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Balancing the relative rights and interests of minority and majority shareholders has long been a problem for lawyers and the law alike. The decision of the High Court of Australia in Gambotto v WCP Ltd (1995) 16 ACSR 1 is the latest in a line of Australian cases dealing with the balance of power between majority and minority shareholders in share expropriation situations.
Section 176 of the Corporations Law authorizes members of a company to alter or add to a company's articles of association. Gambotto concerned a resolution amending the artides of association of a company to permit a holder of more than 90% of the shares to acquire compulsorily the remaining shares at a stated price.
In arriving at its decision, the High Court considered what sort of rights a share confers on the investor. The court conduded that a share confers a proprietary right on the investor, and that it is only in exceptional circumstances that a minority shareholding can be expropriated in this manner.
Australian law developed along the early English lines of according the majority an unfettered ability to exercise the rights as shareholders and control the company, leaving the minority the option of selling if they disapproved of management directions. Over time, this principle has been softened by the development of a number of equitable and statutory protections, such as fraud on the minority, oppression, personal and derivative actions, unfair conduct, and winding up on the just and equitable ground.
But, difficulties arise where a majority shareholder wishes to exercise its voting rights so as to pass a resolution which may advantage the majority shareholder or disadvantage minority shareholders. The most widely quoted test to address this problem has to date been whether the power has been exercised bona fide and for the benefit of the company as a whole (see: Allen v Gold Reefs of West Africa
1900
1 Ch 656). In Gambatto, the High Court rejected the applicability of this test to an alteration of articles designed to effect or authorize the expropriation of shares.
The facts
WCP was a limited liability company in which 99.7% of the shares were held by wholly owned subsidiaries of Industrial Equity. The two appellants were minority shareholders. A general meeting...