Frozen Out by Your Business Partner? “They Didn’t Break Any Rules” Doesn’t Mean You Have No Case

Most people frozen out by a business partner go through a similar process.

They speak to a lawyer, lay out what’s happened and then hear the same thing a lot of frozen-out business partners hear. 

“Did they follow the constitution?” “Was the vote proper?” “Then it’s probably legal.” 

So that’s it, there’s nothing to be done. But that’s only a myth; it’s not quite true.

Under the Corporations Act 2001 (Cth), a shareholder can be removed from the board in strict accordance with the company’s constitution and still make a successful claim against the other owners. Legally valid and unfair aren’t mutually exclusive.

A decision can be fully compliant with procedure and still be considered oppressive, unfairly prejudicial or unfairly discriminatory under section 232. That’s a separate question from whether all the paperwork was handled properly.

This isn’t a rarely-used, theoretical solution either. Research reviewed by the Victorian Law Reform Commission found that over half of reported oppression cases involved ten or fewer shareholders, and it’s now one of the most widely used remedies in Australian corporate law. 

This is small-business territory, not a tool designed for large, listed companies.

Why “it was legal” isn’t the test

There are two different questions in this situation, and most people being frozen out only consider one of them.

The first is whether the majority followed the rules: constitution, shareholders’ agreement, proper notice and a valid vote.

The second is whether the decision was fair. A board or majority can genuinely disadvantage a minority shareholder by doing things like cutting them out of a deal, restructuring the business or diluting their position, and still be acting entirely lawfully. 

This is true as long as the decision was made for a legitimate commercial purpose and wasn’t targeted at that shareholder specifically.

These decisions can pass the first test and fail the second. Removing someone from the board completely by the book can still be considered oppressive if it breaks a legitimate expectation of continued involvement that built up over the life of the company. 

This is most important in smaller, closely-held companies in which the people involved went into business on an informal, trust-based understanding rather than a heavily lawyered agreement.

Courts don’t always apply this “legitimate expectation” idea the same way, and legal academic research on the oppression provisions shows that some judges are wary of treating it as a separate test rather than one way of showing unfairness. 

However, what is consistently captured are founders and early participants who were pushed out after building an expectation of ongoing involvement through how the company was actually run, not just what its constitution says.

Two different claims, and you only need to win one

The Corporations Act gives a shareholder two separate paths to a solution. It’s common to see the wrong one used, or a shareholder incorrectly assume that both need to be proven:

• Conduct harmful to the interests of members as a whole. This applies even without any unfairness targeted at one person specifically.
• Conduct that’s unfairly prejudicial or discriminatory against a particular shareholder. This is the “frozen out” scenario most people picture.

A claimant only needs to be able to prove one in order to be successful. Pursuing the wrong one or assuming both have to be proven are common ways a real claim gets under-argued before even being filed.

What actually decides whether you have a claim

Two key members of Kingsford’s commercial law team, Stefanie Fontana and Nathan Kershler, say that standing and unfairness are the two factors which decide whether a shareholder has a real claim, not how aggrieved they feel about being frozen out.

Standing comes first. Under section 234 of the Corporations Act, you generally need to be a current member of the company to apply, although former members and people entitled to shares by will can qualify in certain situations.

Unfairness is where most claims actually turn. Courts consider whether a reasonable person would see the conduct as unfairly prejudicial or discriminatory, weighing the interests of the majority against the minority. A decision that disadvantages a shareholder isn’t thought to be oppressive as long as it was made fairly, for a proper purpose and in the company’s genuine interest.

It becomes oppression when there’s self-dealing, a conflict of interest, diversion of a company opportunity and/or majority power used to entrench control rather than run the business. 

These are patterns ASIC’s own guidance on disputes between officeholders and members of small proprietary companies recognises as recurring flashpoints in closely-held companies.

Not having a written agreement doesn’t end things either

A lot of business partnerships in Australia run on a handshake, not a shareholders’ agreement.

Of the 2.73 million actively trading businesses recorded by the Australian Bureau of Statistics as at 30 June 2025, many of them are small, closely-held operations where the owners have never formalised exactly who does what.

Not having a written agreement doesn’t make a claim impossible. The legitimate-expectation doctrine exists precisely because informal, trust-based arrangements are common in small companies. Courts can still find that an understanding existed from how the business actually operated, not just what a document says.

It does make finding impactful evidence harder, though. Without a shareholders’ agreement to point to, cases rest more heavily on conduct, correspondence and how decisions were made over the course of the company’s history.

A worked example

A founding participant in a family company was removed from management and cut out of decision-making and company benefits. Nothing about the removal was procedurally defective, and all the paperwork was in order, but he was a founder and the company had operated for years on the basis that he’d remain involved. 

Removal from a management position isn’t automatically oppressive, but it became oppressive in this case because it broke a reasonable expectation of continued participation that had built up over the company’s history.

As Nathan puts it:

“There’s no single face to oppression. It can be a diverted opportunity, an uncommercial loan to a related party, a squeeze-out, or a decision that quietly damages every shareholder at once. The common thread is power being used for something other than the company’s benefit.”

What a frozen-out partner can actually do

If you’re being cut out of decisions, profits or information, there are several things worth doing before you assume you have no options:

• Check what you actually agreed to. A shareholders’ or partnership agreement, even one that’s informal and evidenced by emails or past conduct, shapes which claim fits your situation.
• Separate “legal” from “fair.” Proper process doesn’t rule out an oppression claim by itself.
• Work out which path fits. This could be oppression under section 232, a breach of a partnership or shareholders’ agreement, or both.
• Confirm your standing. Current membership is the usual starting point, with limited exceptions for former members.
• Keep the record. Correspondence, financial information you’ve been denied and anything showing how the business actually operated, not just what the constitution says.
• Consider dispute resolution before litigation. The Australian Small Business and Family Enterprise Ombudsman offers free case management and, where appropriate, access to lower-cost mediation for business-to-business disputes.

None of this means you shouldn’t still seek legal advice at the earliest opportunity. Every ownership structure and falling-out is different, and this is general information rather than a firm verdict on any specific situation.

The corrected understanding

“They followed the rules” is the sentence that stops most frozen-out partners from ever raising the issue properly, but it’s also an incomplete answer because proper process and unfair treatment are two different questions.

Australian law has always kept the two separate for exactly this reason. A majority that adheres to the letter of a constitution can still use that position to squeeze out someone who helped build the business.

If you’re being frozen out, the more useful question isn’t: “did they break a rule?” It’s: “was this fair, given what we actually agreed to and how this business has actually run?”

If you’re going through this and want to know where you stand, Kingsford Lawyers acts for shareholders and business partners Australia-wide, with offices in Melbourne and on the Gold Coast, and consults in 12+ languages. Book a free chat today, with no obligation and no pressure.

Phone: 1300 244 342 · Email: admin@kingsfordlawyers.com.au

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This article is general information, not legal advice. Every shareholder or partnership dispute is different, so speak to a lawyer about your specific situation before acting.