Legal Updates

Articles of Association can not limit or reduce the ability of shareholders to remove oppression of their rights in the company

April 20, 2021

A company ran into financial difficulties due to negligent management and a crisis of confidence between the shareholders which led to the paralysis of the company. While the minority shareholders contended oppression and demanded that the majority shareholders purchase their shares, the majority shareholders contended that there was no oppression and that the minority shareholders are subject to the company's articles of association which give them a right of refusal and grants the board of directors a veto right on the sale of shares to third parties.
The Supreme Court held that the minority shareholders were oppressed and therefore action must be taken to remove the oppression by implementing a bidding mechanism between the parties. Oppression occurs when there is a breach of a well-founded interest or a legitimate expectation of a shareholder in the company. Poor management of the company, failure to allow the minority shareholder to participate in the day-to-day management of the company and an acute crisis or breaking of trust between shareholders in a private company all constitute circumstances that may create oppression and establish the minority shareholder's right to remove such oppression. An arrangement in the company's articles of association which provides for a way to sell shares does not limit f remedies for the removal of oppression if such exists and the articles of association cannot limit this. Here, the company has been failing for years, the mistrust and disconnect between the shareholders created a commercial stalemate and there is no practical possibility where the legitimate expectation of the minority shareholders to generate profits from the company will come true. While there is a mechanism for selling shares in the company's articles of association, this mechanism is intended for a normal and fair course of business and not for a situation of oppression. Therefore, the parties should be separated by using the BMBY bidding mechanism which is a simple fair and effective solution in such disputes.