Gambotto v WCP Ltd 1995

1
Gambotto v WCP Ltd (1995)

• Background
• 97 of 17 million shares in WCP held by wholly
  owned subsidiaries of Industrial Equity Limited
  (IEL).
• Mr Gambotto held 15,898 of the remaining 50,590
  shares.
• WCP called a general meeting to amend its
  internal rules by inserting a provision allowing
  any member entitled to more than 90 of its
  shares to acquire all the remaining shares.
• So article 20A was inserted into articles of
  association of WCP to allow majority shareholders
  to acquire shares they were not entitled to at
  1.80 per share.
• IEL wanted WCP to become a wholly owned
  subsidiary so that it could take advantage of
  WCPs accumulated tax losses and also save a
  considerable amount in administrative costs
• The resolution to introduce art 20A was
  unanimously supported by minority shareholders
  other than the appellants who didnt attend the
  meeting or vote upon the resolution.
• A report accompanying the notice of meeting had
  valued the shares at 1.365 and the appellants
  had conceded that it was a fair price but felt it
  hadnt taken into account income tax benefits of
  4million which would have accrued to WCP when it
  had grouped tax losses after the elimination of
  the minority shareholdings.
• As it stood, the appellants held 0.01 of the
  shares which they wished to retain. Consequently
  they challenged the alteration which introduced
  art 20A.
• The Court went on to look at the question of
  equitable limitations on the alteration of
  company constitutions.

2
Background cont.

• Trial Judge McLelland J, injuncted the
  expropriation on
• the basis that the majority shareholders
  were unjustly
• oppressing the minority shareholders.
• The decision was reversed by the Court of
  Appeal.
• Here the court noted that the expropriated
  
• shareholders received fair compensation for
  their
• shares. Using a contractarian approach
  Priestley J
• pointed to the fact that the shareholders
  on
• becoming members agreed to become bound by
• duly passed resolutions. Meagher JA pointed
  out
• that there were enormous taxation
  advantages to
• the corporation and compensation was fair.
  There
• was no basis for the court to interfere.
  Latham CJs
• test in Peters case was the resolution so
  extravagant
• that no reasonable person could believe
  that it was for the
• benefit of the corporation ? could not be
  answered in the
• affirmative.
• The High Court granted special leave to appeal.

3
Judgment

• Mason CJ, Brennan, Deane and Dawson JJ
• Courts have struggled to strike a balance between
  the interests of majority and minority.
• While Courts have recognized that
• propriety rights attaching to shares are
  subject to modification, even destruction, by
  special resolution altering the articles,
• and
• that the power to vote is exercised by the
  shareholder to their advantage.
• Courts have also acknowledged that the power to
  alter the articles should not be exercised simply
  for the purpose of securing personal gain which
  does not arise out of the contemplated objects of
  the power.

4
The test for determining whether an expropriation
is valid

• As this case involves an alteration of the
  articles to allow an expropriation by the
  majority of the shares, or of valuable
  proprietary rights attaching to the shares, of a
  minority, the test of bona fide for the benefit
  of the company as a whole of Lindley MR in
  Allen v Gold Reefs of West Africa Ltd was
  inappropriate.
• The Court felt that in cases where there is no
  actual or effective expropriation of shares, an
  alteration of the articles by special resolution
  regularly passed would be valid unless it was
  ultra vires. In this case however the immediate
  purpose of the resolution was to confer upon the
  majority shareholders, power to compulsorily
  acquire the property of the minority and as such
  the conferral of such a power does not lie within
  the contemplated object of the power to amend the
  articles.

5
Test

• The majority of the Court laid down the following
  test concerning the use of the corporate power to
  amend the corporate constitution to expropriate
  shares
• The exercise of a power conferred by a companys
  constitution enabling the majority shareholders
  to expropriate the minority shareholding for the
  purpose of aggrandizing the majority is valid if
  relevant provisions in the constitution so
  provides and the relevant provision was included
  in the constitution at time of incorporation of
  the company.

6

• Where a company constitution is sought to be
  amended by an alteration of articles so as to
  confer upon the majority power to expropriate the
  shares of a minority, such a power can not be
  exercised simply for the purpose of aggrandizing
  the majority
• Such a power can only be taken if
• 1) it is exercised for a proper purpose
• and
• 2) its exercise will not operate oppressively
• in relation to the minority shareholders.

7

• Proper purpose
• An expropriation may be justified where it is
  reasonably apprehended that the continued
  shareholding of the minority is detrimental to
  the company, its undertaking or the conduct of
  its affairsresulting in detriment to the
  interests of the existing shareholders
  generallyand expropriation is a reasonable means
  of elimination or mitigating that detriment.
• This limb of the test is tempered by a criterion
  of exceptionality and the present situation
  didnt qualify.

8

• The fact that the alteration would advance the
  interests of the company as a legal and
  commercial entity by providing for tax savings
  and administrative savings was not a sufficient
  justification because it did not attach
  sufficient weight to the proprietary nature of a
  share.
• So there needed to be more than the desire to
  advance the interests of the company as a legal
  and commercial entity, otherwise it would be
  tantamount to permitting expropriation by the
  majority for the purpose of some personal gain
  and thus, be made for an improper purpose. It
  would open the way to circumvent the protection
  which the Corporations Law gives to minorities
  who resist compromises, amalgamations and
  takeovers etc.

9

• Oppressive operation
• This limb of the test incorporates the elements
  of
• Procedural and substantive fairness.
• Procedural fairness, (full disclosure of all
  material info
• leading to the
  alteration and an
• independent
  expert valuation of
• shares to be
  expropriatedit
• involves
  looking at the quality
• and extent of
  info provided to
• shareholders to
  buy their support
• for an
  expropriation via amendments
• to the
  corporate constitution. The Court
• didnt address
  the question of whether
• procedural
  fairness also required the
• majority
  shareholders to refrain from
• voting.)

10

• Substantive Fairness (is largely concerned with
  the price
• at which the
  shares are expropriated.
• Market price
  is relevant in so far as
• 
  expropriation below market price is
• prima facie
  unfair. The market price is
• not
  determinative of fairness and a
• variety of
  factors must be considered
• when
  assessing fairness, including
• the assets
  of the company, dividends
• and its
  likely future etc.)

11
Onus Reversed

• It is for the majority to prove that the
  alteration is valid because it was made for a
  proper purpose
• and
• That it is fair in all circumstances
• This approach ensures that the application of the
• relevant principle doesnt unduly favor the
  majority
• and largely alleviates the sting of practical
• difficulties that would otherwise confront the
• minority shareholders. (e.g. poor access to info)

12
The validity of art 20A in Gambotto v WCP Ltd

• The immediate purpose of the amendment was to
  allow
• the expropriation by the majority
  shareholders of the
• shares held by the minority.
• There is no suggestion that the minority
  shareholders
• continued presence as members puts WCPs
  business
• activities at risk or that they have in some
  way acted to
• WCPs detriment.
• There is no suggestion that WCP sought 100
  ownership in order to comply with a regulatory
  regime.
• All that is suggested is that taxation advantages
  and
• administrative benefits would flow to WCP if
  minority shareholdings were expropriated and WCP
  were to become a wholly-owned
• subsidiary of IEL.
• This cannot by itself constitute a proper purpose
  for a resolution altering the articles to allow
  for the expropriation of a minority shareholders
  shares.
• Subsequently the court held that art 20A was
  invalid and ineffective on the basis that it was
  not made for a proper purpose.

13
McHugh J Judgment

• Held that an alteration effecting the compulsory
  acquisition of shares is valid only when it will
  enable the company to pursue some significant
  goal, or to protect itself from some action that
  is external to the company. Administrative
  convenience or cost could never by itself
  justify an alteration for the purpose of
  expropriation.
• He considered that the business objective
  underlying the alteration was proper since it
  would enable the company to save 4 million in
  taxes.
• Accordingly there was sufficient justification
  for the expropriation of each members share
  provided that the expropriation was otherwise
  fair to that member.
• McHugh held that the concept of fairness had 2
  basic aspects fair dealing and fair price.
• In fair dealing in particular one of the
  requirements is that full disclosure be made
  especially in regards to the purpose of and
  reasons for the expropriation.
• He held that the majority had failed to prove
  that the expropriation was not oppressive as it
  had failed to make the full disclosure of all
  material matters which might affect a members
  vote on the proposed modifications, and as such
  had dealt unfairly with the minority
  shareholders.

14

• The day after the decision a front page
  article stating that the ruling has radically
  altered the balance of power within corporate
  Australia.
• Chris Merrit, Gambotto A Roar Deal for
  Corporate Mice,
• The Australian Financial Review (Sydney),
• 9th June 1995,1

15
Points to consider

• Prior to Gambotto the law entitled majority
  shareholders to exercise the power of alteration
  of articles liberally, in a manner consistent
  with what they considered to be for the benefit
  of the company. This entitlement was subject to
  an equitable principle of fraud on the power of
  alteration. This approach which balanced
  corporate and shareholder interests in a way that
  encouraged value maximization, has been largely
  destroyed by Gambotto. ( Whincop)
• As it is obvious that in most of these situations
  both parties will act in self interest isnt the
  better alternative to examine rigorously whether
  there has been fraud on the power of alteration.
• The rule in Gambotto increases the hold-out value
  by discouraging expropriation at fair prices and
  distorts the value of these shares and encourages
  inefficient allocation of investment. Ultimately
  the decision is likely to achieve an increase in
  the role of courts in corporate affairs and the
  obstruction of legitimate value maximization. It
  seems that the price to pay for corporate
  democracy is high.

16
Further Reading

• H Bird, A Critique of the proprietary Nature of
  Share RightsPublicly Listed Corporations (1998)
  22 Melbourne
• University Law Review 131
• P Spender, Guns and greenmail (fear and loathing
  after Gambotto v WCP Ltd) (1998) 22 Melbourne
  Law Review 96
• M Whincop, Gambotto v WCP Ltd An Economic
  Analysis of Alterations to Articles and
  Expropriation Articles (1995) 23 Australian
  Business Law Review 276