When shareholders expectations are not met, when and how will a court intervene?

When shareholders of a listed company determined that the management of the company was not in their best interests, they unsuccessfully sought an order under section 174 of the Companies Act 1993 (the Act) requiring the company to purchase their shares.

In this case1 the Court of Appeal examined the application of section 174, with a focus on ‘oppression’, shareholders’ expectations and the particular ambit of these concepts in a listed company context.

The case involved a dispute among the shareholders of a listed property company. Certain minority shareholders (the minority) alleged that the management of the affairs of the company by the majority shareholder was adverse to their interests and that the stated management policy of the company, “long-term capital growth with aggressive management”, was reaping the opposite result.

Specifically, it was claimed that the company’s policies were eroding shareholder wealth, had led to inappropriate income for the majority shareholder, and that the majority shareholder had unfairly used its voting power to prevent a liquidation, which was not in the best interests of all of the shareholders.

The order sought by the minority was for the company to purchase its shares at the claimed net asset value (NAV). Importantly, the claimed NAV was 118 percent greater than the sum paid for the minority’s shares two years earlier and was higher than the quoted NZX share price at the time of the action.

The Court of Appeal upheld the High Court’s decision that no relief be granted to the minority. In making its determination, the court canvassed a wide range of authorities from various jurisdictions on the general subject of minority oppression and prejudice. From this survey, it emphasised that:

• poor management, without bad faith or self-interest, cannot amount to oppression;

• second-guessing of management strategy by itself is not the province of courts; and
• section 174 is not the appropriate course for the facilitation of a shareholder exit from a company motivated by a strategic disagreement.

The court considered shareholders’ expectations and the proper balance between its discretion to fulfil these expectations and the need for legal certainty. In determining where the proper bounds of shareholders’ reasonable expectations should fall, the court acknowledged the primacy of the constitution and agreements forming the basis of the relationship between a company and its shareholders. Despite this emphasis, the court observed that consideration of reasonable expectations could arise, though not determinatively, in a listed company setting.

On considerations unique to listed companies, the Court observed that section 174:

• is not limited by virtue only of a company’s listed status and the added layer of shareholder protection provided by the listing rules;
• should not unnecessarily be read down given that similar provisions in other common law jurisdictions had proven both commercially beneficial and judicially workable; and
• should not, as a rule, be lightly interpreted at variance with the treatment of similar provisions elsewhere in the common law, where listed companies are not specially exempt.

Other interesting observations of the Court were that section 174 is not solely concerned with conduct that:

• accords with the constitution, as this may yet give rise to inappropriate prejudice;
• involves a lack of good faith; or
• treats shareholders unequally.

1 Latimer Holdings Ltd & Anor v SEA Holdings NZ Ltd (CA, 15/09/2004; Glazebrook, Hammond and O’Regan JJ, CA 214/03)

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