Shareholder oppression claims and start-up investment – ‘Get your Ducks in a Row’
A recent Victorian Supreme Court decision provides useful guidance regarding shareholder oppression claims in the context of investment in start-ups. The decision also highlights the need for clear, written shareholder agreements.
In BBHF Pty Ltd v Sleeping Duck Pty Ltd & Ors [2024] VSC 320, the Court considered the relationship between Dr. Adir Shiffman, an investor and advisor, and the founders of mattress company, Sleeping Duck Pty Ltd.
In 2017, Dr Shiffman, through his company BBHF Pty Ltd, invested in Sleeping Duck, becoming a significant minority shareholder and advisor to the business’ founders. There was no written shareholders’ or other agreement between Dr Shiffman, his company and the founders of Sleeping Duck. Over time, Dr Shiffman claimed to have helped transform Sleeping Duck from a growing start-up into a profitable business.
However, tensions arose and Dr Shiffman argued the founders excluded him from management decisions and diluted his shareholding without his consent. Specifically, by introducing an Employee Share Option Plan that allowed another consultant to exercise share options, diminishing Dr Shiffman’s equity from 10% to 9.09%.
When discussions about a potential exit for Dr Shiffman failed, he initiated legal proceedings alleging oppressive conduct under the Corporations Act 2001 (Cth).
The Court confirmed the test for oppression under the Corporations Act is objective, focusing on commercial unfairness, not the subjective intentions of the parties involved. The mere existence of tension or disagreement does not constitute oppression.
Dr Shiffman's claim of having a ‘legitimate expectation’ to be involved in management of the business was critically evaluated. While Dr Shiffman believed he was entitled to such involvement, the Court held his expectation was not objectively reasonable. The Court found Dr Shiffman was an adviser and a mentor, but his activities were not in the nature of management activities.
The Court also found Dr Shiffman, in effect, consented to the Employee Share Option Plan and its implications on his shareholding, weakening his oppression claim. The decision to implement the plan was supported by external advice and failed to demonstrate commercially unreasonable behaviour.
In finding against Dr Shiffman, the Court also considered other factual matters relating to the timing of provision of a draft shareholders’ agreement and exercise of a call option deed. The case also addressed the admissibility of without prejudice settlement offers, concluding that while such offers could mislead the Court if not considered, the specific offer made by Dr Shiffman was excessive and uncommercial, reflecting poorly on his position.
Key points:
The case highlights the need for clear, written shareholder agreements between business founders and investors. The absence of formal agreements created significant ambiguity regarding the roles and rights of the parties involved.
Minority shareholders should understand not all disagreements or exclusions will amount to oppression. There must be clear evidence of commercial unfairness and a lack of reasonable justification for the actions taken by the majority shareholders.
Shareholders must be vigilant about their rights and the implications of corporate decisions. Awareness and agreement on the part of the affected shareholder can significantly undermine a future claim of oppression.
Courts are generally reluctant to intervene in business judgments unless there is clear evidence of misconduct or lack of commercial rationale.
The Sleeping Duck Case serves as a cautionary tale for both business investors and founders, illustrating the importance of clear shareholder agreements and careful navigation of shareholder relationships to prevent disputes.
For further information please contact:
Amy Jenkinson
Principal Lawyer
T: 03 5225 5236
E: ajenkinson@ha.legal
Maddi Batchelor
Graduate Lawyer
T: 03 5225 5214
E: mbatchelor@ha.legal
