Gambotto v WCP Ltd [1995] 13 ACSR 342: The High Court held alteration is valid only if the majority of shareholders prove it is; for a proper purpose; and fair in all the circumstances
High Court in Gambotto:
“On the one hand, the courts have recognized that the proprietary rights attaching to shares are subject to modification, even destruction, by special resolution altering the articles & that power is exercisable by a shareholder to his/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.”
Expropriation of Shares
Gambotto’s Case
Majority S/H in WCP held over 99% of share & sought to alter co’s articles so as to allow them to acquire all shares
High Court:
Such an alteration is valid only if majority S/H prove it is:
ü For proper purpose &
ü Fair in all circumstances
Proper Purpose
High Court in Gambotto:
“An expropriation of shares would be for a proper purpose if it prevented the company from suffering significant detriment or harm”
What would the court consider as an “improper purpose”?
Improper Purpose
Securing taxation & administrative advantages for majority S/Hs Gambotto
Compel sale of shares of a member who had formed a competing business Dafen v. Llandlly
Get rid of minority S/Hs Brown v. British Abrasive Wheel
Fairness
Two elements:
ü Process of Expropriation must be fair
ü majority must disclose all relevant information leading up to the alteration
ü Price must be fair
Prima facie unfair – if price is less than market price
However, market price – not sole criterion
Other factors, including assets, market value, dividends, and nature of co & future – need to be taken into account
Gambotto laid down two tests that set a limit on the power of the majority of shareholders to change the constitution of the company:
a) a change to the constitution of the company that does not involve the expropriation of shares (or valuable proprietary rights that attach to them) is valid unless:
- it is ultra vires;
û you can ignore this as the doctrine has been abrogated
- outside the objects of the company;
ð sometimes the constitution of the company will set out the objects of the company: this is increasingly rare and mainly a feature of older companies that are still governed by ‘articles of association’
- or it is oppressive of the minority of shareholders
b) in the case of a change to the constitution of the company that involves the expropriation of shares (or valuable proprietary rights that attach to them) the onus is on the majority of shareholders to show that:
- the change was made for the proper purpose of securing the company from harm or protecting the company from a significant detriment
û securing administrative savings or tax advantages are not proper purposes (but see McHugh J’s dissent)
ü a proper purpose may be present because the shareholder whose shares are to be expropriated:
is in competition with the company; or
must be removed from the share register of the company if the company is to comply with laws and regulations
Credit:ivythesis.typepad.com
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