Legal Updates

Dilution of minority shareholders by issuance of shares will not necessarily be deemed oppressive

May 8, 2020

Shareholders of a publicly traded company contended that the controlling shareholders raised capital in order to take over the company by diluting their holdings in the company, resulting in the company entering the stock exchange's conservation list, limiting share trade and finally resulting in the company entering liquidation.
The Court held that this is a start-up company in which the control holders invested large sums that diluted others, but this is not an oppression of the minority. Not every share allocation that results in diluting the minority would be considered oppression but only when this creates unfair allocation of company resources among its shareholders and impairing the legitimate expectations of the shareholders. The legitimate expectations of the shareholders are reviewed under the circumstances such as the needs of the company and its economic status, and the test is objective and consequential. Issuance of shares must be made in an equitable and fair manner, as it may result in the dilution of non-participating shareholders, but not every issuance is deemed oppressive. If the assumption is that as a result of the issuance the value of the company will increase, as well as the value of the minority shares and when the issuance serves the purpose of the company and enable the company to continue operating it will be deemed justified as long as it has been done fairly and equally. Here, the company considered various options to increase the amount of shares held by the public and found that raising capital is the best of the lot. Participation of the controlling shareholders in the offering was not intended to dilute the minority or take over the company, but to encourage the public to invest in the company, hence there was no oppression even if the result was that the company entered into liquidation.