Gambotto v WCP Limited
182 CLR 432(1995) 13 ACLC 342
(1995) 69 ALJR 266
(Judgment by: Mason J, Brennan J, Deane J, Dawson J)
Between: Gambotto and Anor
And: WCP Limited and Anor
Judges:
Mason CJ
Brennan J
Deane J
Dawson JMcHugh J
Judgment date: 8 March 1995
Melbourne
Judgment by:
Mason J
Brennan J
Deane J
Dawson J
This appeal raises an important question concerning the validity of an amendment to the articles of association of a company, the purpose of which is to enable the shareholder holding 90 per cent or more of the issued shares to acquire compulsorily shares held by minority shareholders. The appeal to this Court is brought by two minority shareholders from a decision of the New South Wales Court of Appeal (Priestley, Meagher and Cripps JJA) allowing an appeal from a declaration made by McLelland J that the insertion of such an article in the articles of association of the first respondent ("WCP") was invalid and ineffective and from consequential orders, including an injunction.
2. WCP is a limited liability company with an issued share capital of 16,980,031 ordinary shares of 20 cents each. The majority shareholders, who are wholly-owned subsidiaries of Industrial Equity Limited ("IEL"), hold 16,929,441 shares (which is approximately 99.7 per cent of the issued capital). The remaining 50,590 shares are held by minority shareholders. The appellants themselves hold 15,898 shares. The shareholding in WCP was such that IEL or a company associated with IEL could not have acquired the appellant's shares compulsorily under either s.414 or s.701 of the Corporations Law. [F1]
3. On 16 April 1992, WCP notified all its members that a general meeting would be held on 11 May 1992 to consider an amendment to WCP's articles of association. The amendment proposed was that a new Art.20A should be included in the articles. The effect of Art.20A was to enable any member who was "entitled for the purposes of the Corporations Law to 90% or more of the issued shares" to acquire compulsorily, before 30 June 1992, all the issued shares in WCP, not being shares to which the majority members were entitled, at a price of $1.80 per share. The documentation sent to the members included the text of Art.20A, a proxy form and an expert's report valuing the shares at $1.365 per share. The appellants concede that this was an independent and fair valuation.
4. The appellants do not want to sell their shares. On 6 May 1992, after WCP indicated that the majority shareholders were likely to vote in favour of the amendment, the appellants commenced proceedings seeking to prevent the meeting being held and the resolution being passed. Those proceedings were resolved on an interim basis. WCP gave an undertaking that, if the resolution were passed, it would not acquire any shares under the new article until the conclusion of the appellants' action.
5. The meeting on 11 May 1992 was attended by representatives of the eight majority shareholders and by a minority shareholder who also represented two other minority shareholders. The appellants did not attend the meeting, either personally or by proxy. The chairperson demanded a poll, presumably to put the matter beyond doubt, after the resolution had been passed unanimously on a show of hands. The three minority shareholders were the only ones to vote in the poll and they all voted in favour of the resolution.
6. The appellants contend that the purported amendment is invalid on a number of grounds. It is only necessary to outline two of them for the purposes of this appeal:
- (1)
- The amendment is oppressive and thus beyond the scope and purpose of the power of alteration of the articles conferred by s.176 of the Corporations Law; and
- (2)
- The amendment imposes restrictions on the right to transfer shares within the meaning of s.180(3) of the Corporations Law.
The decision at first instance
7. McLelland J held that the amendment was invalid and ineffective because its "immediate purpose and effect" was to permit the shares of the minority shareholders to be expropriated by the majority shareholders. According to his Honour, such an amendment amounted to "unjust oppression of those minority shareholders who object".
8. In reaching this conclusion, McLelland J recognized that, despite the apparent width of s.176(1) of the Corporations Law, the power of a company in general meeting to alter its constitution is constrained by the principles of equity. His Honour noted that the "bona fide for the benefit of the company as a whole" test had frequently been cited as the primary restraint since its introduction in Allen v. Gold Reefs of West Africa Limited. [F2] Importantly, his Honour also noted the inappropriateness of this test in situations where a conflict had arisen between different classes or descriptions of shareholders. [F3]
The decision on appeal
9. In the Court of Appeal, Meagher JA (with whom Cripps JA agreed) observed that the articles of association of a company are "infinitely capable of amendment" subject to the Corporations Law and equitable limitations. His Honour agreed with McLelland J that the "bona fide for the benefit of the company as a whole" test was inapt in the present case. However, Meagher JA expressly rejected McLelland J's suggestion that any amendment to articles of association permitting expropriation of minority shares under any circumstances, whether for value or not, will always constitute an oppression on the minority. Nor could it be said that the expropriation provisions of the Corporations Law [F4] constituted a code governing the expropriation of shares. In the present case, the evidence demonstrated that there would be considerable tax advantages and some administrative benefits for WCP if it were to become a wholly-owned subsidiary of IEL. This fact, coupled with the fact that the level of compensation for expropriation was fair, led Meagher JA to conclude that the amendment was not oppressive and should have been allowed to stand.
10. Meagher JA also rejected the appellants' argument that Art.20A would constitute an impermissible restriction on the ability to transfer the shares affected, stating that the minority shareholders could transfer their shares freely until they received an expropriation notice, and that, even then, the shares remained transferable without restriction.
11. Priestley JA concluded that, in the circumstances of the present case, the proposed amendment was not oppressive or unjust.
Expropriation of minority shareholdings
12. The fundamental issue in this case is whether, and if so in what circumstances, the taking of a power by majority shareholders by amendment to the articles to acquire compulsorily the shares of the minority shareholders will be held invalid on the basis that it is oppressive. The logical starting point for a consideration of this issue is Allen v. Gold Reefs of West Africa Limited [F5] where Lindley MR stated that the power of the majority to alter the articles by special resolution:
"must be exercised, not only in the manner required by law, but also bon fide for the benefit of the company as a whole, and it must not be exceeded".
The validity of the resolution altering the articles in that case was upheld by Lindley MR and Romer LJ, who concurred in Lindley MR's reasons. Vaughan Williams LJ dissented on the ground that the resolution was not passed in good faith, "being really passed merely to defeat the existing rights of an individual shareholder" [F6] .
13. Strictly speaking, Allen v. Gold Reefs of West Africa Limited did not involve an expropriation of shares. Rather, it concerned an alteration that gave a company a lien on fully paid shares to cover debts owed to it by the only shareholder who held such shares. Its importance for present purposes lies in the fact that the test outlined above has been used in subsequent cases in England to determine the validity of an amendment that purports to allow the majority to expropriate minority shareholdings. Brown v. British Abrasive Wheel Co. [F7] is an example of such a case. There, the proposed alteration provided that a member would be "bound upon the request in writing of the holders or holder of nine-tenths of the issued shares to sell and transfer his shares ... to the nominee of such holders or holder". Astbury J, after noting that there was no allegation of mala fides on the majority's part, stated [F8] :
"The question therefore is whether the enforcement of the proposed alteration on the minority is within the ordinary principles of justice and whether it is for the benefit of the company as a whole. I find it very difficult to follow how it can be just and equitable that a majority, on failing to purchase the shares of a minority by agreement, can take power to do so compulsorily.
The defendants contend that it is for the benefit of the company as a whole because in default of further capital the company might have to go into liquidation ... (The proposed alteration) is merely for the benefit of the majority. If passed, the majority may acquire all the shares and provide further capital. That would be for the benefit of the company as then constituted. But the proposed alteration is not for the present benefit of this company."
Astbury J seems to have regarded the statement of principle by Lindley MR in Allen v. Gold Reefs of West Africa Limited as requiring both good faith and a tendency to benefit the company as a whole.
14. In Sidebottom v. Kershaw, Leese and Co. [F9] , the English Court of Appeal upheld a proposed amendment that would empower the majority shareholders to expropriate the shares, at full value, of any shareholder who carried on business in direct competition with the company or was a director of another company carrying on such a business. Lord Sterndale MR [F10] and Warrington LJ [F11] rejected the view that Lord Lindley's statement of principle involved two distinct elements.
15. However, in Dafen Tinplate Co. v. Llanelly Steel Co. [F12] , Peterson J took a different view of the principle. There one of the proposed alterations empowered the defendant company in general meeting to determine that the shares of any member "be offered for sale by the Board to such person or persons ... as the Board shall think fit". Peterson J held that the amendment was invalid, stating [F13] :
"It may be for the benefit of the majority of the shareholders to acquire the shares of the minority, but how can it be said to be for the benefit of the company that any shareholder, against whom no charge of acting to the detriment of the company can be urged, and who is in every respect a desirable member of the company, and for whose expropriation there is no reason except the will of the majority, should be forced to transfer his shares to the majority or to anyone else? ... The power of compulsory acquisition by the majority of shares which the owner does not desire to sell is not lightly to be assumed whenever it pleases the majority to do so." (emphasis added)
16. Subsequently, in Shuttleworth v. Cox Brothers and Co. (Maidenhead) [F14] , the English Court of Appeal rejected Peterson J's view of the principle, holding that it denoted one condition only, a condition expressed by Scrutton LJ in these words, namely "that the shareholders must act honestly having regard to and endeavouring to act for the benefit of the company" [F15] .
17. The last English case of interest, In re Bugle Press Ltd. [F16] , involved an attempted expropriation of shares in reliance on the compulsory acquisition provisions contained in s.209 of the English Companies Act 1948. Lord Evershed MR noted that an expropriation without consent would appear to conflict with the fundamental legal principle that prima facie, if a person has a legal right which is an absolute right, then that person can deal with the right as he or she pleases [F17] . That consideration led his Lordship to conclude that the relevant legislative provisions could not be used in such a way so as to expropriate the shares of the minority, unless there was a good reason for the expropriation [F18] :
"(F)or example, that the minority shareholder was in some way acting in a manner destructive or highly damaging to the interests of the company from some motives entirely of his own".
18. Harman LJ stated [F19] that it was a "fundamental rule of company law" that majority shareholders could not expropriate a minority, unless the articles contained an expropriation provision from the outset [F20] .
Peters' American Delicacy Co. Ltd. v. Heath [F21]
19. In that case, this Court held that an alteration of the articles which discriminated against holders of partly-paid shares in favour of the majority shareholders did not constitute a fraud on the minority. In the course of his judgment, Latham CJ (with whom McTiernan J agreed) expressed the view that, although the power to alter articles must be exercised bona fide, the fact that an alteration prejudices or diminishes some (or all) of the rights of the shareholders is not in itself a ground for attacking the validity of an alteration [F22] . On the contrary, his Honour considered that such an alteration must be valid unless the party complaining can establish that the resolution was passed fraudulently or oppressively or was "so extravagant that no reasonable person could believe that it was for the benefit of the company" [F23] . His Honour noted that the criterion of the "benefit of the company as a corporation" could not be invoked as the sole solution to the problem where the amendment in question affected the relative rights of different classes of shareholders [F24] .
20. Dixon J also considered that the amendment was valid, although his Honour arrived at that conclusion by a different route. Dixon J declined to leave any analysis of this question to general notions of fairness and propriety, preferring instead to focus on the purpose of the proposed amendment [F25] . The steps in his Honour's reasoning may be summarized in this way. A share in a company is property consisting of proprietary rights as defined by the articles of association. The power of alteration of the articles might be used by the majority shareholders for their own aggrandizement at the expense of the minority shareholders. It has seemed incredible that this could be so. But reliance on the doctrine that powers shall be exercised bona fide and for no extraneous purpose presents difficulties. The power of alteration is not a fiduciary power and the right to vote is an incident of property which may be exercised for the shareholder's personal advantage [F26] . Prima facie, rights dependent upon the articles are not enduring and indefeasible but are liable to modification or destruction by special resolution [F27] . So, "if a resolution is regularly passed with the single aim of advancing the interests of a company considered as a corporate whole, it must fall within the scope of the statutory power to alter the articles and could never be condemned as mala fides" [F28] .
21. His Honour went on to say [F29] :
"The chief reason for denying an unlimited effect to widely expressed powers such as that of altering a company's articles is the fear or knowledge that an apparently regular exercise of the power may in truth be but a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power. It is to exclude the purpose of securing such ulterior special and particular advantages that Lord Lindley used the phrase 'bona fide for the benefit of the company as a whole'."
22. His Honour considered that "benefit as a whole" is a very general expression negativing purposes foreign to the company's affairs and that the "bona fide for the benefit of the company as a whole" test was "inappropriate, if not meaningless", where the amendment proposed to adjust the rights of conflicting interests [F30] . Although his Honour did not expressly state which test or tests might be applied in such circumstances, he upheld the resolution in question on the basis that it "involved no oppression, no appropriation of an unjust or reprehensible nature and did not imply any purpose outside the scope of the power" [F31] .
23. In conformity with the views expressed in Peters, the use of the expression "for the benefit of the company as a whole" is no longer influential in the context of an alteration of the articles designed to effect or authorize the expropriation of a minority's shares. But the expression is still in vogue in the context of the exercise by directors of their powers, particularly the power to issue or allot shares. [F32]
Striking a balance
24. The foregoing analysis of the authorities reveals that the courts have struggled to strike a balance between the interests of the majority and the minority. On the one hand, the courts have recognized that the proprietary rights attaching to shares are subject to modification, even destruction, by a special resolution altering the articles and that the power to vote is exercisable by a shareholder to his or her own advantage. On the other hand, the courts have acknowledged that the power to alter the articles should not be exercised simply for the purpose of securing some personal gain which does not arise out of the contemplated objects of the power. The problem of stating a workable criterion arises, as Dixon J said in Peters [F33] :
"in attempting to discover and fasten upon some element the presence of which will always vitiate a resolution for the alteration of articles of association".
The test for determining whether an expropriation is valid
25. In the context of a special resolution altering the articles and giving rise to a conflict of interests and advantages, whether or not it involves an expropriation of shares, we would reject as inappropriate the "bona fide for the benefit of the company as a whole" test of Lindley MR in Allen v. Gold Reefs of West Africa Limited. The application of the test in such a context has been criticized on grounds which, in our view, are unanswerable. It seems to us that, in such a case not involving an actual or effective expropriation of shares or of valuable proprietary rights attaching to shares, an alteration of the articles by special resolution regularly passed will be valid unless it is ultra vires, beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations. Somewhat different considerations apply, however, in a case such as the present where what is involved is 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. In such a case, the immediate purpose of the resolution is to confer upon the majority shareholder or shareholders power to acquire compulsorily the property of the minority shareholder or shareholders. Of itself, the conferral of such a power does not lie within the "contemplated objects of the power" to amend the articles [F34] .
26. The exercise of a power conferred by a company's constitution enabling the majority shareholders to expropriate the minority's shareholding for the purpose of aggrandizing the majority is valid if and only to the extent that the relevant provisions of the company's constitution so provide. The inclusion of such a power in a company's constitution at its incorporation is one thing. But it is another thing when a company's constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. Such a power could not be taken or exercised simply for the purpose of aggrandizing the majority [F35] . In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, 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.
27. Accordingly, if it appears that the substantial purpose of the alteration is to secure the company from significant detriment or harm, the alteration would be valid if it is not oppressive to the minority shareholders. So, expropriation would be justified in the case of a shareholder who is competing with the company, as was the case in Sidebottom v. Kershaw, Leese and Co. [F36] (1920) 1 Ch 154 ), so long as the terms of expropriation are not oppressive. Again, expropriation of a minority shareholder could be justified if it were necessary in order to ensure that the company could continue to comply with a regulatory regime governing the principal business which it carries on. To take a hypothetical example: if the conduct of a TV station were the undertaking of a company and a renewal of a television licence under a statute depended upon the licensee's entire share capital being held by Australian residents, the expropriation of foreign shareholders who are unwilling to sell their shares to Australian residents might be justified assuming it is fair in all the circumstances. But that is not to say that the majority can expropriate the minority merely in order to secure for themselves the benefit of a corporate structure that can derive some new commercial advantage by virtue of the expropriation.
28. Notwithstanding that a shareholder's membership of a company is subject to alterations of the articles which may affect the rights attaching to the shareholder's shares and the value of those shares, we do not consider that, in the case of an alteration to the articles authorizing the expropriation of shares, it is a sufficient justification of an expropriation that the expropriation, being fair, will advance the interests of the company as a legal and commercial entity or those of the majority, albeit the great majority, of corporators. This approach does not attach sufficient weight to the proprietary nature of a share and, to the extent that English authority might appear to support such an approach, we do not agree with it. It is only right that exceptional circumstances should be required to justify an amendment to the articles authorizing the compulsory expropriation by the majority of the minority's interests in a company. To allow expropriation where it would advance the interests of the company as a legal and commercial entity or those of the general body of corporators would, in our view, be tantamount to permitting expropriation by the majority for the purpose of some personal gain and thus be made for an improper purpose [F37] . It would open the way to circumventing the protection which the Corporations Law gives to minorities who resist compromises, amalgamations and reconstructions, schemes of arrangement and takeover offers.
29. As noted in the preceding paragraphs, an alteration to the company's articles permitting the expropriation of shares will not be valid simply because it was made for a proper purpose; it must also be fair in the circumstances. Fairness in this context has both procedural and substantive elements. The first element, that the process used to expropriate must be fair, requires the majority shareholders to disclose all relevant information leading up to the alteration [F38] and it presumably requires the shares to be valued by an independent expert. Whether it also requires the majority shareholders to refrain from voting on the proposed amendment is a question that is best left open at this stage.
30. The second element, that the terms of the expropriation itself must be fair, is largely concerned with the price offered for the shares. Thus, an expropriation at less than market value is prima facie unfair [F39] , and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value [F40] . That said, it is important to emphasize that a shareholder's interest cannot be valued solely by the current market value of the shares [F41] . Whether the price offered is fair depends on a variety of factors, including assets, market value, dividends, and the nature of the corporation and its likely future [F42] .
Onus
31. The respondents' submissions, which are based heavily on Peters, are premised on the proposition that an alteration allowing an expropriation is prima facie valid. It is conceded that the suggested presumption of validity will be rebutted if the minority shareholder proves either that the alteration was made for an improper purpose or that it is oppressive to that particular shareholder. Nonetheless, the respondents' approach, which forces the minority shareholder to shoulder a heavy onus of proof, tilts the balance too far in favour of commercial expediency and fails to attach sufficient weight to the proprietary nature of a share. A share is liable to modification or destruction in appropriate circumstances [F43] , but is more than a "capitalized dividend stream" [F44] : it is a form of investment that confers proprietary rights on the investor. Accordingly, in the case of expropriation, we consider that the onus lies on those supporting expropriation to show that the power is validly exercised.
32. It is for the majority to prove that the alteration is valid because it was made for a proper purpose and is fair in all the circumstances. This approach ensures that the application of the relevant principle does not unduly favour the majority and it largely alleviates the sting of practical difficulties, such as poor access to information, that would otherwise confront minority shareholders.
The validity of Art.20A
33. As the appellants did not contend that the expropriation was not fair in the sense explained above, the validity of Art.20A hinges on whether the respondents have proved that the amendment was not made for a proper purpose. The immediate purpose of the amendment was to allow the expropriation by the majority shareholder of the shares held by the minority, including the shares held by the appellants. There is no suggestion that the appellants' continued presence as members puts WCP's business activities at risk or that the appellants have in some way acted to WCP's detriment. Nor is there any suggestion that WCP sought 100 per cent 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. In our view, however, that cannot by itself constitute a proper purpose for a resolution altering the articles to allow for the expropriation of a minority shareholder's shares. In that regard, it is not irrelevant to note that it is difficult to conceive of circumstances in which financial and administrative benefits would not be a consequence of the expropriation of minority shareholdings by a majority shareholder.
34. Accordingly, we would hold Art.20A invalid and ineffective on the basis that it was not made for a proper purpose.
Transferability of shares
35. Having reached this conclusion, it is strictly unnecessary for us to deal with the appellants' alternative argument based on s.180(3) of the Corporations Law. However, we shall indicate our conclusions on this issue.
36. Section 180(3) relevantly provides as follows:
"A member of a company, unless either before or after the alteration is made the member agrees in writing to be bound by it, is not bound by an alteration of the constitution made after the date on which the member became a member so far as the alteration:
...
(c) increases, or imposes, restrictions on the right to transfer the shares held by the member at the date of the alteration".
The respondents submit that Art.20A does not impose any restriction on the right of the appellants to transfer their shares in WCP because those shares would remain transferable without restriction even after an expropriation notice had been issued. There is considerable force in this submission. To give s.180 (3)(c) a wider interpretation could lead to the result that any amendment empowering the expropriation of shares would be invalid, notwithstanding that the amendment was made for a proper purpose and is fair in all the circumstances. Such a result would tilt the balance too far in favour of the minority. Accordingly, the appellants' argument on this point must fail.
37. In the result, we would allow the appeal with costs, set aside the orders made by the Court of Appeal and in lieu thereof order that the appeal to that Court be dismissed with costs.