When doing business with anyone, mutual expectations must be agreed upon. If minority investors are to become part of your organisation the rights and responsibilities of those investors should be clearly set out in shareholder agreements and be well known and understood by the parties.

Take the recent case of BBHF Pty Ltd v Sleeping Duck Pty Ltd & Ors [2024] VSC 320. This is a case where an investor launched a Supreme Court action against the company alleging oppressive conduct of a minority shareholder. In that case, a minority investor agreed with the founders to give the company ten months worth of work, for which he would receive 10% of the founder’s shares. It was later agreed that he could receive a further 10% under the terms of a call option deed. The investor was a former medical practitioner but a current entrepreneur, and the company was a manufacturer and online retailer of mattresses.

It was claimed by the investor that his activities had moved the business from a poorly run enterprise to a profitable business but that he had been wrongfully excluded from management of the company after a short period of time.

Indeed, the enterprise engaged other consultants to assist with management and paid them a monthly fee. It also provided an employee share option plan to the new management team that, if exercised, would dilute the investor’s shareholding from 10% to 9.09%.

The investor argued that he had a reasonable expectation that he would be able to participate in the company’s management and that the denial in that regard constituted oppressive conduct. The court did not accept his argument and found that whilst the investor had provided advice and was a mentor, what he had undertaken was not properly characterised as management activities.

The investor further argued that he should have been notified of and required to consent to the financial arrangements made with the new consultant, especially regarding the employee share option plan offered to that consultant. The fact that he hadn’t meant that he had been oppressed.

In this regard, the court found that the investor knew about the financial arrangement but had consented to the creation of the ESOP and had not made any complaint about it. The court also found that the steps taken by the organisation in relation to the valuation of the shares under the ESOP had been appropriate and that the general arrangements with the consultant did not render the arrangement commercially unreasonable.

The court considered other factors concerning the matter, including the timing of the provision of draft shareholder agreements, the failure of the company to notify the investor of the exercise of the options by the other consultant, and issues in relation to the admission of without prejudice correspondence.

In the end, the conclusion was that there had been no oppressive conduct, and the investor failed in his application. It should be noted, too, that it appears that the investor, after the proceedings, remained a shareholder in the enterprise. It will be interesting to see whether an agreement can be reached about the investor divesting himself of the shares or whether they will continue as a shareholder, notwithstanding the dysfunction between the two parties.

If you have any questions relating to this article or shareholder agreements, contact Tal Williams from our Business, Corporate & Commercial team.