Question

corporate law question

1. For the past two years, Sam’s Sausages Ltd (SS) reported tax losses totalling $235,000.
Recently, the decision was made to change the company constitution to allow the
company’s majority shareholder, Mighty Meats Pty Ltd (MM), to take over SS’s last
remaining shares.
Following a shareholder vote, it was agreed to change the constitution and that MM
would be allowed to expropriate SS’s minority shares for their current market value.
Shareholders are angry and believe the takeover was done purely to use MM’s tax
losses. They also feel they were not paid enough when their shares were expropriated.
Required:
(a) According to Gambotto v WCP Ltd, what is the test for determining whether
constitutional amendments were valid - in circumstances where minority shares
were expropriated.
(b) Advise SS’s minority shareholders whether their shares were validly expropriated.

Answer 1

a) According to [WCP Limited v Gambotto & Anor (1993)],WCP is a limited liability company with an issued share capital of 16,980,031 ordinary shares of 20 cents each. The majority shareholders, who are wholly-owned subsidiaries of Industrial Equity Limited (``IEL''), hold 16,929,441 shares (which is approximately 99.7 per cent of the issued capital). The remaining 50,590 shares are held by minority shareholders. The shareholding in WCP was such that IEL or a company associated with IEL could not have acquired the appellant's shares compulsorily under either s. 414 or s. 701 of the Corporations Law.On 16 April 1992, WCP notified all its members that a general meeting would be held on 11 May 1992 to consider an amendment to WCP's articles of association. The amendment proposed was that a new Art. 20A should be included in the articles. The effect of Art. 20A was to enable any member who was ``entitled for the purposes of the Corporations Law to 90% or more of the issued shares'' to acquire compulsorily, before 30 June 1992, all the issued shares in WCP, not being shares to which the majority members were entitled, at a price of $1.80 per share.

The appellants contend that the purported amendment is invalid on a number of grounds. It is only necessary to outline two of them for the purposes of this appeal:

• (1) The amendment is oppressive and thus beyond the scope and purpose of the power of alteration of the articles conferred by s. 176 of the Corporations Law; and
• (2) The amendment imposes restrictions on the right to transfer shares within the meaning of s. 180(3) of the Corporations Law

McLelland J held that the amendment was invalid and ineffective because its "immediate purpose and effect" was to permit the shares of the minority shareholders to be expropriated by the majority shareholders. Such an amendment amounted to "unjust oppression of those minority shareholders who object".

In reaching this conclusion, McLelland J recognized that, despite the apparent width of s.176(1) of the Corporations Law, the power of a company in general meeting to alter its constitution is constrained by the principles of equity. His Honour noted that the "bona fide for the benefit of the company as a whole" test had frequently been cited as the primary restraint since its introduction in Allen v. Gold Reefs of West Africa Limited. ^[F2] Importantly, his Honour also noted the inappropriateness of this test in situations where a conflict had arisen between different classes or descriptions of shareholders.

b) According to the appropriate provisions, power by majority shareholders by amendment to the articles to acquire compulsorily the shares of the minority shareholders must be exercised not only in the manner required by law, but also bon fide for the benefit of the company as a whole, and it must not be exceeded. Here the question therefore is whether the enforcement of the proposed alteration on the minority is within the ordinary principles of justice and whether it is for the benefit of the company as a whole. I find it very difficult to follow how it can be just and equitable that a majority, on failing to purchase the shares of a minority by agreement, can take power to do so compulsorily.

It can be said that minority shareholders were not validly expropriated .