Shareholder Pilot Program now formalised in new Practice Note

February, 2017

By Stuart Walter, Partner

The Supreme Court of Victoria “pilot program” for the handling of shareholder oppression disputes in an efficient and cost effective manner has been incorporated into a Practice Note that became effective 30 January 2017 (Practice Note SC CC 8).  The program has been the subject of certain revisions that are now formalised in the new Practice Note.

The Background behind developing the Program

The reasoning behind the development and implementation of the program are expressed in the Note as follows:

Many applications each month are issued in the Court seeking relief under s 233 of the Act where it is alleged that the affairs of a company have been conducted in an oppressive manner…

Almost all of the claims seeking relief under s 233 of the Act relate to small businesses, most commonly family businesses.  Frequently, the value of the business is not substantial.  Nevertheless, applications are often supported by affidavits which run to many pages and considerable detail.  At the first return of the originating process, it is common for orders to be made for inspection and copying of the books of the company, for valuation of the shares in the company and for mediation.[1]

In essence, feuding parties spent huge amounts of time and expense to ‘air their grievances’, with that time, money and effort doing very little to move the parties towards a solution.

The key elements of the Program

The program has looked to address these barriers to resolution by limiting the initial affidavit such that it

(a)        is no more than three pages in length;

(b)        sets out a clear and succinct summary of the facts alleged to constitute the acts of oppression;

(c)        sets out a preliminary estimate of the value of the shares in the company (where practicable);

(d)        exhibits a current ASIC search of the company; and has no other exhibits.

Further, upon proceedings being issued and the matter being assessed as suitable for the program, the proceeding will be listed for an initial conference before an Associate Justice of Judicial Registrar where the parties (and their lawyers) are expected to attend to explore whether the matter is ready for referral to mediation or what preliminary steps are required to enable the matter to progress to mediation as quickly as possible.  Some of these matters for exploration include whether:

           (i) the Defendant(s) should first be afforded an opportunity to file a responding affidavit of no more than 3 pages;
           (ii) a valuation should be obtained;
          (iii) an order for access and inspection of books should be made.

If the matter does not resolve at mediation then the case will return to an Associate Justice or Judicial Registrar for consideration on what the appropriate course is for the ongoing proceeding.

Our experience in using the Program

The obvious benefit in using the Program is that it brings the parties together relatively quickly.  This is important to aggrieved minority shareholders who often have been excluded from management and/or where the majority have no real motivation to alter the status quo.

The program has the added benefit of being under the supervision of the Supreme Court of Victoria which adds a degree of seriousness that may not always be afforded where the parties choose to negotiate themselves or use private mediation services.  Risks such as huge legal costs, adverse costs orders and the Court ordering the winding up of the Company, if a solution is not found, are usually raised in a very direct way by the Court at the initial conference and can help to focus the minds of the parties and narrow issues.

We have also found that the Program generates better early discussions between the parties on matters such as the necessity of a valuation, whether a joint valuation may be appropriate and what facts and assumptions may be put to the valuer(s), alternatively what information is required in order to facilitate a solution.

The Program is not necessarily suitable for all disputes but should be properly considered before a party decides to bring an action against their fellow shareholders.

A copy of the Practice Note can be found here.

Contact Mills Oakley

For further information about the Program or in relation to dealing with shareholder issues, please contact Stuart Walter.

Stuart Walter | Partner
T: +61 3 8568 9524
E: swalter@millsoakley.com.au
[1] See Practice Note SC CC 1 – Commercial Court for the form of standard valuation and mediation orders.
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