Board oppression – a cautionary tale
The recent decision of the NSW Supreme Court in Lukaszewicz v Polish Club Limited highlights the mistakes a Board can make when trying to manage divisions within an organisation.
The 129 page decision gives some insight into a long-standing dispute between Club members and the Board which ultimately led to some members suing the company as well as four individual Directors. The court found that some of the steps the Board took to try and manage that dispute were in breach of the Corporations Act as they oppressed a minority of the Club members.
What is oppression?
Under the Corporations Act a member of a company (including a not-for-profit company) has a right to apply to the court for an order to stop oppressive conduct by the company.
The remedy is designed to guard against the risks of majority rule. It provides a way for a court to intervene where the Board of a company is making decisions that aren’t in the interests of the members as a whole, or that are unfairly prejudicial or “oppressive” against a particular member or minority group of members.
The courts have made it clear that members cannot use an oppression action as a way to challenge any and all management decisions of a company. A Board is allowed to make decisions in good faith in the interests of the company even if those decisions have the effect of disadvantaging some members. However, the court may intervene if the Board makes a decision that is so unfair that no reasonable Board of Directors would have made it.
What did the Polish Club Directors do wrong?
The court found that, although the Directors had not breached the company’s Constitution and had not acted with any improper motive, they had nevertheless engaged in oppressive conduct contrary to the Act by:
- regularly refusing to admit members who were unknown personally to the directors and who could have held views contrary to the Board;
- seeking out and admitting new members who were known to share the same views as the Board; and
- exercising disciplinary powers against members who did not share the views of the Board.
The court effectively said that the Directors’ conduct had the capacity to stack the membership of the Club and dilute the influence of dissenting members. This amounted to oppressive conduct.
What are the lessons for Directors?
This case serves as a reminder that conduct can be oppressive even where there is no intention to oppress and where there is no breach of the Constitution. The court’s focus will be on the objective reasonableness of a decision and its impacts on a member or members.
Directors should ensure that the reasons for significant or contentious decisions are well documented. Where appropriate the Board should consider consulting with members to explain important decisions and seek feedback about how negative impacts can be minimised.
Organisations with large or active memberships may also benefit from having specific checks and balances in their constitutions to manage the risks of membership stacking.