02 November 2026

Honey, I shrunk the shareholder: directors pay personally for oppressive dilution

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Want to squeeze out a minority shareholder? A share issue might shrink their stake, but it can leave the directors with personal liability.

In Aulich v Scott [2026] FCAFC 139, the Full Court upheld orders requiring two directors to compensate a diluted minority shareholder personally. By the time of trial, one company was in liquidation and the other was likely to enter external administration. Neither circumstance erased the consequences of the earlier oppression.

Key takeaway

Directors who unfairly dilute a minority shareholder’s stake can be ordered to pay compensation out of their own pockets. The company’s later collapse does not wipe the slate clean: personal compensation may still be available where a buyout or reversal of the share issue would no longer provide an effective remedy.

A shrinking interest

Joanna Scott held a 25% stake in each of two companies in the Aulich legal practice group and wanted the other shareholders to buy her out. In private correspondence, the directors acknowledged that her stake in Aulich Civil Law Pty Ltd (ACL) was worth about $500,000 to $550,000. Instead, they offered existing shareholders 99,900 additional shares at $1 each, even though each existing share was worth around $20,000 on a net asset basis.

Ms Scott did not take up her allocation, and the other shareholders acquired it, reducing her stake from 25% to just 0.025%. A similar share issue diluted her stake in Aulich Property Trading Pty Ltd (APT) a year later. Mr Aulich calculated that the ACL dilution would leave her receiving just $25 of every $100,000 distributed. “That’s kinda cool,” he wrote to the other directors.

The constitution is not a permission slip

The directors relied on broad constitutional powers to issue shares on terms and at prices they considered appropriate. But constitutional authority did not answer the oppression question: was the exercise of that power objectively unfair? Citing Chief Disruption Officer Pty Ltd v Michel (No 3) [2022] FCA 1302, the Full Court emphasised that the power is fiduciary and exists primarily to raise capital.

What is shareholder oppression?

Under section 232(e) of the Corporations Act 2001 (Cth), the question is whether the conduct is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder.

The test is objective: viewed in its commercial context, was the conduct so unfair that reasonable directors would not have thought it fair?

Motive is relevant, but not decisive. An intention to dilute a shareholder can support a finding of unfairness, but the Court must assess the conduct’s effect in all the circumstances.

Here, the evidence went well beyond hostile emails. Despite genuine concerns about COVID-19, the ACL raising merely recirculated group funds. The directors also rejected an interest-free loan and offered no explanation for the $1 issue price or why a less dilutive structure was not used.

Offering Ms Scott the chance to subscribe did not cure the unfairness. As Stewart J explained, at first instance, dilution is not inherently oppressive, but forcing a shareholder to invest more or have their stake reduced requires a genuine commercial rationale.

This time, it was personal

A conventional oppression remedy is a buyout order, allowing the oppressed shareholder to exit at an appropriate value. But section 233 is broader. It permits any order the Court considers appropriate in relation to the company, expressly giving the example in subparagraph (j) of “requiring a person to do a specified act”.

That has been understood to include an order that a director compensate a shareholder for loss suffered by the shareholder provided that it is not a loss that is derivative of the loss sustained by the company: In the matter of JGS Investment Holdings Pty Ltd [2014] NSWSC 1532 at [19]- [20] per Black J; Chaudhary v Bandicoot Group Pty Ltd [2017] FCA 517 at [20] per Besanko J.

Critical insight

Three features made this the case for personal compensation:

The loss was hers alone: Ms Scott’s loss arose from the reduction in the extent and value of her shareholdings. It was not merely a loss that arises from a loss to or devaluation of the companies.
The conduct had stopped, but its effects remained: The dilution had prevented Ms Scott from realising the value of her interests when she wanted to leave, and that harm remained unremedied.
The usual remedies were ineffective: With ACL in liquidation and APT facing external administration, winding up or reversing the share issues would not meaningfully address her loss. Stewart J regarded personal compensation as the only form of relief that would do so.

Compensation, not punishment

At first instance, Stewart J ordered Mr Aulich and Mr Woodhouse to compensate Ms Scott personally: $500,000 for her ACL interest and $33,860 for her APT interest, less subsequent dividends and with interest adjustments. They were jointly and severally liable, meaning she could recover the amount owed from either or both directors, but could not recover it twice. The compensation reflected what she would have received had her shares been bought out at the time of each dilution.

The directors argued that Ms Scott had no contractual right to demand a buyout and no outside buyer for her shares. Her wish to leave was not enough to force a purchase, but their oppressive dilution gave her grounds to ask the Court to require them to buy her shares. The compensation reflected what that buyout would have paid.

An important remedy, not an automatic one

The decision does not mean that every shareholder in a failed company can recover their investment from its directors. Oppression relief after liquidation or external administration remains rare.

Applying Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97, the Court emphasised that relief must be assessed when the discretion is exercised. The remedy must alleviate the consequences of the oppression, not improve the shareholder’s position beyond what it would have been without it.

The practical message

For directors: Identify and document the funding need, pricing basis, alternatives and expected dilution. A constitutional power and an offer to all shareholders do not, by themselves, establish commercial fairness.
For minority shareholders: Preserve communications and seek advice promptly about a proposed dilutive issue. A company’s later collapse does not necessarily extinguish a claim arising from earlier oppression.
For advisers: Distinguish the shareholder’s own loss from loss belonging to the company. Consider personal compensation where conventional relief would not repair the harm, recognising that this remains a fact-sensitive remedy.