Legal Updates

A decision to change the rights of a class of shares without a legitimate business rationale behind it may be oppressing

April 16, 2020

In a company that owns real estate, it was set already in 1973 that the share capital is divided into ordinary shares and redemption shares, with the ordinary shares entitled to dividends and the redemption shares being the only ones with a right to vote and forfeiting their rights if they are redeemed or transferred, including upon the demise of the shareholder. In a general meeting it was decided to change the articles of association so that the limitation of alienability is cancelled and redemption shares are entitled to dividends.
The Supreme Court held that there is no oppression of the minority in the cancellation of the limitation of alienability, but the decision to grant dividend rights to the redemption shares is oppressing and cancelled. Oppression is an unfair distribution of resources between shareholders in the company and the test for oppression is the question of whether the legitimate expectations of shareholders was compromised given, inter alia, the nature of the company. The test is whether the result is oppressing and does not focus on the oppressor's motives. A company may stipulate different voting rights to different classes of shares in the articles of association and the denial of voting rights to a class does not constitute oppression. It is not possible to completely block the possibility of a change the articles, either in a provision of the articles of association or in an agreement, but the ability may be limited by a special required majority. Nevertheless, unless stipulate otherwise in the articles, amendment of the articles to change such supermajority requires an ordinary majority. Here there was no legitimate expectation for ordinary shareholders to participate in management, but they had an expectation of receiving all dividends. Thus, cancelling the alienability limitation of the redemption shares does not constitute oppression. The decision on dividend eligibility also for the redemption shareholders does not increase the wealth of the company, but only changes the way the company distributes resources and has no legitimate business rationale and is therefore oppressing and void.