Economic conditions are challenging. As often happens during downward business cycles, strong business relationships are fraying and minority partners, often investors, are finding themselves shut out. This means that there is an increased focus on shareholder oppression proceedings and derivative actions, including those which are drawing media attention. We are seeing increasing numbers of disaffected parties exploring legal avenues to wrestle back their rights.

In this piece, we consider the recent high profile Sleeping Duck litigation which involved startups, investors and clearly misaligned expectations. This case demonstrates what can happen when a business relationship sours, the steps available to a disaffected party and the factors the Court will look at in seeking to preserve rights and untangle the web.

Facts of the case

Dr Adir Shiffman is a well-known angel investor who writes regularly in the Australian Financial Review on the topic of start-ups. He is no novice or pushover in that space. However, all his know‑how and experience could not prevent an intense and costly legal stoush with the company founders.

In BBHF Pty Ltd v Sleeping Duck Pty Ltd & Ors [2024] VSC 320, Dr Shiffman’s company (BHHF) sued the founders of Melbourne mattress manufacturer, Sleeping Duck. BHHF alleged that the founders’ conduct had been oppressive or unfairly prejudicial to BHHF. Dr Shiffman argued that, as an adviser, he had reached an agreement with the founders that BHHF would receive 5% of the founders’ shares and another option to acquire further shares, in exchange for his advisory service.

This case may have garnered more publicity than most but the points of difference were, by no means, atypical.

Central question – was there shareholder oppression?

Similar to many oppression cases, the contentious issues related to:

• Excluding an investor/mentor from being involved in the management/strategic direction of the company in circumstances where that party believed that they were entitled to do so;
• Issuing of shares/options to a third party associated with the controlling parties at the detriment of the investor/minority shareholder; and
• Breaches of agreements (or failure to act in good faith) which it was argued were either express or implied.

What the court found

The decision did not go Dr Shiffman’s way. Despite Justice Delaney finding him to be a credible witness, His Honour determined that the evidence did not support Dr Shiffman’s claims that his company had been shut out or oppressively outmanoeuvred. Each argument was met with what the Court considered to be a credible legal position.

The decision helpfully analyses the existing principles of the legislation and the principles on oppression, specifically the interpretation of the expression ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ in s 232(e) of the Corporations Act. The courts continue to apply the objective test either by reference to individual items of conduct and/or by reference to the cumulative effect of that conduct are cautious to conclude that business judgments amount to oppression.

The outcome in this case was very fact specific but nevertheless instructive as to how legal oppression battles can be fought and won. Its not a stretch to say that the outcome could have (and might yet on appeal) go the other way. Either way, it will serve as a useful guide to navigating cases of this kind and is a good litmus test as to how they may play out.