A new remedy for family business oppression

Disputes in family businesses are messy, and if they end up in claims that the affairs of the company were conducted in an “oppressive” manner, it will often see small family business shareholders paying tens of thousands of dollars to prove their claim.

It's generally money that they just don't have. In some cases, they are bought out, or the business is wound up.

All this could change with a new Victorian Supreme Court pilot program that could see shareholders get some sort of resolution without spending a packet.

“Oppressive” conduct typically occurs when majority shareholders won't allow minority shareholders to see the accounts.

This can occur, for example, when the majority shareholder is preparing to put the company in liquidation or is resurrecting the company in a new corporate entity that will not include the minority shareholder, maybe even a “Phoenix” operation.

It's often seen in family businesses where the founder has died and there are issues between siblings, or where a senior investor wants to take the company in a direction that the other shareholders don't approve of. Or maybe the company has the patent on a product that other directors see as a real money spinner that the majority shareholder wants to licence. Shareholders in a family business might have the same level of investment, but some might be directors and making decisions unbeknownst to the non-director shareholders.

Very often, one of the remedies sought by the shareholder claiming they are oppressed is that the company be wound up. In this scenario, the majority shareholders will be ordered to buy out the minority ones at a fair price. If the majority buys out the minority, they will continue to run the company. But if they don't have the funds to buy out the minority, or they are not willing to, and the parties can't sort out their differences or sell the business to someone else, then they might have to be wound up.

Seeking relief under Section 233 of the Corporations Act would cost tens of thousands of dollars, particularly because the people have to prove they suffered oppressive conduct. That is to say, they were discriminated against. There would be massive costs preparing the documentation. And any shareholder seeking to be paid out can expect a wait of six to 18 months while valuation experts are called in.

Streamlining the dispute process

To fix this, the Supreme Court has brought in a six-month pilot program dealing with oppression applications. The aim is to resolve the dispute before the significant costs start to kick in.

To cut out the paper work, the court will require applications to run for no more than three pages, setting out a clear and succinct summary of the facts alleged to be causing the oppression. In effect, it's an affidavit, costing at the most a couple of thousand dollars.

By forcing the parties to state the case in a three-page affidavit, they have to hone in on all the key issues that the court should know about without going overboard and incurring costs. And chances are the other family members can fill in the gaps. This then goes to an initial conference before an associate judge, usually in two to three weeks of the application being made. All the parties are expected to attend that conference. The aim is to create a resolution. If it's still not resolved, it's either managed by the associate judge or referred to a judge for further directions and hearing.

The practice note is the brain child of Justice Anne Ferguson, who says these disputes involving family members rack up significant costs and are highly emotional.

“It's a difficult time because it's family members,'' Justice Ferguson says. “Often it involves not just two brothers, for example, that are fighting. It involves all their other siblings and their parents, if they are still alive, and their wives or husbands and the whole box and dice. They are troubling cases.

“We started to think about whether there were different ways of dealing with them because one of the issues is that the more the legal costs build up, the less likely it is that you can readily resolve the matter and the costs become the matter rather than the dispute. So if you have an expensive procedure to get to a point where you go to mediation, the costs might be an inhibitor.”

The aim of the exercise, she says, is to get it resolved through discussion. Talking about a problem works a lot better than fighting over it in court.

“Sometimes seeing things in writing that have inevitably been prepared by lawyers can come across more harshly than if there was a discussion. There's a certain language that's used and boxes people more into their entrenched positions,'' she says.

The pilot program started in October, so it's early days yet. But Justice Ferguson says the uptake has been good and can see it creating a big change in the way family business disputes are handled.

“I would expect there would be more efficient and cheaper disposition of these types of disputes. I would hope a larger number would settle than had previously settled at an earlier stage of the proceedings without significant costs being incurred,'' she says.

Geoffrey Shiff, from law firm Shiff & Company, says that the program is perfect for small family businesses.

“Small companies can't afford the applications and the court has said, if they can't afford it, the company will be wound up,'' Mr Shiff says.

“We have had cases where people just can't afford to make an application claim. All they can do is sit back and wait for management to do whatever they want. A lot of companies are then being wound up.

“My personal experience has been in acting for minority shareholders and we have to deal with the situation where it is difficult for them to have an economic dispute resolution.”

David Hope, a partner at K&L Gates, says oppression applications are common in family businesses and can be exceedingly costly for any small business.

“The issues can get very messy,'' Hope says. “You can spend a lot of money on lawyers. You do these high affidavits where all the grievances are aired then the other side reads them, they get upset naturally, they may want to put their reply, and the parties can get even further apart.”

A three-page affidavit and a session before an associate judge to sort things out would change that. Sometimes the simplest solutions are the best.