Gambotto principles?
85 The next issue, again part of question 2 as identified by Santow J and the subject of ground of appeal 6, is whether the capital reduction had to satisfy the Gambotto principles as well as the requirements in s 256B(1) of the Law.
86 In Gambotto v WCP Ltd a special resolution passed at a general meeting of the company amended the articles of association to enable a shareholder with 90 per cent or more of the issued shares to acquire compulsorily for a stated price per share the shares of minority shareholders. The stated price was a fair price. It was held that the amendment was invalid.
87 The principal judgment was the joint judgment of Mason CJ and Brennan, Deane and Dawson JJ.
88 Their Honours relevantly identified as the issue whether the amendment was oppressive and thus beyond the scope and purpose of the power of alteration of the articles (at 438). They refined the issue to whether 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 to be invalid on the basis that it is oppressive (at 439). They disapproved, in the context of a special resolution altering the articles and giving rise to a conflict of interests and advantages, the "bona fide for the benefit of the company as a whole" test of oppression (at 444). They said 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 would 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". (The possible circularity need not be investigated in the present case.)
89 Their Honours continued (at 444-7) -
"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 [cf (1939) 61 CLR, at p 511].
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 [In re Bugle Press Ltd, [1961] Ch, at pp 286-287, 287-28]. 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.
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 & Co [[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 television 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.
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 [Brown v British Abrasive Wheel Co, [1919] 1 Ch, at pp 295-296]. 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 .
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 [Re John Labatt Ltd (1959), 20 DLR (2d) 159, at p 163] 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.
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 [Nova Scotia Trust Co v Rudderham (1969), 1 NSR (2d) 379, at p 398, but cf Phillips v Manufacturers' Securities Ltd (1917), 116 LT 290], and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value [Re Sheldon; Re Whitcoulls Group Ltd (1987), 3 NZCLC 100,058, at p 100,060]. That said, it is important to emphasize that a shareholder's interest cannot be valued solely by the current market value of the shares [Weinberger v UOP Inc . (1983), 457 A 2d 701]. 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 [ibid, at p 711]." (Emphasis added)
90 From this passage came the Gambotto principles. In the view I take, it is not necessary to seek to state precisely and comprehensively what they might be.
91 Selective capital reduction had been accepted in the High Court (Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787), but protection to minorities who resisted selective capital reduction was not included in the catalogue emphasised in the passage set out above. Selective capital reduction in which minority shareholdings are cancelled on payment of fair prices has frequently been recognised by the courts, and in many cases confirmed (eg Catto v Ampol Ltd (1989) 16 NSWLR 342; Ramsay Health Care Ltd v Elkington (1992) 8 ACSR 73; Nicron Resources Ltd v Catto; re Deniliquin Corporation Ltd (1994) 12 ACSR 623; Melcann Ltd v Super John Pty Ltd (1995) 14 ACLC 92; re Prime Group Holdings Ltd (1995) 1 VR 56).
92 In re Albert Street Properties Ltd (1997) 23 ACSR 318, a case of capital reduction under the court confirmation regime, Hansen J considered whether Gambotto v WCP Ltd should be seen as "heralding a more stringent approach to the expropriation of minority shareholdings and that mere benefit for the majority or the company as a commercial entity may be insufficient" (at 322). His Honour said (also at 322) -
"However, Gambotto did not state disapproval of the selective reduction cases and there is the overriding importance of the requirement (directed by the High Court) of consistency in decision making which means that I should follow Nicron (and the other cases) unless I am persuaded that the decision is clearly wrong. As to that I say two things. In both Deniliquin and Prime the decision in Nicron has been followed by Hayne J in this court. Second, I am not persuaded that Nicron is wrong. Finally, the relevant article (cl 52) on its ordinary and natural meaning contains no restriction that would exclude from its exercise a selective reduction of capital. Nor in light of the case law upon the point can I see any reason why it should be supposed that, contrary to its terms, the article truly intended to carry the limitation suggested."