Oppression revisited: Valuing an inherited, minority holding

KEY CONCEPTS

The shareholders: death of a minority shareholder – disappointed expectation of inheritance on the part of surviving director – incoming shareholder not having invested equity in the company – materiality of transfer provisions in shareholders agreement where oppression has been found – applicability of the minority discount

Director’s remuneration: whether remuneration was excessive when paying a dividend was precluded in consequence – when bonuses become unreasonable and oppressive

On 28 August 2024, I published a Keynote called Oppression is a Broad, Flexible and Pragmatic Remedy but Safe Harbours may be another Means of Saving the Company. A recent decision of Justice Matthews of In the matter of National Protective Services Pty Ltd; Holmes Properties (Aust) Pty Ltd v Saunders &National Protective Services Pty Ltd [2025] VSC 486 (15 August 2025) illustrates other aspects of the oppression jurisdiction.

BACKGROUND

1. The company carries on a security business that had been founded by the first defendant, Ms Saunders in 1988. In 1994, a Mr Holmes became involved in the business, first as an employee and then in 2004, as director and 1/3 shareholder. In about 2000, Mr Holmes transferred his interest to Holmes Properties.
2. In 2002, the company moved into new premises in South Melbourne purchased by Ms Saunders and Mr Holmes in equal parts. Rent was paid.
3. Mr Holmes began to have periods of ill health and worked less and less while still remaining as a director. Ms Saunders’ husband started working for the business.
4. From time to time, dividends would be paid, largely reflecting Mr Holmes’ requests for financial assistance.
5. In 2020, the COVID lockdown severely affected the company and Ms Saunders had to lay off most of the staff.
6. On 9 June 2020, Mr Holmes died unexpectedly and when clearing out his home, Ms Saunders found a will leaving his residual estate, including his interest in Holmes Properties, to his best friend, a Ms Lowson.
7. Ms Saunders had expected to inherit Ms Holmes’ interest in the business which had been the case with previous wills and was devastated by this turn of events and no longer wished to continue working for the company as CEO.
8. On 7 July 2020, Ms Saunders, as director, passed a resolution that she and her husband would commit to the next 12 months at the company and that any profit would be paid to them, this to be reviewed quarterly. At trial, Ms Saunders said that this was done to motivate her to commit to the business through the COVID pandemic period.
9. Shortly afterwards, the company began to provide guard services during the COVID lock down and its profitability soared, with upwards of 1500 staff employed at the height of this work. Over time, the level of work decreased but the company was able to maintain the benefit of its enhanced position in the market.
10. Pursuant to the 7 July 2020 resolution, for FY 2021 and 2022, Ms Saunders received bonuses of $2,300,000 and $2,075,00 respectively while Mr Saunders received $2,300,000 and $1,000,000. No dividends were paid over the period.
11. On 10 November 2021, Ms Saunders advised the executor’s solicitor that no dividends to shareholders would be paid. On 22 February 2022, Ms Lowson was appointed director and secretary of Holmes Properties. There were attempts to arrange a meeting to discuss a sale of Holmes Properties’ share of the company, but nothing eventuated.
12. Ms Lowson’s lawyers then engaged an accounting firm to conduct a forensic analysis of the business to enable a formal valuation however onerous confidentiality provisions were proposed by Ms Saunders regarding the provision of information and the idea lapsed.
13. Over 6 months later, Ms Saunders wrote to Ms Lowson saying that she wanted to conclude the partnership regarding the York Street property and buy out Ms Lowson. She suggested obtaining valuations.
14. Five days later, Ms Lowson commenced proceedings.
15. At trial, there was considerable expert evidence on the reasonableness of the remuneration and bonuses paid to Ms and Mr Saunders. Expert evidence was also called regarding the valuation of the business and there was a joint experts’ report.
16. Part of Ms Saunders’ case was that she and her husband had been underpaid over the 2014 to 2017 period and that allowance should be made for this with a liability to this effect appearing in the company balance sheet. However, no evidence was called regarding the decision making behind the earlier remuneration nor why this amount had subsequently become a liability of the company only in later years.

THE OPPRESSION REMEDY

1. As noted in my 28 August 2024 article, the Court’s oppression jurisdiction is enlivened only where one of the heads in s 232 of the Corporations Act are satisfied. That is, there must be evidence that the conduct of the company’s affairs or an act or proposed act or omission by or on behalf of the company is:

• either contrary to the interests of the members as a whole; or
• oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

2. Justice Matthews restated oppression principles that she had applied in earlier cases:

• Oppressive conduct generally requires commercial unfairness to a member or members of the company;
• The test for commercial fairness is objective in the eyes of a commercial bystander, and should be assessed in context;
• Evidence of intent, deliberate unfairness or lack of good faith “is persuasive, but not necessary” [171];
• Motives are unnecessary but the presence or absence of commercial justification is relevant;
• Mismanagement or poor management is not itself oppressive [307] but where excessively high bonuses are paid, that cannot be characterised as mere mismanagement;
• While hands-on directors can take high salaries, they cannot ignore the interests of investor shareholders even if those shareholders did not invest capital themselves and received their interest for no consideration [309];
• Breach of directors’ duties may be conduct that is not in the best interest of the company and so be oppressive.

3. Here, the judge accepted expert evidence that while Ms and Mr Saunders’ fixed remuneration was high, it was not unreasonable but that their bonuses were excessive being in the sum of $6,644,431 for the FY2021 and FY2022 periods.

FINDINGS OF OPPRESSIVE CONDUCT

1. The judge concluded that the excessive bonuses, allied to the nonpayment of dividends after Mr Holmes’ death, was oppressive [336].
2. The judge also found that the company had no liability to the Saunders respecting any accrued charges due to earlier alleged underpayments. There was no evidence that the earlier remuneration was set at levels that were other than the Saunders’ choice [316]. Therefore, the alleged underpayments could not be taken into account in assessing commercial unfairness [312] – [317]. Further, recording the accrued charges respecting the underpayments in the balance sheet was also oppressive conduct as it was not a genuine liability but would have influenced the valuation of the company [325] – 331].
3. The judge came to these conclusions without finding any lack of good faith on the part of Ms Saunders and indeed, the Saunders were described as honest and intelligent witnesses.

FIXING A PRICE WHERE THERE IS OPPRESSIVE CONDUCT

1. The judge then turned to fixing a price. To value the company, both experts used a capitalisation of future earnings approach which was then adopted by the judge.
2. The judge then turned to relevant principles in oppression cases:

• The price must represent fair value in all the circumstances, and the Court is not constrained my ordinary valuation principles [376];
• The purpose of a buyout order is to compensate the victim of the oppression [386];
• Where there has been oppression, the Court can override an earlier agreement regarding valuation of shares for transfer purposes such as in a shareholders’ agreement, as otherwise it may be unfair to the plaintiff to be bought out on a fictitious basis that assumes a free election to sell the shares [392];
• In consequence, the price is aimed at remedying the oppression and may not always reflect the actual worth of the shares on the open market;
• There are no rules about the correct date for valuation, the overriding principle is fairness and justice to both parties [377];
• Where oppression has occurred, it is generally not appropriate to apply a minority discount [390]; and
• When fixing a price, adjustments should be made to overcome the effect of overpayment of remuneration and of the alleged liability for earlier underpayments [388].

3. Ultimately, the judge decided that the price to be paid for the plaintiff’s shares was $5,638,000. The defendant’s preference was that this be by way of share buyback rather than a purchase. This was accepted by the plaintiff and the judge agreed to make this order with purchase being the fallback position if the buyback did not take place.