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Class 17 - Shareholders' remedies The protection of minority shareholders in overview
[8.05] Protecting the few from the company??
Redmond notes the many potential areas of disagreement between members (remuneration of directors, constitutional structure etc.) and the scope of the exploitation of minority interests that can result - especially in small proprietary companies and companies whose shares are illiquid where there are no opportunities for market exit Minority shareholders can also exploited by means such as: o Withholding dividends with profits distributed to the majority as salaries, bonuses etc. o Exclusion from management participation o Diversion of corporate assets to interests associated with the majority o Disproportionate allotments o Withholding information concerning company affairs or the making of fundamental changes that effect their interests etc. There are a number of constraints, such as equitable constraints, on the voting power of the majority in general meeting. Two fundamental principles contend with each other in this area o The identification of the corporate will with a decision of the majority o Doctrines which together prevent majorities in GM from acting oppressively towards minorities or using powers for an improper purpose even though they act within the scope of their powers The difficulty, however, lies in formulating a general standard for identifying the factors or conceptions that prompt judges to invoke the formulary - it requires the drawing of a distinction between a legitimate exercise of majority power, even though it can cause dissension and disappointment amongst the minority, and the use of powers that is over-reaching and unfair. o Differing conceptions of justice and fairness, the claims of the majoritarian principles and the diversity and complexity of competing interests are reflected by the clear and unambiguous standards
[8.10] Shareholder litigationGiving shareholders legal standing is another way to protect their interest. Such standing exists in terms of a personal right to bring a cause of action, and a corporate right
The latter presents difficulties since it displaces the rule that gives directors the powers to litigate for the company. However a potential reason for running contrary to this is where the alleged wrongdoers are the directors/senior managers. If such a safeguard were not present their duties would be merely aspirational. There are others (fraud on the minority)
Equitable limitations upon the voting power of majorities
[8.15] The general principle???
The second of the two competing principles above was traditionally expressed in Allen v Gold Reefs of West Africa - "The power of the three fourths majority to alter the company articles must like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded" This was not the same as the director's duty to act in good faith since it does not carry a fiduciary obligation But in Gambotto v WCP the HCA rejected this test as inappropriate and adopted the language of 'oppression and improper purpose' to define the vitiating overreach by majorities. GM resolutions that offend this general principles are often called a fraud on the minority Redmond notes that the cases which follows are attempted to be put into categories but notes that it is difficult to be confident that these categories identify the principles that prompt courts to invoke the doctrine or provide a reliable predictor of future judicial decision Thus in Crumpton v Morrine Hall Jacobs J commented that "no amount of legal analysis or analytical reasoning can conceal the fact that the decision in the past turned, and must turn ultimately, on a value judgment formed in respect of the conduct of the majority - a judgment formed not by any strict process of reasoning or bare principle of law but upon the view taken of the conduct"
[8.45] Alterations of the company's constitution that prejudice shareholder rights?
A company's constitution can be altered by special resolution - but this is subject to any requirements already placed in the company's constitution One challenge under the 'fraud upon the minority' doctrine concerns resolutions for the alteration of company constitutions that prejudicially affect the rights of some members
The classic statement in Allen v Gold Reefs that powers of majorities must be exercised in 'bona fide for the benefit of the company as a whole' was made in the context of reviewing an alteration of company articles o But the difficulty under this and other formulations of the fraud doctrine is distinguishing between alterations that are proper, even if they prejudice/extinguish shareholder rights and those that offend the equitable limitation o The worst of such alteration is introducing machinery to appropriate the minority's shareholdings
[8.55] Greenhalgh v Arderne Cinemas Ltd  Ch 286
Facts: The company's constitution (CC) contained a provision prohibiting the sale of shares non-members as long as any member was willing to purchase them at a fair price. Despite a detailed pre-emption mechanism, Mallard, wishing to sell his controlling interest to an outsid procured an SR to alter the pre-emptive rights article by adding a proviso by that a member an ordinary resolution can affect a transfer to an outsider. This was followed by an ordinary resolution sanctioning the transfer of shares. G challenged these as a fraud on the minority Evershed MR: The first line of attack was that this SR's validity depended on it being passed in good faith for the benefit of the company as a whole
This means that the shareholder must proceed upon what, in his honest opinion, is fo benefit of the company as a whole "The company as a whole" does not mean the company as a corporate entity distinct its corporators - it is the corporators as a body. The case can be taken of a hypothetic member and it may be asked whether what is proposed, in the honest opinion of thos voting, is it for that person's benefit This can be restated as saying that an SR of this kind would be impeached if it's effec were to discriminate between the majority and minority so as to give the former an advantage which the latter was deprived o But one does not dissociate themselves form their own prospects and consider company as a going concern. If an outsider makes an offer to buy shares then facie, if the corporators thing it is a fair offer and vote in favour, one cannot impeach it on the basis of their position as individuals
The second line of attack was that the plaintiff and majority shareholders were deprived of t right of buying the shares of the majority when they were to be disposed
? The answer to this is that someone who becomes a shareholder cannot assume the articles will remain in a particular form
? So long as the articles do not unfairly discriminate in the way stated above, it is not a objection, as long as the resolution is passed bona fide, that the right to tender of the majority holding was lost by the lifting of that restriction
? In substance, this was an offer by an outsider to buy the shares from anyone willing t As commonly happens, Mallard (the MD) negotiated and had to proceed on the footin
that he had sufficient support to make this negotiation a reality. o This did not discriminate between two types of shareholder. Anyone who wante 'get out' at that price could have done so Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd (1959) 59 SR (NSW) 33
Facts: The directors of the defendant company gave notice of an EGM to consider an altera to the company's articles by disenfranchising any member holding shares as a trustee unde publicly held unit trust ('custodian trustee'). Under the SR they couldn't vote unless and unt they had received the direction of a majority of unit holdings as to the manner of casting th vote. The plaintiffs sued to restrain this alteration.
McLelland J began b drawing the inference from the evidence that custodian trustees, in m cases, would not be able to obtain a majority direction and the cost to them would be subst
- essentially taking their right to vote or greatly reducing it in its effectiveness. In doing so t right to vote of other shareholders has been rendered more effective and valuable.
? His honour noted that the stated purpose of the articles was to ensure that the comp affairs were handled only by those with a financial stake in the company
? His honour expressed that the article did not carry out the purpose stated by the dire
- for it was confined in operation to only one class of shareholders within the stated purpose
? In the absence of evidence as to how this showed a reasonable connection for a "company's purpose" between their existence and the restriction of the operation of article to one class of shareholder - the article would affect discrimination without a reasonable explanation
? Further, the inference was open that the purpose of the article was not a "company purpose" and without evidence coming in from the side best able to produce it, his ho drew an inference that it was not
The act discriminated between the minority and the majority - giving the latter an advantag which the former were deprived. There are no grounds upon which reasonable men could d that the article in its terms were for the benefit of the company as a whole.
Redmond identifies a number of expositions of the test for a fraud on the minority noting Dixon J in Peters who said that "the ground upon which the invalidity is placed is fraud, but what amounts to fraud has not been made the subject of definition"(1) In Peter's Dixon J's test was that "if a resolution is regularly passed with a single aim of advancing the interests of a company considered as a corporate whole, it....could never be condemned as mala fides"
???(2) Another approach is invalidation on the basis of prejudicial effects on minority rights. Mere prejudice is not enough but the purpose animating the resolution "must not be simply the enrichment of the majority at the expense of the minority" (Rich J Peters) or "sacrifice the interests of the minority to those of the majority without any reasonable prospect of advantage to the company as a whole (Dixon J, Peters) (3) "The alteration may be so oppressive as to cast suspicion on the honesty of the person responsible for it, or so extravagant that no reasonable man could really consider it for the benefit of the company" (4) The 'individual hypothetical member' test in Greenhalgh In Clemens v Clemens Bros (where the shares of a company were split 55/45 but the latter diluted by issue, removing her right to veto SR and diminishing other rights) Foster J commented that "it would be unwise to produce a principle since the circumstances of each case are infinitely varies....The right to vote is subject ...to equitable considerations which may make it unjust...to exercise it in a particular way" o Here the resolution was framed to put the company in the hands of the former (aunt) and her directors and greatly reduce the niece's rights (5) Greenhalgh - the discriminatory effect test. In that case the making of an offer to an outsider was to effect no such discrimination (6) Dixon J in Peter's - he explained the "benefit of the company" in Allen v Gold Reefs as "a very general expression negativing purposes foreign to the company's operations, affairs and organizations" - in that case the resolution "did not imply any purpose outside the scope of the power" and in AU Fixed Trusts no connection between the 'a company purpose' and the restriction could be found
Gambotto v WCP Ltd (1995) 182 CLR 432
Facts: 99.7% of WCP's capital was held by subsidiaries of IEL. Their shareholding in WCP couldn't acquire the minority by the prevailing compulsory acquisitions provision. The ar were modified to include a provision that the majority could acquire shares which they weren't entitled to at $1.80. This was unanimously supported by all the minority except appellants who didn't attend the meeting. The shares were valued at $1.365. The appell conceded this valuation as fair but submitted it didn't take into account a $4m tax benefi they would have gotten if the minority shareholdings were eliminated. The appellants he almost 0.01% of the shares.
Mason, Brennan, Deane and Dawson J prefaced their judgment by noting the tension between the rights of the minority in having shares which are recognizable proprietary ri
and the power of the majority to alter a company's articles.
The test for determining whether an appropriation is valid
Their honours began by rejecting the test posited in Allen v Gold Reef and went on to establish a general principle:In such a casse not involving an actual or effective expropriation of shares or of valuable proprietary rights attaching to shares, an alteration of the articles by spe resolution regularly passed will be valid unless it is ultra vires, beyond any purpo contemplated by the articles or oppressive as that expression is understood in the relating to corporations
But different considerations apply in cases of expropriations which normally do not lie wi the sphere of power to amend the articles of association (Peters).?First, such a measure is valid if and only to the extent that the constitution provide The inclusion in a constitution at incorporation is one thing - but it is quite anothe thing if it is an amendment. Such a power could not be taken or exercised simply for the purpose of aggrandiz the majority. It can be taken only if o It is exercisable for a proper purpose o Its exercise will not operate oppressively in relation to minority shareholder
? In other words, an expropriation may be justified where it is reasonab apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affa resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment
Some examples include:
? Sidebottom v Kershaw - securing the company from significant detriment or harm where it will not be oppressive to the minority. In t case it was justified where the shareholder was one who was compet with the company
? It will be justified it is necessary in order to ensure that the company continues to comply with a regulatory regime governing the business carries on (e.g. all shares have to be Australian - if the minority are overseas shareholders)
? Their honours rejected the test that an expropriation, if fair, will advance the inter of the company or those of the majority given that it did not attach significant wei to the proprietary nature of a share
? Neither will an alteration permitting expropriation be valid simply because it was m for a proper purpose (it is necessary, not sufficient) o It must be fair, both procedurally and substantively o
?Procedurally it must be fair in the sense of disclosing all relevant information leading up to the alteration and require the shares be va by an independent expert The terms itself must be fair. Prima facie if offered at market value it and it will be unusual for a court to be satisfied that one above marke value wasn't. But t is important to emphasize that market value isn't only consideration - it also includes the assets of the company, divid the nature of the corporation and its likely future
? Recognizing that placing the onus on the shareholders would tilt the balance too f favour of commercial expediency and insufficiently recognizing the proprietary na of the share their honours said that the onus lies on those supporting expropriatio show that the power was validly exercised The validity of art 20A
The appellants didn't contend that the expropriation was not fair in the sense above and hence only contend that it was not made for a proper purpose.
? In this case there was no suggestion that the minority shareholders put the busine risk, or that expropriation was necessary for compliance with a regulatory regime
? The only suggested benefit was large taxation and administrative benefits that wo flow from expropriation. This, on its own, cannot constitute a proper purpose for expropriating a minority
? It is difficult to conceive of circumstances in which administrative benefits would n a consequence of the expropriation of minority shareholdings by a majority shareh
McHugh J dissented, positing a different test but holding that the $5m tax benefit was a proper purpose amounting to a sufficient justification.In response to this decision the CA was amended to introduce a power of compulsory acquisition under Pt 6A.2 Div 1. o A person who holds full beneficial ownership in 90% of securities of a class or has 90% of the voting power in the company may compulsorily acquire the remainder of the shares of the class - s 664A
? The power must be exercised within 6 months of satisfying either of the 90% control tests in s 664AA
? The acquisition can be challenged by court proceedings only for failure to pay fair value for the securities - the acquirer must establish this fairness (s 664F)
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