Tuesday, 23 October 2018

New Zealand: can a minority shareholder's refusal to endorse a special resolution be unfairly prejudicial?

Earlier this year - on 22 August to be precise - New Zealand's highest appellate court, the Supreme Court, delivered judgment in Baker v Hodder [2018] NZSC 78. A media summary is available here (pdf). The judgment is noted here for reasons that do not emerge strongly from the media summary: the discussion of the extent to which a majority shareholder is able to seek relief in respect of a minority's refusal to endorse a special resolution.

The facts were these. The company's shareholders and directors were family members: the Bakers and the Hodders; the Hodders held 70% of the shares and the Bakers the remaining 30%. An important transaction - the sale of a farm - was proposed requiring a special resolution under section 129 ("Major transactions") of the Companies Act 1993. The Bakers agreed to sign a written resolution if certain conditions were met; without their approval a special resolution could not be passed.

The Bakers decided not to grant their approval, whereupon the Hodders brought an action under section 174 ("Prejudiced shareholders") of the 1993 Act, which permits a shareholder to seek relief where "... the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity".

The trial judge, Ellis J, held that the Bakers' refusal was unfairly prejudicial and ordered the Bakers to sign the resolution; she also refused to stay her decision to permit the Bakers to appeal. The farm was sold. The Court of Appeal declined to hear the Bakers' appeal, taking the view that the case was moot given that the farm had been sold.

The Supreme Court unanimously held that the Court of Appeal should have heard the Bakers' appeal which, though moot, raised issues of sufficient importance - including the interaction between sections 129 and 174 of the 1993 Act - to justify the Court of Appeal exercising its discretion to hear the appeal. The Court further held that it was inappropriate to order the Bakers to sign the resolution: this was, the Court held, "usurping their position as shareholders" (para. [72]). A little earlier in the judgment, it was observed (paras. [70] and [71]):
...s 174 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 party claiming under s 174. Although this language is not obviously apt where the oppression complained of consists of a shareholder invoking the right to decline to approve a major transaction under s 129, s 174(3) contemplates that a s 174 order may be made against a person other than the company, including a shareholder. That could be taken as suggesting that s 174 could apply where a shareholder or group of shareholders refuses to approve a major transaction under s 129. Even if s 174 did apply in such a situation, however, the power to make an order under that section would need to be exercised with great caution.

One situation in which it may be appropriate to make an order under s 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. There may be others; it is not necessary for us to reach a definitive view on that in the present case".

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