Gambotto V WCP Ltd: A Landmark Essay On Corporate Law In Australia.

Background of Gambotto v WCP Ltd case

Question:

Recognise the laws relating to companies in Australia and Examine the duties, rights and responsibilities of Company officers.

Gambotto v WCP Ltd was considered as the important case of corporate law in the Australian history. In this case, High Court rejected the amendment made in the constitution of the company because amendment allowed the majority shareholders of the company to compulsorily acquired or expropriate the shares hold by minority shareholders of the company.

High Court of Australia took historical decision on 8^th March 1995, and in this decision High Court empowered the minority shareholders under the Corporation Act of Australia. In this, Mr. Giancarlo Gambotto representing himself and achieved great success against the Industrial Equity Ltd (IEL) for expropriate the share hold by Mr. Gambotto in WCP as minority shareholder by altering the Articles of Association of WCP. This victory was considered as remarkable victory because it shows the interventionist approach, which was usually avoided by the Courts in corporate context. Decision of High Court in this case was also important because High Court introduced the new stringent rule for the purpose of testing the validity of such alterations made under companies AOA and MOA.

Litigation in this case was related to the attempt made by majority for obtaining the 100 percent stake in the WCP limited. In these majority shareholders of the wholly-owned subsidiaries of IEL holds almost 99.7% shares of the share capital of the WCP and the appellant that were Giancarlo Gambotto and Eliandri Sandri holds almost 0.094% shares of the issued share capital of the WCP. IEL wants to get the 100% control of the WCP for the purpose of obtaining taxation and administrative benefits which includes saving in income tax of almost $4 million and accounting fee savings of almost $3,000 per year.

It becomes possible for IEL to purchase the appellant’s shares under the process of alternative compulsory acquisition, and because of this IEL insert provision in the constitution of the company which allowed any member of the company who hold 90% or more of the issued shares to acquire the shares on compulsory basis before thirtieth June 1992, all the issued shares in WCP at a price of $1.80 per share. WCP also send notice to the shareholders of the meeting which was held on 11 May 1992 for the purpose of considering the amendment to its effect. Experts valued the share at $1.365 per share, and this price was considered fair valuation by the appellant. Appellants do not desire to sell their shares and file suit against the respondent before the meeting for the purpose of preventing the resolution being passed. This meeting took place subsequently, but Court directed to the WCP that it was not possible to acquire any shares by WCP on the basis of this mechanism till the Court’s decision in this regard. In the meeting, company approve the amendment but IEL did not vote its shares in the meeting (Mitchell, 1994).

Constitutional Amendments and Expropriation of Shares

As per the judge McLelland J in the Supreme Court of New South Wales, stated that section 176 (1) of the Corporation Law give power to the company to made amendments in the constitution of the company, but the exercise of power was constrained by the equitable principles. He further stated that main aim of amendment made by WCP was to allow the majority shareholders to expropriate the shares of the minority shareholders.

As per the opinion of the judge, this amendment results in unjust oppression to those minority shareholders who object this decision. Judge noted if this amendment was permissible and if it was allowed to expropriate the minority shareholders by the majority shareholders, the procedure related to compulsory acquisition stated in the corporation law under section ss 414 and 701 would be unnecessary (Austlii, 1996).

High Court overturned the decision of Court of Appeal by stating that amendment made by the company was invalid because amendment was not made for proper purpose. This decision was taken by the majority of judges that were Mason CJ, Brennan, Deane and Dawson JJ, who initiated their analysis by framing the question of fundamental importance as “whether, and if yes in what situations 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”.

For answering this question, judges considered the judgment taken by Lindley MR in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at 671. In this case, Lindley MR stated that power of the shareholders to amend the constitution of the company by passing special resolution must be exercised not only as per the procedure of the law but also in the benefit of the company as a whole. By following the judgment taken by Peter in American Delicacy Co Ltd v Heath, majority of the judges of High Court in this case rejected the notion that test laid down by Lindley MR in Allen as “bona fide for the benefit of the company as a whole” was inappropriate while considering the rights and interest of the shareholders. Court made the difference between the two type of alterations made in the constitution. Court stated that those alterations which does not involve expropriation of shares or of valuable proprietary rights which were attached to the shares, can be made by passing regular special resolution and such resolution was not ultra vires, not beyond any purpose contemplated by the constitution nor oppressive (Ramsay & Saunders, n.d.).

Equity Principles and Fairness

On the other side, if alteration involves the expropriation of shares or any valuable property rights which were attached to the shares then it was not sufficient to regularly pass the SR, and on these different considerations was applied. Majority of judges in High Court stated two tests which must be conducted while making amendment to the constitution of the company which permits expropriation of shares, and these two tests were stated below:

• Company exercises this power for proper purpose.
• If company exercises its power then it will not operate oppressively in relation to the minority shareholders of the company.

The first factor of the test which stated that Company must exercises this power for proper purpose means that expropriation of shares will only justified in that case in which it was reasonably proved that continued shareholding of the minority cause damage to the company and affairs of the company and expropriation of shares was necessary for the purpose of eliminating and mitigating that detriment.

Majority further stated that it would not be considered as sufficient justification if expropriation of shares would advance the interest of the company or ensures any commercial advantage for the company. An expropriation of shares will only be valid if it saves the company from detriment of any harm. Majority of judges provide two examples which clarify the meaning of proper purpose such as when shareholders of the company is competing in the company, in case when it was necessary to ensure that company is complied with the regulatory provisions such as residency requirement of shareholder.

The second factor of the test states that expropriation of shares must be fair and not oppressive in nature, which means it must include both procedural and substantive aspects. The process through which expropriation was conducted must be fair, and it requires the majority to disclose all the necessary information. It also includes valuation of shares by independent expert. On the other side, substantive fairness includes price to be paid for the shares. Majority stated that market value cannot be considered as sufficient indicator for the purpose of determining the fair value of the shares. It must be noted that other factors must be considered such as assets of the company, dividend, nature of the company, and expected future.

In this case, fairness was not challenged by the appellant but it could not be established that expropriation of shares was conducted for proper purpose. Majority also stated burden to prove is lie on the party who intended to expropriate for the purpose of proving that power was validly exercised. 

This decision of High Court was considered as historic decision in context of corporation law in Australia, and following are some key aspects of this decision:

• Firstly, High Court defines the proper purpose narrowly and also stated the test which is known as stringent test for satisfying the proper purpose of expropriation of shares. Court also stated objective test which ensures that inquiry does not limit in relation to the subjective good faith of the majority. It can be said that Court framed the test in such way which makes it unattractive for the majority shareholders for the purpose of avoiding the protections which is stated in the statutory expropriation mechanisms. The test for proper propose stated by the High Court has no equivalent in the statutory mechanism for expropriation of shares.
• Secondly, majority of judges placed focus on the concept related to shares as property, with the holder which has proprietary rights in the property. Judges stated that they does not consider, in the case of amendment of the AOA by authorizing expropriation of shares. They further stated that it is sufficient justification related to expropriation of shares that expropriation must be fair and also ensure the interest of the company as legal as well as social entity. However, this approach does not justify the property nature of the shares.
• Thirdly, principles stated in this case were considered valid only if they were inserted by amending the constitution of the company and do not apply to the constitution from the incorporation of the company. If constitution of the company stated about the expropriation of shares from the time of incorporation of the company then such provision in the constitution is valid.

Conclusion:

Experts stated that this case was the most important case in the history of corporate law of Australia because this case empowers the minority shareholders of the company. In this case, High Court not only empowered the minority shareholders but also impose responsibility on the majority shareholders and management of the company to conduct expropriation of shares for proper purpose only, and not the for the benefit of majority shareholders. In this High Court protect the interest of minority shareholders.

The decision taken by High Court was considered as significant victory for the minority shareholders of the company. In this High Court provide the power to the minority shareholders of the company. This decision is considered as new provision in the protection of minority shareholders of the company.

References:

Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at 671.

American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 481.

Austlii, (1996). Oppression of Majority Shareholders by a Minority? Gambotto v WCP Ltd. Retrieved on 17^th November 2017 from: https://www.austlii.edu.au/au/journals/SydLRev/1996/6.pdf.

Corporation Act 2001- Section 414.

Corporation Act 2001- Section 701.

Gambotto v WCP Ltd (1995) 182 CLR 432; 127 ALR 417; 16 ACSR 1; 13 ACLC 342.

Mitchell, V (1994). Gambotto and the Rights of Minority Shareholders. Retrieved on 17^th November 2017 from: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1091&context=blr.

Ramsay, I. & Saunders, B. What do you do with a high court decision you don’t like? .legislative, judicial and academic responses to Gambotto V WCP Ltd. Retrieved on 17^th November 2017 from: https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709610/42-WhatDoYouDoWithAHighCourtDecisionYouDontLike1.pdf.