Companies—Articles of association—Amendment—Amendment authorizing expropriation of shares—Validity—Proper purpose—Fairness—Procedural fairness—Substantive fairness—Onus of proof—Corporations Law, ss. 176(1), 180(3).
Headnote
A company passed a special resolution for the amendment of its articles of association the effect of which was to enable a shareholder holding 90 per cent or more of the issued shares to acquire compulsorily shares held by minority shareholders for a stipulated price per share. The notice of meeting was accompanied by a valuation of shares in the company prepared by a firm of accountants. The stipulated price exceeded the net asset value of a share as valued by the accountants. Two minority shareholders applied for a declaration that the amendment of the articles was invalid. The majority shareholders, who were related, held about 99.7 per cent of the issued capital. The shareholding of the company was such that the majority shareholders or companies associated with them could not have acquired the plaintiff shareholders' shares compulsorily under s. 414 or s. 701 of the Corporations Law. The plaintiff shareholders conceded that the accountants' valuation was independent and fair. There would have been considerable tax advantages and administrative benefits for the company if it had become a wholly-owned subsidiary of the holding company of the majority shareholders. The majority share-holders did not vote upon the special resolution which was passed upon the votes of minority shareholders other than the plaintiffs.
Held that the amendment of the articles was invalid.
An alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority may be exercised lawfully only if (a) it is exercisable for a proper purpose and (b) its exercise will not operate oppressively in relation to minority shareholders (scil. 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 affairs - resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment) (Mason CJ, Brennan, Deane and Dawson JJ.), or the acquisition is necessary to protect or promote the interests of the company and when the alteration will not be oppressive to those shareholders (McHugh J.).
Per curiam. (1) An alteration to articles of association permitting the expropriation of shares will not be valid simply because it is made for a proper purpose; it must also be fair in the circumstances.
(2) Fairness in this context has both a procedural and a substantive element. Substantive fairness will largely be concerned with the price offered for the shares. An expropriation at less than market value is prima facie unfair. Whether the price offered for shares is fair depends not only upon the current market value of shares but on a variety of factors including assets,…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Gambotto v WCP Ltd [1995] HCA 12
Case
[1995] HCA 12
Decision Date
CaseChat Overview and Summary
The High Court of Australia considered the case of *Gambotto v WCP Ltd*. The dispute concerned the validity of a company's constitution that allowed it to compulsorily acquire shares from minority shareholders. The shareholders challenging the constitution, the Gambottos, argued that the provision was invalid and sought to prevent the company, WCP Ltd, from exercising its power to acquire their shares.
The central legal issue before the High Court was whether a company's constitution could validly include a provision for the compulsory acquisition of shares from minority shareholders, even if that provision was not in the best interests of those shareholders. Specifically, the Court had to determine if such a provision infringed upon the proprietary rights of shareholders and whether it was a valid exercise of the power to alter a company's constitution.
The Court held that while a company has the power to alter its constitution, this power is not unlimited. It is subject to the general law, including the common law principles that govern the exercise of corporate power. The majority of the Court found that a provision allowing for compulsory acquisition of shares, which effectively expropriates a shareholder's property, must be for the benefit of the company as a whole. If the provision is solely for the benefit of the majority shareholders and is oppressive or unfair to the minority, it will be invalid. The Court distinguished between alterations that are for the benefit of the company and those that are merely for the benefit of the majority.
The High Court ultimately found that the provision in WCP Ltd's constitution was invalid because it was not for the benefit of the company as a whole, but rather for the benefit of the majority shareholders at the expense of the minority. Consequently, the company was restrained from compulsorily acquiring the Gambottos' shares.