Stella Koukounis June 11 2018 Forced sale orders on grounds of unfair prejudice and oppression Solsidus Law | Corporate & Commercial - Cyprus Stella Koukounis Corporate & Commercial IntroductionWhat is 'unfair prejudice and oppression'?Court powers when deciding petitionsWho should buy out whom?IntroductionIn leading case O'Neill v Phillips, Lord Hoffmann compared shareholder petitions of unfair prejudice to divorce petitions. Indeed, these shareholder disputes tend to carry the same level of acrimony, especially when courts are faced with the option of deciding the sale of one shareholder's shares to another. Fairness is at the heart of the courts' consideration when deciding cases of unfair prejudice and shareholder oppression. When they decide that the company will continue to operate, the courts strive to achieve fairness in choosing the right party to continue leading the company to successful operations and the right price for the departing party, taking into consideration all relevant factors.What is 'unfair prejudice and oppression'?In Cyprus, a petition for unfair prejudice and oppression may be brought to court by virtue of Section 202 of the Companies Law (Cap 113). The grounds of petition have been defined in Cypriot case law, including In re Pelmaco Developments and a more recent District Court of Nicosia case, Re SGO Sibgasoil Investments Ltd (Petition 375/2013). Accordingly, the grounds of petition are that the affairs of the company must have been conducted in an unfairly prejudicial manner that affects the rights of the members in their capacity as members. The wording of Section 202 does not contain any pre-emptive test for the courts to apply in order to eliminate petitions without first examining their merits.Court powers when deciding petitionsSection 202 of the Companies Law grants Cypriot courts wide powers following a successful petition for unfair prejudice and oppression. Section 202(2) provides that the court may order "the purchase of shares of any members of the company by other members of the company or by the company itself". This provision enables the court to decide on the appropriate party to continue the company's operations, benefiting from ownership of the shares. The other party will be ordered to leave the joint venture, fairly compensated based on the principles of O'Neill v Phillips.Who should buy out whom?The question of who should buy out whom in a petition for unfair prejudice and oppression was explored in the Australian Supreme Court cases of Patterson v Humfrey ( WASC 446) and Fedorovitch v St Aubins Pty Ltd ( NSWSC 776; (1999) 17 ACLC 1558). In Patterson, the court reviewed the principles laid out in Fedorovitch in deciding whether the minority oppressed party can purchase the majority oppressing party. In Fedorovitch it was held that:for reasons of public policy, the courts should apply a uniform approach to remedy cases of oppression; andthe proper order was for the oppressing party to purchase the oppressed party.In Patterson, the Supreme Court followed Fedorovitch in holding that it was appropriate for the oppressing party to purchase the oppressed party. However, given that both parties wanted to purchase the other, the court gave the oppressing party the opportunity to purchase the shares at the price fixed by the court within 28 days. Failure to do so would enable the oppressed party to purchase the oppressing party's shares.Importantly, in issuing the orders for purchase, the court evaluated:the financial standing of the parties, and hence their ability to purchase the shares at a fair value (valuation applied); andthe experience of the parties in conducting business, and hence which party would be best to manage the company moving forward.The court held that the oppressed is entitled to be released from the company if, because of the opponent's oppression, it can no longer have its capital invested in the company.In Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd ( NSWCA 97; (2001) 37 ACSR 672), Chief Justice Spigelman described the remedy of allowing a minority to acquire the shares of a majority as "extraordinary and virtually unprecedented". This case was cited in Patterson and Fedorovitch.Decisions by Cypriot courts on the matter reveal that an order requiring the majority respondent to buy out the minority petitioner is the most appropriate order to deal with intra-corporate disputes. Such order will free the petitioner from the company and enable it to extract its share of the business and assets in return for forgoing any future dividends. The company and its business will be preserved for the benefit of the respondent set of shareholders, free from the petitioners' claims and the possibility of future difficulties between shareholders.For further information on this topic please contact Stella Koukounis at Solsidus Law by telephone (+357 22 007700) or email ([email protected]). The Solsidus Law website can be accessed at www.solsiduslaw.com.