Discuss about the Industrial Equity Limited.
The main issue discussed in the above mentioned case law is about the powers that the majority shareholders of a company has to amend the articles of association of a company and if the resolution passed for the amendment of the articles of WCP Ltd which would enable the enforced acquisition of the shareholdings of the minority shareholders is valid or not. The majority stake was held by Industrial Equity Limited (IEL) who tried to forcefully take the minority stake of Mr. Giancarlo Gambotto by introducing a paragraph in the articles of WCP Ltd.
IEL was the owner of 99.7% of the issued capital of WCP Ltd via a wholly owned subsidiary. However soon the majority stakeholder decided to become a wholly owned subsidiary of WCP ltd as well as it would benefit him for tax purposes as well as for the costs of administration. It therefore decided to include a new section, section 176 of the Corporations Law in its articles wherein it sought to buy the minority stakeholder’s shares as well for 1.80 cents per share. But Mr. Giancarlo Gambotto and Ms. Eliana Sandri did not support for such an alteration and hence did not turn up for the general meeting in which decision for such an alteration would take place.
In simple terms any alterations in the articles of a company which connotes oppression of any kind to any member of the company would be invalid and beyond the powers conferred in section 176 of the Corporations Law. Articles of a company may be altered for allowing the majority power to confiscate the shares of the minority only if it is lawful with regards the purpose for which such an expropriation is taking place and it should at the same time ensure that the minority shareholders in no manner be oppressed. Thus fairness of such an alteration is of utmost importance. By fairness it means that the price at which the expropriation is offered to happen should be not less than the market value and other factors such as the company’s goodwill, its dividend structure and future should all be considered as well. The burden to prove the farness lies on the majority shareholders.
Thus as per section 176 of the Law an expropriation of shares of the minority is valid if it is fair in all circumstances and is for the benefit of the company. Such as n the case of Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch D 290, the alteration in the articles of the company was rejected as the majority shareholders wished to purchase the shares of the minority as the majority were ready to put in the additional capital which the company needed but in lieu of the shares of the minority. The court rejected it as such an alteration did not benefit the company in any manner.
Hence as per the rule any change in the alteration of the articles of association of any company is welcomed and agreed by the court only if it is in the bonafide interest of the company as a whole and the minorities interest is not suppressed in any manner whatsoever.
The said case has a very unique judgement passed by the High Court. The decision of the New South Wales Court of Appeal was reversed by the High Court eventually and a final decision was passed in the year 1995 in favour of the minority shareholders. The High Court applied the provisions of Section 176 of the Corporation Law very minutely by studying each word of the section in depth. It also referred to the previous case laws and found out the dissimilarities of the case. The decision taken in the year 1993 was further reviewed by the Supreme Court and a final verdict was spelt out in 1995.
Initially, McLelland J said that the said alteration led to a suppression of the rights of Gambotto and other minority shareholders and hence was invalid and impressed upon the fact that alteration should be ‘ bonafide for the benefit of the company as a whole’ was not apt for the particular case. However on an appeal put forward in the New South Wales court of Appeal it was agreed by Meagher JA and Cripps JA together that the suggestion put forward by McLelland J, that any alteration in the articles which would allow confiscation of shares of the minorities would always lead to oppression is false. They reiterated section 176, which states that the shareholders of a company has the right to make changes in the articles of a company by passing a special resolution but only if such an alteration does not cause any kind of an oppression by the majority over the minority. It also conferred upon the fact that such an alteration was basically for the benefit of the company as well, as WCP Ltd would end up gaining with regards the tax instance as well would further benefit in saving upon huge costs on administration. Lastly the price offered by the majority shareholder for such an act is also not unfair i.e. it is above the net asset value of the company.
The appeal made by them was further seconded by Priestley JA which stated that the shares are a sort of property and again impressed upon the fact that it is the rights of the majority shareholders to alter the articles as per section 176 and compensation for the same was adequate enough hence it was a valid stance by the majority shareholders to proceed with such an alteration.
However the High Court pronounced a different judgement which enabled to strengthen the position of the minority shareholders of a company drastically. The High Court did not pay heed to the old test which stated about the interest of the company and introduced two new tests for the said case. The first test is with regards the changes to be made in the articles of the company which leads to conflict of interest amongst the various shareholders of a company but it does not include the expropriation of shares or any property rights attached to such shares. Thus such changes are acceptable and valid until and unless it contradicts any purpose stated in the articles previously or leads to any sort of oppression.
The second test includes any kind of conflicts with regards the alteration of the articles of association of a company with regards the confiscation of the shares by the majority shareholders of the minority. A two limbed test was introduced by the High Court with regards the same First was the purpose and second was the fairness of such an expropriation.
Mason CJ, Brennan, Deane and Dawson JJ , pronounced that a proper purpose means something that saves the company or the organization from suffering from any serious harm or damage. Thus expropriation should be done so as to ensure that the company is saved from such detriment. Proper purpose was defined as expropriation of shares of a rival group or those held by a foreign entity or an individual. Therefore it is clear that this part is stricter than the traditional purpose which said ‘bonafide benefit for the company as a whole’.
Further to this the joint judgement concluded that the proposed alterations of the articles of WCP Ltd were null and void as it failed to clear the first limb test. By making such a change the company did not try to overcome a possible loss instead tried to simply gain a benefit which ultra vires the definition of proper purpose. Howsoever, there are some issues with regards this concept. Firstly the distinction made between the two phrases does not connote any difference to the company as avoiding any act which would cause harm tot he company is also for the benefit of the entity and similarly denying a company from obtaining any benefit can cause detriment to the company. Secondly this view failed to consider the nature of the shares. It did not differentiate between the private and public company shares expropriation purposes. Thirdly the concept of ‘proper purpose’ has led to a reversal of the oppression by the minority over the majority.
Apart from the joint judgement, McHugh J’s view for the first limb is a wider one and more acceptable. It stated that the purpose is said to be a proper one if it enabled safeguarding or promoting of the interest of a company. But one additional clause which McHugh J added was that the proper purpose should be ‘external’ to the organization and hence saving on the administration cost does not comply with such an external purpose, but the tax benefit does justify the same.
The second limb of fairness enabled the minority shareholders to ask the majority to prove that there has been no oppression. Joint judgement divided the same into two parts – procedural and substantive. The former demands the shareholders with majority stake to disclose all the important data and also that the shares of the company should be valued by an expert who is not influenced by the company’s shareholders or any such other related person. The latter focussed upon the price at which the shares would be acquired by the majority shareholders. Joint judgment stated that only the market price of the shares was not the true test of sufficiency. It should consider other factors such as dividend loss and future benefits derived.
McHugh J, though seconded with the joint judgement but had some deviations to the same as well. He said that the market value of the shares of large listed public companies is prone to market fluctuations. He found that there was a proper purpose attached but the price offered was unfair and hence ultimately both the joint judgement and that pronounced by McHugh J were similar i.e. the expropriation was unacceptable and invalid in nature. Although Gambotto did not question upon the fairness of the expropriation.
Gambotto had also stated about section 180(3) of the Corporations Law which was duly rejected by the joint judgement as it does not restrict trading of the shares before expropriation even if such a clause is valid. However the decision was in favour of the minority shareholder as although the ‘proper purpose’ was available but the fairness of the dealings was not proved by the majority shareholders.
Conclusion:
On a concluding note it is understood from the above issue, rules to be applied and that finally applied that past judgements are just used as references and the provisions should not be read at its face value only. They should be understood deeply as to what the Law means to say. It is clearly proved that the Corporation Law has become stringent with regards the corporate governance after the decision has been spelt out in favour of the minority shareholders in the said case study. Further it has paved the way to introduce a reform in the legislation in this area which would protect the interest of the minority as well as the majority shareholders to the extent that nobody is oppressed by each others dealings. It has clearly stated that the concept of ‘bonafide for the benefit of the company as a whole’ has been dismantled totally and that the sections of the Corporation Law should be studied and viewed with a broader mind.
References
Brown v British Abrasiye Wheel Co (1919) 1Ch290, Sid
Deborah A. DeMott, ‘Proprietary Norms in Corporate Law: An Essay on Reading Gambotto in the United States, in Gambotto v. WCP Ltd.: Its Implications for Corporate Regulation 90-101 (Ian Ramsay ed., 1996)’, (online), <https://scholarship.law.duke.edu/faculty_scholarship/3140>
Gambotto v WCP Ltd (1995) 69 AWR 266 (Gambotto)
Kevans, Stephen, ‘Oppression of Majority Shareholders by a Minority ? Gambotto v WCP Ltd’, (1996), Sydney Law Review Journal (Online), <https://www.austlii.edu.au/au/journals/SydLawRw/1996/6.pdf>
Mitchell, Vanessa, ‘Gambotto and the Rights of Minority Shareholder’ , (1994), Bond Law Review 6(2)
Ramsay, Ian and Saunders, Benjamin, ‘ What Do You Do With a High Court Decision You Dont Like ?- Legislative , Judicial and Academic Responses to Gambotto v WCP Ltd’, (1996), Melbourne Law School (Online),
< https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709610/42-WhatDoYouDoWithAHighCourtDecisionYouDontLike1.pdf>
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