section 129 of the Companies Act). In this case, the minority shareholders agreed to sign a written resolution approving the sale, but only on conditions that were unacceptable to majority.

Consequently, the majority commenced proceedings against the minority under section 174 of the Companies Act (for relief where the affairs of a company are being conducted in a way that is oppressive, unfairly discriminatory or unfairly prejudicial to the applicant) alleging that the refusal to approve the proposed sale was oppressive and/or unduly prejudicial to the majority and to the company.

At first instance, the High Court judge accepted a submission from the majority that the matter was urgent and truncated the timetable for the conduct of the proceeding – granting an application under section 174 and ordering the minority to sign a special resolution under section 129 to authorise the sale of the farm forthwith. The judge also refused to stay her decision to allow the minority to appeal to the Court of Appeal. As a result, the farm was sold.

The Court of Appeal then declined to determine an appeal by the minority, on the basis that it was now a moot point – given the farm had been sold.

However, the Supreme Court decided that the Court of Appeal should have heard the minority’s appeal – and decided that it should deal with the merits of the minority’s appeal rather than remit the case back to the Court of Appeal.

The Supreme Court decision

The Supreme Court recited the legislative history of section 129 – specifically noting that it operates as a restriction on the general management powers of directors and (where there is a major transaction), the relevant powers are specifically reserved for special resolution of shareholders. There is also the safeguard of dissenting shareholders’ (appraisal) rights.

Importantly, shareholders exercising their voting rights in relation to a major transaction are, in usual circumstances, not subject to any obligations to each other or to the company ruling out any such duty was not carried forward into the Companies Act.

In the Supreme Court, the minority argued that the use of section 174 in the context of the facts of this case undermined their rights as shareholders under section 129, and that the High Court had no jurisdiction to make the order. The Supreme Court noted that:

“Although this language [i.e. the language of section 174 – which applies where the affairs of the company have been, are being or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the claimant] is not obviously apt where the oppression complained of consists of a shareholder invoking the right to decline to approve a major transaction under section 129”.

it then noted that section 174(3) contemplates that a section 174 order may be made against a person other than the company, including a shareholder and that:

“[this] could be taken as suggesting that section 174 could apply where a shareholder or group of shareholders refuses to approve a major transaction under section 129”.

But the Court also cautioned that, even if section 174 did apply in such a situation – the power to make an order under that section would need to be exercised with great caution.

Unfortunately, the Supreme Court concluded that it did not need to be definitive on the circumstances in which the exercise of minority rights under the Companies Act might itself constitute oppression under section 174 – because the Court found that the High Court hearing had been miscarried. This was because the truncated process followed in the High Court meant that the Judge was not in a position to determine a number of factual disputes. As a result, it quashed the order made by the High Court made under section 174.

The Supreme Court also noted that, by requiring the minority to sign a special resolution was that the Court was, in effect, usurping their position as shareholders. The High Court Judge justified this on the basis that there was no rational basis for the minority not to sign the resolution, given that the company was effectively insolvent and its shares were valueless. This left only the ‘bargaining chip’ in relation to the minority and their indebtedness to the majority. However, that presupposes that the minority were not able to act out of self-interest.

Importantly however, the Supreme Court did indicate that one situation in which it may be appropriate to make an order under section 174 against a minority shareholder who refuses to approve a major transaction is:

“where there are particular circumstances that mean the minority shareholder is breaching a duty owed to the company or to another shareholder or an understanding among shareholders as to the ongoing conduct of the affairs of the company”.

As an example, it said that if, on the facts of the case before it, the High Court did have the power to make an order under section 174 and such an order was justified, the form of the order made, requiring the Bakers to sign a special resolution approving the transaction, was inappropriate. It usurped their position as shareholders and “presupposes that the Bakers were not able to act out of self-interest”.

Concluding comments

The outcome of this case is that the types of case that might provide a majority shareholder with scope to obtain relief against the minority under section 174, where consent to a major transaction as being withheld, appears to be narrower than a previous High Court decision (Fairway – 2014) would indicate.

When exercising their voting rights in relation to a major transaction, shareholders are typically able to act in a self-interested manner. Consequently, in order to sustain an oppression-type claim under section 174, something more is required – to show that a minority shareholder is subject to obligations to the other shareholder/s or to the company itself. Perhaps the circumstances of a family business, such as a family-farming operation, might add that extra dimension.

It should also be noted that the Supreme Court has also indicated that even if a Court did have jurisdiction to make an order under section 174, then rather than making an order requiring the minority to approve a major transaction, the appropriate remedy would be to appoint a receiver to carry out the transaction or, alternatively, for the majority to apply to the Court for a winding-up order on the just and equitable grounds. Regrettably, the Court did not shed any further light on whether this reasoning would hold in the face of a mortgagee sale (as in Fairway) or the loss of a good deal (as in the present case).

Further information

If you would like more information about any of the matters discussed in this note, please contact me.