Share issues and director obligations: lessons from Scott v Aulich [2025] FCA 1329

The recent Federal Court of Australia decision in Scott v Aulich, in the matter of Aulich Civil Law Pty Ltd (in liq) [2025] FCA 1329 (Scott) serves as a timely reminder to directors of the importance of acting for a proper purpose and with due regard to shareholder interests when issuing shares or undertaking similar corporate actions.

Background

Ms Scott was a 25% shareholder in two law firms (Companies). Pursuant to ss 232 – 233 of the Corporations Act 2001 (Cth), Ms Scott alleged that the directors of the Companies had conducted the Companies’ affairs oppressively by issuing new shares at a gross undervalue ($1.00 per share) despite the Company’s net asset value being nearly $2 million. The result was the dilution of her holdings to less than 0.1%.

The directors claimed the share issue was a “cash injection” necessitated by their precarious financial position as a result of the COVID-19 pandemic. However, the Court rejected this justification. The Court held the purpose of the capital raising was not to inject cash, but rather to inflict prejudice on a minority shareholder, and that purpose was achieved.

Key findings

Justice Stewart held that the share issue had no genuine commercial rationale and was principally motivated by an improper purpose. Several factors supported this conclusion:

• there was no reasonable justification for the directors to raise capital in the Companies which affected Ms Scott, as these Companies were in the strongest financial position within the broader group of entities;
• the share issue merely recirculated existing funds within the group as a whole which was contrary to the stated objective providing the capital injection;
• Ms Scott was not provided with contemporaneous financial information that would have enabled her to assess the merits of the share issue;
• the share issue forced Ms Scott to either invest further funds (i.e. take up the share offer) or suffer near-total dilution, despite her clear wish to be bought out; and
• shares were issued at $1.00 despite being worth approximately $20,000 per share based on net asset value of the respective Companies.

A finding that a share issue was made for an ulterior purpose, other than the purported cash injection, also supports a finding of oppression. This inference is particularly strong where the conduct prejudices a minority shareholder. Even if directors acted honestly in seeking to raise capital, if no reasonable director could regard their conduct as fair in the circumstances, it will nonetheless be oppressive.

Relief and implications

Where Courts find oppressive conduct, the Court bares a wide discretion pursuant to s 233 to grant relief “which is best suited to deal with the particular oppressive conduct”. Here, the Court ordered that the directors personally compensate Ms Scott for the diminution in the value of her shares at the time of issue.

Further, this case underscores that directors cannot evade responsibility merely because the company has since entered liquidation.

Takeaways

The decision highlights several key obligations and considerations when issuing shares:

• proper purpose – share issues must be genuinely connected to the company’s commercial objectives and not used to alter control or disadvantage a shareholder;
• transparency – shareholders, particularly minorities, should receive full and timely financial information before any capital raising;
• valuation and fair pricing – new shares should be issued at a price reflective of market or asset value. A nominal issue price can invite oppression claims (however so formulated);
• avoiding oppression – even actions taken in good faith may breach s 232 if they result in unfair prejudice. Directors must ensure the effect, not just the intention, of their conduct is fair.

When contemplating capital raising, directors must make certain that decisions are underpinned by genuine commercial purpose and equitable treatment of all shareholders. Where directors fail to do so, Scott illustrates that the Courts bare a wide remedial discretion which can extend to holding directors personally liable for shareholder loss.

For assistance with share issues and navigating directors’ obligations, contact our commercial law team.