Gambotto v WCP Limited
182 CLR 432(1995) 13 ACLC 342
(1995) 69 ALJR 266
(Judgment by: McHugh J)
Between: Gambotto and Anor
And: WCP Limited and Anor
Judges:
Mason CJ
Brennan J
Deane J
Dawson J
McHugh J
Judgment date: 8 March 1995
Melbourne
Judgment by:
McHugh J
The question in this appeal is whether a resolution adding a new article (Art.20A) to the articles of association of WCP Limited ("the company") was invalid because its passing was oppressive of minority shareholders. In the Equity Division of the Supreme Court of New South Wales, McLelland J held that the "purported insertion" of Art.20A was "invalid and ineffective" on the ground that it was an unjust oppression of the minority shareholders who objected to it. The Court of Appeal unanimously reversed his Honour's order. This Court granted special leave to appeal against the orders of the Court of Appeal.
2. Property development has been the principal business of the company, which has an issued capital of 16,980,031 ordinary shares of 20 cents each. As at 16 April 1992, Acmex Investments (No.4) Pty. Ltd. and its associates (which are wholly owned subsidiaries of Industrial Equity Ltd.) owned 99.69 per cent of these shares. Seventy-one persons owned the remaining 50,590 shares of which the appellants held 15,898. The first appellant had held his shares since about 1970; the second appellant had held her shares since about 1987.
3. On 16 April 1992, the secretary of the company gave notice to its members that a general meeting of the company would be held on 11 May 1992 for the purpose of considering and, if thought fit, passing a special resolution to insert a new Art.20A in the articles of association. The article empowered any member who was entitled to 90 per cent or more of the issued shares of the company to acquire all the remaining shares in the company at the price of $1.80 per share. It authorised the majority member prior to 30 June 1992 to lodge a notice in writing with the company of an intention to acquire the minority shares. The notice was to be accompanied by a stamped transfer, executed under the common seal of the majority member on behalf of each holder of the remaining shares as transferor and on its own behalf as transferee, together with payment for the shares. Upon the receipt of the notice, the article required the company to register the majority member as the holder of the remaining shares and to cancel the share certificates of the minority shareholders. Within 14 days, the company was also required to inform the minority shareholders of the transfer and their entitlements and obligations arising out of the transfer.
4. The notice of the meeting was accompanied by a valuation of the shares of the company prepared by a firm of accountants. The valuation showed that, as at 8 April 1992, the principal assets of the company and its subsidiaries were seven tracts of land. The book value of the land was $15,035,000, but its market value was estimated to be $25,977,000. The report stated that the company had been selling off its land in recent years and that "there is no intention of continuing the property development business" once the sales had been completed. The report concluded that, of the various methods of share valuation that might be used, "the net asset value basis appears to (sic) the most appropriate for the purpose of this valuation". The report declared that on a net asset value basis the fair value of the shares was $1.365 per share. It did not include "the future income tax benefit as a separate asset". At no stage of these proceedings has it been suggested that $1.365 is not the fair value of the shares.
5. On 6 May 1992, the appellants commenced proceedings in the Equity Division to restrain the company from resolving to alter the articles to add Art.20A. Upon the company undertaking not to transfer the minority shares, the meeting was allowed to take place on 11 May. The appellants did not attend. The resolution for the insertion of Art.20A was declared carried after three minority shareholders holding 7,900 shares voted in favour of it. The majority shareholder did not vote on the resolution.
6. Subsequently, the proceedings came before McLelland J. A director of the company gave evidence to the effect that the principal purpose of the alteration and the expropriation of minority shareholdings was to enable the company to take advantage of "unutilised tax losses" within the Industrial Equity Ltd. ("IEL") group of companies which would be available to the company if it and its subsidiaries were wholly owned subsidiaries of IEL. The witness asserted:
"(I)f all the land holdings of the (company and its subsidiaries) were sold at a price equal to their current valuation, (the company) would become liable to income tax of approximately $4.235 million. The IEL Group currently has available tax losses in excess of this amount which could be transferred to (the company) or its wholly owned subsidiaries to eliminate such a tax liability and increase the profitability of (the company)."
The witness also asserted that the company would save approximately $3,000 per year in accountancy fees "by not having to prepare group accounts" and approximately $1,300 per year as the result of terminating services in relation to maintaining the share register of the company.
The alteration of articles
7. Section 176 of the Corporations Law provides that "(s)ubject to this Law, a company may by special resolution alter or add to its articles". Majority shareholders owe no fiduciary duty to minority shareholders when they exercise the power conferred by s.176 to alter the articles of association of a company. Shareholders are not trustees for the company or for one another [F45] . Nevertheless, the courts have sought to protect the interests of the minority by the use of equitable principles. In Allen v. Gold Reefs of West Africa Limited [F46] , Lindley MR, after referring to the then English equivalent of s.176 (1), said:
"The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company's memorandum of association. Wide, however, as the language of s.50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded."
In this respect, the "general principles" by which the Court of Chancery restrained the fraudulent exercise of a power vested in a person to deal with property which that person did not own have played a leading role. In the Court of Chancery, a finding that there had been a "fraud on the power" did not necessarily denote conduct that was dishonest. It simply meant "that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power" [F47] . In Peters' American Delicacy Co. Ltd. v. Heath [F48] , Latham CJ said that an alteration of articles "must be exercised bona fide for the benefit of the company as a whole". In the same case, Dixon J said [F49] that the phrase "the benefit of the company as a whole" negatived "purposes foreign to the company's operations, affairs and organizations."
8. The statement that an alteration of articles must be for "the benefit of the company as a whole" accords with a long line of authority [F50] . It is a criterion that is also widely used for determining whether powers conferred on directors have been validly exercised [F51] . But it is not always a satisfactory test for determining whether a proposed alteration of the articles of a company is valid. A power to alter articles is one that can be used to alter the rights of shareholders inter se, and one which, in many circumstances, must give rise to conflicts of interests. In Peters [F52] , Latham CJ and Dixon J both pointed out that the test of "benefit of the company as a whole" cannot be adopted as the criterion in every case. Indeed, Dixon J said [F53] :
"If the challenged alteration relates to an article which does or may affect an individual, as, for instance, a director appointed for life or a shareholder whom it is desired to expropriate, or to an article affecting the mutual rights and liabilities inter se of shareholders or different classes or descriptions of shareholders, the very subject matter involves a conflict of interests and advantages. To say that the shareholders forming the majority must consider the advantage of the company as a whole in relation to such a question seems inappropriate, if not meaningless, and at all events starts an impossible inquiry."
9. Dixon J went on to say that "unless the subject matter is held outside the power, the purpose of the resolution, as distinguished from the motives of the individuals, often must be to resolve the conflict in favour of one and against the other interest" [F54] . It is clear, however, that his Honour did not intend to hold that an alteration of articles of association was valid as long as the subject matter and the purpose of the alteration were within the scope of the power. His judgment makes it plain that, although a shareholder may vote to alter the articles so as to serve his or her own interests, the exercise of the power must not involve any oppression of the minority shareholders, or any unjust or reprehensible appropriation of their rights, or be for a purpose outside the scope of the power of alteration [F55] . Thus, neither the subject matter nor the purpose of the alteration exhausts the tests for determining whether an alteration is a "fraud on the power". Indeed, when the sole purpose of the alteration is to enable the majority shareholders to acquire the shares of minority shareholders, those tests will seldom prove helpful.
10. In my opinion, a company may alter its articles of association for the purpose of enabling a shareholder to acquire the shares of existing shareholders only when the acquisition is necessary to protect or promote the interests of the company and when the alteration will not be oppressive to those shareholders. In the absence of statutory authorisation, a general contractual power to alter the articles of a company would not authorise an amendment empowering the compulsory acquisition of a member's shares. "(C)lear judicial authority, clear legislation or clear principle and necessity would seem to be required" [F56] before a general power to alter the articles of a company could be construed as authorising such a far reaching alteration. The power to alter the articles of association of a company, however, does not depend upon contract. It is, and long has been, authorised by statute. But, wide though that power is, its application is, as I have indicated, subject to restrictions. One of them is that it does not extend to an alteration whose purpose is to expropriate the shares of an existing shareholder unless the expropriation is necessary for the protection or promotion of the company's interests.
11. In the absence of an unambiguous expression of legislative intention, a general statutory power such as s.176 is not to be construed as authorising the expropriation of private rights. This presumptive rule is strengthened when the recipient of the power is a private citizen or group of private citizens. Legislative authority for one citizen or group of citizens to acquire the private property of other citizens compulsorily is a rare and exceptional occurrence [F57] . A legislative grant of power to private citizens should not be taken to authorise the compulsory acquisition of the property rights of other persons unless the intention to do so appears from express words or by necessary implication [F58] . Section 176 of the Corporations Law lacks any express or necessarily implied indication that the power to alter the articles of a company can be used generally for the purpose of enabling one shareholder to acquire the shares of another. Moreover, the presence of ss.701-703 in the Act tells strongly against the intention to grant such a power in s.176. The section should be construed, therefore, as authorising the expropriation of shares only when it is necessary to do so in the interests of the company.
12. Unsurprisingly, the courts have refused to uphold the validity of resolutions purporting to alter the articles to allow the expropriation of a member's shares in the absence of circumstances affecting the interests of the company. Thus, in Brown v. British Abrasive Wheel Co. [F59] , Astbury J, after referring to the English equivalent of s.176(1) said that its "language, though very wide, must obviously be read with some qualification" [F60] . His Lordship restrained a company and its directors from holding a meeting to pass a resolution altering the articles so that the two majority shareholders, who held 98 per cent of the share capital, could acquire the shares of the remaining shareholders. Astbury J held that it was not for the benefit of the company as then constituted to add the article to the articles of association even though the company was in need of capital and the majority shareholders were prepared to provide it only if they could acquire all the shares in the company. His Lordship said [F61] :
"The proposed alteration is not directly concerned with the provision of further capital, nor does it ensure that it will be provided. It is merely for the benefit of the majority."
Similarly, in Dafen Tinplate Co. v. Llanelly Steel Co. [F62] , Peterson J. held void a resolution purporting to alter a company's articles so that the shareholders in general meeting could determine that a member's shares should be offered for sale by the directors to such person as they thought fit at the fair value as determined by the directors. His Lordship said [F63] :
"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?"
13. To hold that the power conferred by s.176 cannot be used generally to acquire a member's shares does not mean that the power conferred by that section can never authorise the compulsory acquisition of a member's shares. Literally, the power to alter the articles of association extends to any alteration. Although, for the reasons that I have given, the generality of the power does not authorise an alteration providing for the expropriation of a member's shares by majority vote, no reason exists for holding that the power does not extend to those alterations that are necessary to protect or promote the company's interests. Thus, alteration for the purpose of expropriating a member's shares may be permissible if it is necessary to protect the company against direct competition from a member or from a company of which the member is a director [F64] . Similarly, alteration for the purpose of expropriation may be permissible if the character or status of a member will cause harm to the company or prevent it from pursuing a legitimate commercial interest.
14. No distinction should be drawn between an expropriation that will enable a company to pursue a beneficial course of action that would otherwise be denied to it and an expropriation that avoids a detriment to the existing interests of the company. I see no difference between an expropriation that will enable a company to renew an existing licence to do something and an expropriation that will allow the company to acquire that kind of licence. Nor in a case like the present, can I see a valid distinction in principle between an expropriation that would allow a company to escape the incidence of a particular tax and an expropriation that would allow the company to reduce its potential tax liability. In both cases, the proper conclusion is that the expropriation is commercially necessary to protect the assets of the company. That does not mean that an expropriation will be valid whenever the expropriation will financially benefit the company. Independently of any question of oppression, the alteration of articles for the purpose of expropriating a member's shares will be valid only if 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, for example, could never by itself justify an alteration for the purpose of expropriation.
Oppression
15. Moreover, the fact that an expropriation is necessary for the protection or promotion of the company does not prevent it from being oppressive to the shareholders whose shares will be acquired. When the articles of association contain no power to expropriate the shares of a member of the company, any resolution granting such a power is prima facie oppressive to those shareholders who do not wish to sell their shares. In the absence of an article authorising the expropriation of a member's shares, members have a legitimate expectation that, unless some exceptional circumstance should arise, they will be able to retain their shares until they wish to sell or until the company is wound up. Once the articles are altered to give the power of expropriation to the directors or the majority shareholders, a shareholder whose shares are liable to be expropriated is placed in the position where he or she can be forced to accept cash or debt in exchange for the shares while the majority retain their shareholding [F65] . Any benefits that will flow to the company from the acquisition will flow only to the remaining shareholders [F66] . Furthermore, those given the power to acquire are usually not bound to exercise their power. Often, the expropriators can time the acquisition to suit their own convenience and purposes. In periods such as that which followed the stock market "crash" of October 1987, the price of shares may be artificially depressed giving the expropriators the chance to acquire the shares at a price below their "fundamental value" [F67] . Usually, the expropriator is a person who controls the company and who often has access to information that is denied to other shareholders and to the stock market.
16. Under these circumstances, to require shareholders to sell their shares against their will is an infringement of their rights as autonomous beings to make their own decisions and to carry out their own actions. In a society and under a legal system that is predicated on its members being free and equal agents any interference with the autonomy of any individual needs to be justified if it is not to be regarded as oppressive. Because those proposing an alteration for the purpose of expropriation must justify their action, the onus must be on them to establish that there has been no oppression.
17. To prevent an alteration for the purpose of an expropriation being oppressive, the expropriators will need to act fairly. In a leading American case, Weinberger v. UOP Inc. [F68] , the Supreme Court of Delaware, in dealing with a statute that enabled a corporation that was a majority shareholder in another corporation to buy out the minority shareholders and merge the two corporations, pointed out [F69] that the "concept of fairness has two basic aspects: fair dealing and fair price".
Fair price
18. Payment of compensation which accords with the market value of the expropriated shares will go a long way to preventing the expropriation from being classified as oppressive. The market price of shares on a security exchange is cogent evidence of value [F70] particularly when the shares have traded in a fairly narrow band over an extended period. But the market price or even a price above the market price is not decisive of the fair value of the shares for the purpose of an expropriation. A price sufficiently high to prevent an expropriation being characterised as oppressive will need to take into account numerous factors. In Weinberger [F71] , the Supreme Court of Delaware said that a fair price included "all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock". Consideration of these factors may lead to the conclusion that the market price or a higher price is not the fair price of the shares.
19. In Re Sheldon; Re Whitcoulls Group Limited [F72] , however, Holland J held that the compulsory acquisition of shares at $2 per share was fair because at the time the current market price had been $1.65. That was the lowest price the shares had been in "the preceding three years". Six months later the acquiring shareholder contracted to sell its shareholding for $2.65 per share. In addition, the three independent directors of the company had asserted at the time of the acquisition that the price of $2 was "inadequate in the light of the company's asset backing". Nevertheless, his Honour held that the minority shareholder had failed to prove that the price of $2 was inadequate. The learned judge said [F73] :
"In the case of a company with shares quoted on the Stock Exchange it would be rare indeed that a Court could be satisfied that a price substantially higher than that ruling on the public market was anything other than a fair value for those shares."
20. With great respect, I do not think that that dictum should be followed in Australia. Sharemarkets are driven by many factors, not all of them rational or fair. Even the share prices of long established and profitable companies may fluctuate by as much as 50 per cent in the space of a year. A share is an interest, however small, in an underlying business. Outside the context of the stockmarket, it would not occur to the owner of a business to think that the fair value of his or her business could move up and down, sometimes violently, not only from week to week or day to day but during the course of a day. No doubt in the long term the share price of a company will reflect its fundamental earning capacity or value. But the histories of stockmarkets are overrun by examples of companies whose intrinsic value remained unnoticed by the market for long periods of time. The "herd mentality" exists in the stock market as in other areas of life. Judges cannot delegate to the market the duties of courts to fix a fair price for shares.
21. Wyn-Parry J asserted in In re Press Caps Ltd. [F74] that "the final test of what is the value of a thing is what it will fetch if sold". But what it will fetch depends on when it is sold. Shareholders whose shares are expropriated have no say concerning the timing of the expropriation. In Catto v. Ampol Ltd. [F75] , Rogers A-JA was correct, in my opinion, in refusing to accept the current market price as reflecting the fair price of shares in an application to approve a capital reduction scheme under which the minority shareholders would receive a price of $2.78 per share which was in line with the current market price. His Honour thought that the facts of that case indicated that a price of $4.00 per share paid by the majority shareholder 18 months earlier was a surer guide to their true value. [F76]
Fair dealing
22. In Weinberger [F77] , the Supreme Court of Delaware said that the notion of fair dealing embraces questions of when the transaction was timed, how it was initiated, structured, negotiated and disclosed and how approvals to the transactions by directors and other shareholders were obtained. In the forefront of the requirement of fair dealing is the necessity for the majority shareholders through the company to make a full disclosure of all matters that may affect a judgment as to the fairness of the proposed alteration. [F78] This will usually mean the disclosure of the purpose of the transaction, the giving of full reasons for rejecting alternative means of achieving that purpose and for concluding that the compensation offered will be fair to those affected, and the obtaining of an independent valuation for the shareholders. In most cases, full disclosure will also require information concerning the current and historical market prices of the shares where they are applicable, the net book value of the assets, and the value of the company both as a going concern and on a liquidation together with any reports or appraisals prepared in relation to the alteration and any firm offers for, or serious inquiries about the purchase of, the assets of the company. [F79]
The present case
23. In the present case, the principal goal sought to be achieved by the alteration was in my view a legitimate business objective and one that would justify the expropriation of each appellant's shares provided that it was otherwise fair to that person. The alteration of the articles and the expropriation of the minority shares would enable the company to save over $4 million dollars in taxes.
24. In my opinion, however, the company has failed to prove that the expropriation was not oppressive. It is true that upon the evidence before the Court and having regard to the concessions of the appellants the price of $1.365 per share may well have been a fair price for the shares. But the onus is on the company to prove that the price was fair, that the appellants have been dealt with fairly and that a full disclosure of all matters in relation to the alteration and expropriation has been made. The evidence falls far short of proving that the company and the majority shareholders have dealt with each appellant fairly. Almost no attempt was made to make the full disclosure that is required in this class of case.
25. It follows that the resolution adopting Art.20A was invalid.
The appeal should be allowed.
1 See s 414(5)(b) and s 701(2)(c)(ii)
2 (1900) 1 Ch 656 at 671
3 (1992) 8 ACSR 141 at 143-144 citing Peters' American Delicacy Co. Ltd v. Heath (1939) 61 CLR 457 at 512 per Dixon J and Crumpton v. Morrine Hall Pty. Ltd (1965) 82 WN(Pt 1)(NSW) 456 at 460-461 per Jacobs J
4 ss 701-702 (takeover schemes), s 414 (contracts and arrangements)
5 (1900) 1 Ch at 671
6 ibid. at 677
7 (1919) 1 Ch 290
8 ibid. at 295-296
9 (1920) 1 Ch 154
10 ibid. at 163
11 ibid. at 172
12 (1920) 2 Ch 124
13 ibid. at 141-142
14 [1927] 2 KB 9
15 ibid. at 23. See also Greenhalgh v. Arderne Cinemas Ltd (1951) Ch 286 at 291
16 (1961) Ch 270
17 ibid. at 285
18 ibid. at 287
19 ibid. at 287-288
20 cf. Albert Phillips and Albert Phillips Ltd v. Manufacturers' Securities Ltd (1917) 116 LT 290
21 (1939) 61 CLR 457 . See also Crumpton v. Morrine Hall Pty. Ltd
22 ibid. at 480
23 ibid. at 482
24 ibid. at 481
25 ibid. at 504, 507
26 ibid. at 504
27 ibid. at 507
28 ibid. at 507-508
29 ibid. at 511-512
30 ibid. at 512
31 ibid. at 513
32 Richard Brady Franks Ltd v. Price (1937) 58 CLR 112 at 135; Mills v. Mills (1938) 60 CLR 150 at 187-188; Ngurli Ltd v. McCann (1953) 90 CLR 425 at 440; Harlowe's Nominees Pty. Ltd v. Woodside (Lakes Entrance) Oil Co. N.L (1968) 121 CLR 483 at 493; Whitehouse v. Carlton Hotel Pty. Ltd (1987) 162 CLR 285
33 (1939) 61 CLR at 507
34 cf. ibid. at 511
35 In re Bugle Press Ltd (1961) Ch at 286-287, 287-288
36 (1920) 1 Ch 154
37 Brown v. British Abrasive Wheel Co. (1919) 1 Ch at 295-296
38 Re John Labatt Ltd (1959) 20 DLR (2d) 159 at 163.
39 The Nova Scotia Trust Company v. Rudderham (1969) 1 NSR (2d) 379 at 398; but cf. Phillips v. Manufacturers' Securities Ltd (1917) 116 LT 290
40 Re Sheldon; Re Whitcoulls Group Limited (1987) 3 NZCLC 100 ,058 at 100,060
41 Weinberger v. UOP Inc. (1983) 457 A 2d 701
42 ibid. at 711
43 Peters (1939) 61 CLR at 507 per Dixon J
44 But cf. Sanford v. Sanford Courier Service Pty. Ltd (1986) 10 ACLR 549 at 563; Re Shoppers City Ltd and M. Loeb Ltd (1969) 1 OR 449 at 454
45 Peters' American Delicacy Co. Ltd v. Heath (1939) 61 CLR 457 at 482, 504; Ngurli Ltd v. McCann (1953) 90 CLR 425 at 439
46 (1900) 1 Ch 656 at 671
47 Vatcher v. Paull [1915] AC 372 at 378
48 (1939) 61 CLR at 480
49 ibid. at 512
50 Allen (1900) 1 Ch at 671; Sidebottom v. Kershaw, Leese and Co. (1920) 1 Ch 154 at 167; Shuttleworth v. Cox Brothers and Co. (Maidenhead) [1927] 2 KB 9 at 23
51 See, for example, Ngurli (1953) 90 CLR at 440; Whitehouse v. Carlton Hotel Pty. Ltd (1987) 162 CLR 285 at 300-301
52 (1939) 61 CLR at 481, 512
53 ibid. at 512
54 ibid. at 513
55 ibid
56 Hole v. Garnsey [1930] AC 472 at 491
57 cf. Elkington v. Shell Australia Ltd (1993) 32 NSWLR 11 at 14 per Kirby A-CJ
58 cf. Clunies-Ross v. The Commonwealth (1984) 155 CLR 193 at 201
59 (1919) 1 Ch 290
60 ibid. at 295
61 ibid. at 296
62 (1920) 2 Ch 124
63 ibid. at 141
64 Sidebottom (1920) 1 Ch 154
65 Spender, "Compulsory Acquisition of Minority Shareholdings", (1993) 11 Company and Securities Law Journal 83
66 ibid. at 91
67 cf. Digby, "Eliminating Minority Shareholdings", (1992) 10 Company and Securities Law Journal 105 at 124
68 (1983) 457 A 2d 701
69 ibid. at 711
70 Elkington (1993) 32 NSWLR at 22
71 (1983) 457 A 2d at 711
72 (1987) 3 NZCLC 100,058
73 ibid. at 100,060
74 (1949) Ch 434 at 447
75 (1989) 16 NSWLR 342 at 361
76 See also the remarks of Bryson J in Kingston v. Keprose Pty. Ltd (No 2) (1987) 6 ACLC 111 at 114 and those of Jacobs J in Mercantile Mutual Life Insurance Co. Ltd v. Actraint No 85 Pty. Ltd (1990) 1 ACSR 569 at 578
77 (1983) 457 A 2d at 711
78 Re John Labatt Ltd (1959) 20 DLR (2d) 159
79 cf. the requirements in the United States Securities and Exchange Commission Rule 13e-3 cited by Digby, op. cit. at 128-129 and the disclosure requirements in s 672(3) of the Corporations Law.
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