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Exegeses of corporate law by the High Court of Australia are comparatively rare, even in the 1990s. Accordingly, their arrival is greeted with considerable interest and scrutiny by practitioners and academics. Gambotto v WCP Ltd(1) does not profoundly reshape corporate law but it does represent a departure from previous authority, including a previous High Court decision. The thesis of this article is that prior to Gambotto v WCP Ltd the law entitled majority shareholders to exercise liberally the power of alteration of articles, in a manner consistent with what they considered to be for the benefit of the company and the appropriate means of resolving shareholder conflicts of interest. This entitlement was subject to an equitable principle of fraud on the power of alteration. This approach, which balanced corporate and shareholder interests in a way that encouraged value maximisation, has been largely destroyed by Gambotto v WCP Ltd, which is analytically incorrect, and from an economic perspective, quite perplexing.
This article is divided into three sections. The first section reviews the previous case-law and analyses the basic conflict in an economic context. The second section critiques the reasoning of the court in Gambotto v WCP Ltd. The third section critically reviews the decision from an economic "contractarian" frame of reference.
Control of majority shareholders voting for alteration of articles
Statutory framework for alteration of articles
Gambotto v WCP Ltd is the authoritative statement of the ability of a majority of shareholders to alter articles so as to permit them to expropriate shares owned by minority interests. Before considering the preceding caselaw, it is useful to consider the statutory and economic context of conflicts concerning alteration of articles.
Section 176 of the Corporations Law provides that, to be valid, an alteration to articles must be passed by a special resolution and must comply with further requirements specified in the Memorandum of Association or in the Corporations Law itself. However, s 180 provides that members are not bound by certain types of alterations made subsequent to them becoming members. These include alterations that, inter alia, increase the liability of members to contribute to share capital, or that restrict the right to transfer shares.
Economic context of contentious alterations
If the corporation is conceptualised as a "nexus...