Gambotto v WCP Ltd [1995] HCA 12; (1995) 182 CLR 432; (1995) 13 ACLC 342; (1995) 69 ALJR 266 (8 March 1995)

HIGH COURT OF AUSTRALIA

GAMBOTTO AND ANOTHER v W.C.P. LIMITED AND ANOTHER
F.C. 95/007
Number of pages - 19
Companies [1995] HCA 12; (1995) 182 CLR 432
(1995) 13 ACLC 342
(1995) 69 ALJR 266

HIGH COURT OF AUSTRALIA
MASON CJ(1), BRENNAN(1), DEANE(1), DAWSON(1) AND McHUGH(2) JJ

Companies - Articles of association - Amendment - Amendment authorizing expropriation of shares - Validity - Proper purpose - Fairness - Procedural fairness - Substantive fairness - Onus of proof - Corporations Law, ss. 176(1), 180(3).

HEARING

1994, April 21; 1995, March 8
8:3:1995

ORDER

Appeal allowed with costs.
Set aside the orders made by the New South Wales Court of Appeal and in lieu

DECISION

MASON CJ, BRENNAN, DEANE AND DAWSON JJ This appeal raises an
important question concerning the validity of an amendment to the
articles of association of a company, the purpose of which is to
enable the shareholder holding 90 per cent or more of the issued shares
to acquire compulsorily shares held by minority shareholders. The
appeal to this Court is brought by two minority shareholders from a
decision of the New South Wales Court of Appeal (Priestley, Meagher and
Cripps JJA) allowing an appeal from a declaration made by McLelland
J that the insertion of such an article in the articles of association
of the first respondent ("WCP") was invalid and ineffective and from
consequential orders, including an injunction.

2. 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 appellants themselves hold 15,898
shares. 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
(1 See s.414(5)(b) and s.701(2)(c)(ii)).

3. 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 documentation sent to the members included
the text of Art.20A, a proxy form and an expert's report valuing the
shares at $1.365 per share. The appellants concede that this was an
independent and fair valuation.

4. The appellants do not want to sell their shares. On 6 May 1992,
after WCP indicated that the majority shareholders were likely to vote
in favour of the amendment, the appellants commenced proceedings
seeking to prevent the meeting being held and the resolution being
passed. Those proceedings were resolved on an interim basis. WCP
gave an undertaking that, if the resolution were passed, it would not
acquire any shares under the new article until the conclusion of the
appellants' action.

5. The meeting on 11 May 1992 was attended by representatives of
the eight majority shareholders and by a minority shareholder who also
represented two other minority shareholders. The appellants did not
attend the meeting, either personally or by proxy. The chairperson
demanded a poll, presumably to put the matter beyond doubt, after the
resolution had been passed unanimously on a show of hands. The three
minority shareholders were the only ones to vote in the poll and they
all voted in favour of the resolution.

6. 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.

The decision at first instance

7. 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. According to his Honour, such an amendment amounted to
"unjust oppression of those minority shareholders who object".

8. 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 (2 (1900) 1 Ch 656 at
671). Importantly, his Honour also noted the inappropriateness of
this test in situations where a conflict had arisen between different
classes or descriptions of shareholders (3 (1992) 8 ACSR 141 at
143-144 citing Peters' American Delicacy Co. Ltd. v. Heath [1939] HCA 2; (1939) 61
CLR 457 at 512 per Dixon J and Crumpton v. Morrine Hall Pty. Ltd.
(1965) 82 WN(Pt 1)(NSW) 456 at 460-461 per Jacobs J).

The decision on appeal

9. In the Court of Appeal, Meagher JA (with whom Cripps JA
agreed) observed that the articles of association of a company are
"infinitely capable of amendment" subject to the Corporations Law and
equitable limitations. His Honour agreed with McLelland J that the
"bona fide for the benefit of the company as a whole" test was inapt
in the present case. However, Meagher JA expressly rejected
McLelland J's suggestion that any amendment to articles of
association permitting expropriation of minority shares under any
circumstances, whether for value or not, will always constitute an
oppression on the minority. Nor could it be said that the
expropriation provisions of the Corporations Law (4 ss.701-702
(takeover schemes), s.414 (contracts and arrangements)) constituted a
code governing the expropriation of shares. In the present case, the
evidence demonstrated that there would be considerable tax advantages
and some administrative benefits for WCP if it were to become a
wholly-owned subsidiary of IEL. This fact, coupled with the fact that
the level of compensation for expropriation was fair, led Meagher JA
to conclude that the amendment was not oppressive and should have been
allowed to stand.

10. Meagher JA also rejected the appellants' argument that Art.20A
would constitute an impermissible restriction on the ability to
transfer the shares affected, stating that the minority shareholders
could transfer their shares freely until they received an
expropriation notice, and that, even then, the shares remained
transferable without restriction.

11. Priestley JA concluded that, in the circumstances of the
present case, the proposed amendment was not oppressive or unjust.

Expropriation of minority shareholdings

12. The fundamental issue in this case is whether, and if so in what
circumstances, the taking of a power by majority shareholders by
amendment to the articles to acquire compulsorily the shares of the
minority shareholders will be held invalid on the basis that it is
oppressive. The logical starting point for a consideration of this
issue is Allen v. Gold Reefs of West Africa Limited (5 (1900) 1 Ch at
671) where Lindley MR stated that the power of the majority to alter
the articles by special resolution:

"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".

The validity of the resolution altering the articles in that case was
upheld by Lindley MR and Romer LJ, who concurred in Lindley MR's
reasons. Vaughan Williams LJ dissented on the ground that the
resolution was not passed in good faith, "being really passed merely
to defeat the existing rights of an individual shareholder" (6 ibid.
at 677).

13. Strictly speaking, Allen v. Gold Reefs of West Africa Limited
did not involve an expropriation of shares. Rather, it concerned an
alteration that gave a company a lien on fully paid shares to cover
debts owed to it by the only shareholder who held such shares. Its
importance for present purposes lies in the fact that the test
outlined above has been used in subsequent cases in England to
determine the validity of an amendment that purports to allow the
majority to expropriate minority shareholdings. Brown v. British
Abrasive Wheel Co. (7 (1919) 1 Ch 290) is an example of such a case.
There, the proposed alteration provided that a member would be "bound
upon the request in writing of the holders or holder of nine-tenths of
the issued shares to sell and transfer his shares ... to the nominee of
such holders or holder". Astbury J, after noting that there was no
allegation of mala fides on the majority's part, stated (8 ibid. at
295-296) :

"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.

The defendants contend that it is for the benefit of the company

as a whole because in default of further capital the company might
have to go into liquidation ... (The proposed alteration) is merely
for the benefit of the majority. If passed, the majority may acquire
all the shares and provide further capital. That would be for the
benefit of the company as then constituted. But the proposed
alteration is not for the present benefit of this company."

Astbury J seems to have regarded the statement of principle by
Lindley MR in Allen v. Gold Reefs of West Africa Limited as requiring
both good faith and a tendency to benefit the company as a whole.

14. In Sidebottom v. Kershaw, Leese and Co. (9 (1920) 1 Ch 154), th e
English Court of Appeal upheld a proposed amendment that would empower
the majority shareholders to expropriate the shares, at full value, of
any shareholder who carried on business in direct competition with the
company or was a director of another company carrying on such a
business. Lord Sterndale MR (10 ibid. at 163) and Warrington LJ
(11 ibid. at 172) rejected the view that Lord Lindley's statement of
principle involved two distinct elements.

15. However, in Dafen Tinplate Co. v. Llanelly Steel Co. (12 (1920) 2
Ch 124), Peterson J took a different view of the principle. There
one of the proposed alterations empowered the defendant company in
general meeting to determine that the shares of any member "be offered
for sale by the Board to such person or persons ... as the Board shall
think fit". Peterson J held that the amendment was invalid, stating
(13 ibid. at 141-142) :

"It may be for the benefit of the majority of the shareholders to
acquire the shares of the minority, but how can it be said to be for
the benefit of the company that any shareholder, against whom no
charge of acting to the detriment of the company can be urged, and who
is in every respect a desirable member of the company, and for whose
expropriation there is no reason except the will of the majority,
should be forced to transfer his shares to the majority or to anyone
else? ... The power of compulsory acquisition by the majority of
shares which the owner does not desire to sell is not lightly to be
assumed whenever it pleases the majority to do so." (emphasis added)

16. Subsequently, in Shuttleworth v. Cox Brothers and Co.
(Maidenhead) (14 (1927) 2 KB 9), the English Court of Appeal rejected
Peterson J's view of the principle, holding that it denoted one
condition only, a condition expressed by Scrutton LJ in these words,
namely "that the shareholders must act honestly having regard to and
endeavouring to act for the benefit of the company" (15 ibid. at 23.
See also Greenhalgh v. Arderne Cinemas Ltd. (1951) Ch 286 at 291).

17. The last English case of interest, In re Bugle Press Ltd. (16
(1961) Ch 270), involved an attempted expropriation of shares in
reliance on the compulsory acquisition provisions contained in s.209 of
the English Companies Act 1948. Lord Evershed MR noted that an
expropriation without consent would appear to conflict with the
fundamental legal principle that prima facie, if a person has a legal
right which is an absolute right, then that person can deal with the
right as he or she pleases (17 ibid. at 285). That consideration led
his Lordship to conclude that the relevant legislative provisions could
not be used in such a way so as to expropriate the shares of the
minority, unless there was a good reason for the expropriation (18
ibid. at 287) :

"(F)or example, that the minority shareholder was in some way acting
in a manner destructive or highly damaging to the interests of the
company from some motives entirely of his own".

18. Harman LJ stated (19 ibid. at 287-288) that it was a
"fundamental rule of company law" that majority shareholders could not
expropriate a minority, unless the articles contained an expropriation
provision from the outset (20 cf. Albert Phillips and Albert Phillips
Ltd. v. Manufacturers' Securities Ltd. (1917) 116 LT 290).

Peters' American Delicacy Co. Ltd. v. Heath (21 [1939] HCA 2; (1939) 61 CLR 457.
See also Crumpton v. Morrine Hall Pty. Ltd.)

19. In that case, this Court held that an alteration of the articles
which discriminated against holders of partly-paid shares in favour of
the majority shareholders did not constitute a fraud on the minority.
In the course of his judgment, Latham CJ (with whom McTiernan J
agreed) expressed the view that, although the power to alter articles
must be exercised bona fide, the fact that an alteration prejudices or
diminishes some (or all) of the rights of the shareholders is not in
itself a ground for attacking the validity of an alteration (22 ibid.
at 480). On the contrary, his Honour considered that such an
alteration must be valid unless the party complaining can establish
that the resolution was passed fraudulently or oppressively or was "so
extravagant that no reasonable person could believe that it was for the
benefit of the company" (23 ibid. at 482). His Honour noted that the
criterion of the "benefit of the company as a corporation" could not be
invoked as the sole solution to the problem where the amendment in
question affected the relative rights of different classes of
shareholders (24 ibid. at 481).

20. Dixon J also considered that the amendment was valid, although
his Honour arrived at that conclusion by a different route. Dixon J
declined to leave any analysis of this question to general notions of
fairness and propriety, preferring instead to focus on the purpose of
the proposed amendment (25 ibid. at 504, 507). The steps in his
Honour's reasoning may be summarized in this way. A share in a company
is property consisting of proprietary rights as defined by the articles
of association. The power of alteration of the articles might be used
by the majority shareholders for their own aggrandizement at the
expense of the minority shareholders. It has seemed incredible that
this could be so. But reliance on the doctrine that powers shall be
exercised bona fide and for no extraneous purpose presents
difficulties. The power of alteration is not a fiduciary power and the
right to vote is an incident of property which may be exercised for the
shareholder's personal advantage (26 ibid. at 504). Prima facie,
rights dependent upon the articles are not enduring and indefeasible
but are liable to modification or destruction by special resolution (27
ibid. at 507). So, "if a resolution is regularly passed with the
single aim of advancing the interests of a company considered as a
corporate whole, it must fall within the scope of the statutory power
to alter the articles and could never be condemned as mala fides" (28
ibid. at 507-508).

21. His Honour went on to say (29 ibid. at 511-512) :

"The chief reason for denying an unlimited effect to widely

expressed powers such as that of altering a company's articles is the
fear or knowledge that an apparently regular exercise of the power may
in truth be but a means of securing some personal or particular gain,
whether pecuniary or otherwise, which does not fairly arise out of the
subjects dealt with by the power and is outside and even inconsistent
with the contemplated objects of the power. It is to exclude the
purpose of securing such ulterior special and particular advantages
that Lord Lindley used the phrase 'bona fide for the benefit of the
company as a whole'."

22. His Honour considered that "benefit as a whole" is a very
general expression negativing purposes foreign to the company's
affairs and that the "bona fide for the benefit of the company as a
whole" test was "inappropriate, if not meaningless", where the
amendment proposed to adjust the rights of conflicting interests (30
ibid. at 512). Although his Honour did not expressly state which test
or tests might be applied in such circumstances, he upheld the
resolution in question on the basis that it "involved no oppression, no
appropriation of an unjust or reprehensible nature and did not imply
any purpose outside the scope of the power" (31 ibid. at 513).

23. In conformity with the views expressed in Peters, the use of the
expression "for the benefit of the company as a whole" is no longer
influential in the context of an alteration of the articles designed
to effect or authorize the expropriation of a minority's shares. But
the expression is still in vogue in the context of the exercise by
directors of their powers, particularly the power to issue or allot
shares (32 Richard Brady Franks Ltd. v. Price [1937] HCA 42; (1937) 58 CLR 112 at
135; Mills v. Mills [1938] HCA 4; (1938) 60 CLR 150 at 187-188; Ngurli Ltd. v. McCann
[1953] HCA 39; (1953) 90 CLR 425 at 440; Harlowe's Nominees Pty. Ltd. v. Woodside
(Lakes Entrance) Oil Co. N.L [1968] HCA 37; (1968) 121 CLR 483 at 493; Whitehouse v.
Carlton Hotel Pty. Ltd. [1987] HCA 11; (1987) 162 CLR 285).

Striking a balance

24. The foregoing analysis of the authorities reveals that the
courts have struggled to strike a balance between the interests of the
majority and the minority. On the one hand, the courts have
recognized that the proprietary rights attaching to shares are subject
to modification, even destruction, by a special resolution altering
the articles and that the power to vote is exercisable by a shareholder
to his or 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. The
problem of stating a workable criterion arises, as Dixon J said in
Peters (33 (1939) 61 CLR at 507) :

"in attempting to discover and fasten upon some element the presence
of which will always vitiate a resolution for the alteration of
articles of association".

The test for determining whether an expropriation is valid

25. In the context of a special resolution altering the articles and
giving rise to a conflict of interests and advantages, whether or not
it involves an expropriation of shares, we would reject as
inappropriate the "bona fide for the benefit of the company as a
whole" test of Lindley MR in Allen v. Gold Reefs of West Africa
Limited. The application of the test in such a context has been
criticized on grounds which, in our view, are unanswerable. It seems
to us that, in such a case not involving an actual or effective
expropriation of shares or of valuable proprietary rights attaching to
shares, an alteration of the articles by special resolution regularly
passed will be valid unless it is ultra vires, beyond any purpose
contemplated by the articles or oppressive as that expression is
understood in the law relating to corporations. Somewhat different
considerations apply, however, in a case such as the present where what
is involved is an alteration of the articles to allow an expropriation
by the majority of the shares, or of valuable proprietary rights
attaching to the shares, of a minority. In such a case, the immediate
purpose of the resolution is to confer upon the majority shareholder or
shareholders power to acquire compulsorily the property of the minority
shareholder or shareholders. Of itself, the conferral of such a power
does not lie within the "contemplated objects of the power" to amend
the articles (34 cf. ibid. at 511).

26. The exercise of a power conferred by a company's constitution
enabling the majority shareholders to expropriate the minority's
shareholding for the purpose of aggrandizing the majority is valid if
and only to the extent that the relevant provisions of the company's
constitution so provide. The inclusion of such a power in a company's
constitution at its incorporation is one thing. But it is another
thing when a company's constitution is sought to be amended by an
alteration of articles of association so as to confer upon the
majority power to expropriate the shares of a minority. Such a power
could not be taken or exercised simply for the purpose of aggrandizing
the majority (35 In re Bugle Press Ltd. (1961) Ch at 286-287, 287-288).
In our view, such a power can be taken only if (i) it is exercisable
for a proper purpose and (ii) its exercise will not operate
oppressively in relation to minority shareholders. In other words, an
expropriation may be justified where it is reasonably apprehended that
the continued shareholding of the minority is detrimental to the
company, its undertaking or the conduct of its affairs - resulting in
detriment to the interests of the existing shareholders generally - and
expropriation is a reasonable means of eliminating or mitigating that
detriment.

27. Accordingly, if it appears that the substantial purpose of the
alteration is to secure the company from significant detriment or
harm, the alteration would be valid if it is not oppressive to the
minority shareholders. So, expropriation would be justified in the
case of a shareholder who is competing with the company, as was the
case in Sidebottom v. Kershaw, Leese and Co. (36 (1920) 1 Ch 154), so
long as the terms of expropriation are not oppressive. Again,
expropriation of a minority shareholder could be justified if it were
necessary in order to ensure that the company could continue to comply
with a regulatory regime governing the principal business which it
carries on. To take a hypothetical example: if the conduct of a TV
station were the undertaking of a company and a renewal of a television
licence under a statute depended upon the licensee's entire share
capital being held by Australian residents, the expropriation of
foreign shareholders who are unwilling to sell their shares to
Australian residents might be justified assuming it is fair in all the
circumstances. But that is not to say that the majority can
expropriate the minority merely in order to secure for themselves the
benefit of a corporate structure that can derive some new commercial
advantage by virtue of the expropriation.

28. Notwithstanding that a shareholder's membership of a company is
subject to alterations of the articles which may affect the rights
attaching to the shareholder's shares and the value of those shares,
we do not consider that, in the case of an alteration to the articles
authorizing the expropriation of shares, it is a sufficient
justification of an expropriation that the expropriation, being fair,
will advance the interests of the company as a legal and commercial
entity or those of the majority, albeit the great majority, of
corporators. This approach does not attach sufficient weight to the
proprietary nature of a share and, to the extent that English
authority might appear to support such an approach, we do not agree
with it. It is only right that exceptional circumstances should be
required to justify an amendment to the articles authorizing the
compulsory expropriation by the majority of the minority's interests in
a company. To allow expropriation where it would advance the interests
of the company as a legal and commercial entity or those of the general
body of corporators would, in our view, be tantamount to permitting
expropriation by the majority for the purpose of some personal gain
and thus be made for an improper purpose (37 Brown v. British Abrasive
Wheel Co. (1919) 1 Ch at 295-296). It would open the way to
circumventing the protection which the Corporations Law gives to
minorities who resist compromises, amalgamations and reconstructions,
schemes of arrangement and takeover offers.

29. As noted in the preceding paragraphs, an alteration to the
company's articles permitting the expropriation of shares will not be
valid simply because it was made for a proper purpose; it must also be
fair in the circumstances. Fairness in this context has both
procedural and substantive elements. The first element, that the
process used to expropriate must be fair, requires the majority
shareholders to disclose all relevant information leading up to the
alteration (38 Re John Labatt Ltd. (1959) 20 DLR (2d) 159 at 163.)
and it presumably requires the shares to be valued by an independent
expert. Whether it also requires the majority shareholders to refrain
from voting on the proposed amendment is a question that is best left
open at this stage.

30. The second element, that the terms of the expropriation itself
must be fair, is largely concerned with the price offered for the
shares. Thus, an expropriation at less than market value is prima
facie unfair (39 The Nova Scotia Trust Company v. Rudderham (1969) 1
NSR (2d) 379 at 398; but cf. Phillips v. Manufacturers' Securities Ltd.
(1917) 116 LT 290), and it would be unusual for a court to be
satisfied that a price substantially above market value was not a fair
value (40 Re Sheldon; Re Whitcoulls Group Limited (1987) 3 NZCLC
100,058 at 100,060). That said, it is important to emphasize that a
shareholder's interest cannot be valued solely by the current market
value of the shares (41 Weinberger v. UOP Inc. (1983) 457 A 2d 701).
Whether the price offered is fair depends on a variety of factors,
including assets, market value, dividends, and the nature of the
corporation and its likely future (42 ibid. at 711).

Onus

31. The respondents' submissions, which are based heavily on Peters,
are premised on the proposition that an alteration allowing an
expropriation is prima facie valid. It is conceded that the suggested
presumption of validity will be rebutted if the minority shareholder
proves either that the alteration was made for an improper purpose or
that it is oppressive to that particular shareholder. Nonetheless,
the respondents' approach, which forces the minority shareholder to
shoulder a heavy onus of proof, tilts the balance too far in favour of
commercial expediency and fails to attach sufficient weight to the
proprietary nature of a share. A share is liable to modification or
destruction in appropriate circumstances (43 Peters (1939) 61 CLR at
507 per Dixon J), but is more than a "capitalized dividend stream" (44
But cf. Sanford v. Sanford Courier Service Pty. Ltd. (1986) 10 ACLR
549 at 563; Re Shoppers City Ltd. and M. Loeb Ltd. (1969) 1 OR 449 at
454) : it is a form of investment that confers proprietary rights on
the investor. Accordingly, in the case of expropriation, we consider
that the onus lies on those supporting expropriation to show that the
power is validly exercised.

32. It is for the majority to prove that the alteration is valid
because it was made for a proper purpose and is fair in all the
circumstances. This approach ensures that the application of the
relevant principle does not unduly favour the majority and it largely
alleviates the sting of practical difficulties, such as poor access to
information, that would otherwise confront minority shareholders.

The validity of Art.20A

33. As the appellants did not contend that the expropriation was not
fair in the sense explained above, the validity of Art.20A hinges on
whether the respondents have proved that the amendment was not made
for a proper purpose. The immediate purpose of the amendment was to
allow the expropriation by the majority shareholder of the shares held
by the minority, including the shares held by the appellants. There is
no suggestion that the appellants' continued presence as members puts
WCP's business activities at risk or that the appellants have in some
way acted to WCP's detriment. Nor is there any suggestion that WCP
sought 100 per cent ownership in order to comply with a regulatory
regime. All that is suggested is that taxation advantages and
administrative benefits would flow to WCP if minority shareholdings
were expropriated and WCP were to become a wholly-owned subsidiary of
IEL. In our view, however, that cannot by itself constitute a proper
purpose for a resolution altering the articles to allow for the
expropriation of a minority shareholder's shares. In that regard, it
is not irrelevant to note that it is difficult to conceive of
circumstances in which financial and administrative benefits would not
be a consequence of the expropriation of minority shareholdings by a
majority shareholder.

34. Accordingly, we would hold Art.20A invalid and ineffective on
the basis that it was not made for a proper purpose.

Transferability of shares

35. Having reached this conclusion, it is strictly unnecessary for
us to deal with the appellants' alternative argument based on s.180(3)
of the Corporations Law. However, we shall indicate our conclusions
on this issue.

36. Section 180(3) relevantly provides as follows:

"A member of a company, unless either before or after the

alteration is made the member agrees in writing to be bound by it, is
not bound by an alteration of the constitution made after the date on
which the member became a member so far as the alteration:

...

(c) increases, or imposes, restrictions on the right to transfer the
shares held by the member at the date of the alteration".

The respondents submit that Art.20A does not impose any restriction on
the right of the appellants to transfer their shares in WCP because
those shares would remain transferable without restriction even after
an expropriation notice had been issued. There is considerable force
in this submission. To give s.180(3)(c) a wider interpretation could
lead to the result that any amendment empowering the expropriation of
shares would be invalid, notwithstanding that the amendment
was made for a proper purpose and is fair in all the circumstances.
Such a result would tilt the balance too far in favour of the
minority. Accordingly, the appellants' argument on this point must
fail.

37. In the result, we would allow the appeal with costs, set aside
the orders made by the Court of Appeal and in lieu thereof order that
the appeal to that Court be dismissed with costs.

McHUGH J The question in this appeal is whether a resolution adding
a new article (Art.20A) to the articles of association of WCP Limited
("the company") was invalid because its passing was oppressive of
minority shareholders. In the Equity Division of the Supreme Court of
New South Wales, McLelland J held that the "purported insertion" of
Art.20A was "invalid and ineffective" on the ground that it was an
unjust oppression of the minority shareholders who objected to it.
The Court of Appeal unanimously reversed his Honour's order. This
Court granted special leave to appeal against the orders of the Court
of Appeal.

2. Property development has been the principal business of the
company, which has an issued capital of 16,980,031 ordinary shares of
20 cents each. As at 16 April 1992, Acmex Investments (No.4) Pty.
Ltd. and its associates (which are wholly owned subsidiaries of
Industrial Equity Ltd.) owned 99.69 per cent of these shares.
Seventy-one persons owned the remaining 50,590 shares of which the
appellants held 15,898. The first appellant had held his shares since
about 1970; the second appellant had held her shares since about 1987.

3. On 16 April 1992, the secretary of the company gave notice to
its members that a general meeting of the company would be held on 11
May 1992 for the purpose of considering and, if thought fit, passing a
special resolution to insert a new Art.20A in the articles of
association. The article empowered any member who was entitled to 90
per cent or more of the issued shares of the company to acquire all
the remaining shares in the company at the price of $1.80 per share.
It authorised the majority member prior to 30 June 1992 to lodge a
notice in writing with the company of an intention to acquire the
minority shares. The notice was to be accompanied by a stamped
transfer, executed under the common seal of the majority member on
behalf of each holder of the remaining shares as transferor and on its
own behalf as transferee, together with payment for the shares. Upon
the receipt of the notice, the article required the company to register
the majority member as the holder of the remaining shares and to cancel
the share certificates of the minority shareholders. Within 14 days,
the company was also required to inform the minority shareholders of
the transfer and their entitlements and obligations arising out of the
transfer.

4. The notice of the meeting was accompanied by a valuation of the
shares of the company prepared by a firm of accountants. The
valuation showed that, as at 8 April 1992, the principal assets of the
company and its subsidiaries were seven tracts of land. The book value
of the land was $15,035,000, but its market value was estimated to be
$25,977,000. The report stated that the company had been selling off
its land in recent years and that "there is no intention of continuing
the property development business" once the sales had been completed.
The report concluded that, of the various methods of share valuation
that might be used, "the net asset value basis appears to (sic) the
most appropriate for the purpose of this valuation". The report
declared that on a net asset value basis the fair value of the shares
was $1.365 per share. It did not include "the future income tax
benefit as a separate asset". At no stage of these proceedings has it
been suggested that $1.365 is not the fair value of the shares.

5. On 6 May 1992, the appellants commenced proceedings in the
Equity Division to restrain the company from resolving to alter the
articles to add Art.20A. Upon the company undertaking not to transfer
the minority shares, the meeting was allowed to take place on 11 May.
The appellants did not attend. The resolution for the insertion of
Art.20A was declared carried after three minority shareholders holding
7,900 shares voted in favour of it. The majority shareholder did not
vote on the resolution.

6. Subsequently, the proceedings came before McLelland J. A
director of the company gave evidence to the effect that the principal
purpose of the alteration and the expropriation of minority
shareholdings was to enable the company to take advantage of
"unutilised tax losses" within the Industrial Equity Ltd. ("IEL")
group of companies which would be available to the company if it and
its subsidiaries were wholly owned subsidiaries of IEL. The witness
asserted:

"(I)f all the land holdings of the (company and its subsidiaries) were
sold at a price equal to their current valuation, (the company) would
become liable to income tax of approximately $4.235 million. The IEL
Group currently has available tax losses in excess of this amount
which could be transferred to (the company) or its wholly owned
subsidiaries to eliminate such a tax liability and increase the
profitability of (the company)."

The witness also asserted that the company would save approximately
$3,000 per year in accountancy fees "by not having to prepare group
accounts" and approximately $1,300 per year as the result of
terminating services in relation to maintaining the share register of
the company.

The alteration of articles

7. Section 176 of the Corporations Law provides that "(s)ubject to
this Law, a company may by special resolution alter or add to its
articles". Majority shareholders owe no fiduciary duty to minority
shareholders when they exercise the power conferred by s.176 to alter
the articles of association of a company. Shareholders are not
trustees for the company or for one another (45 Peters' American
Delicacy Co. Ltd. v. Heath [1939] HCA 2; (1939) 61 CLR 457 at 482, 504; Ngurli Ltd.
v. McCann [1953] HCA 39; (1953) 90 CLR 425 at 439). Nevertheless, the courts have
sought to protect the interests of the minority by the use of equitable
principles. In Allen v. Gold Reefs of West Africa Limited (46 (1900)
1 Ch 656 at 671), Lindley MR, after referring to the then English
equivalent of s.176 (1), said:

"The power thus conferred on companies to alter the regulations

contained in their articles is limited only by the provisions
contained in the statute and the conditions contained in the company's
memorandum of association. Wide, however, as the language of s.50 is,
the power conferred by it 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."

In this respect, the "general principles" by which the Court of
Chancery restrained the fraudulent exercise of a power vested in a
person to deal with property which that person did not own have played
a leading role. In the Court of Chancery, a finding that there had
been a "fraud on the power" did not necessarily denote conduct that
was dishonest. It simply meant "that the power has been exercised for
a purpose, or with an intention, beyond the scope of or not justified
by the instrument creating the power" (47 Vatcher v. Paull (1915) AC
372 at 378). In Peters' American Delicacy Co. Ltd. v. Heath (48
(1939) 61 CLR at 480), Latham CJ said that an alteration of articles
"must be exercised bona fide for the benefit of the company as a
whole". In the same case, Dixon J said (49 ibid. at 512) that the
phrase "the benefit of the company as a whole" negatived "purposes
foreign to the company's operations, affairs and organizations."

8. The statement that an alteration of articles must be for "the
benefit of the company as a whole" accords with a long line of
authority (50 Allen (1900) 1 Ch at 671; Sidebottom v. Kershaw, Leese and
Co. (1920) 1 Ch 154 at 167; Shuttleworth v. Cox Brothers and Co.
(Maidenhead) (1927) 2 KB 9 at 23). It is a criterion that is also
widely used for determining whether powers conferred on directors have
been validly exercised (51 See, for example, Ngurli (1953) 90 CLR at
440; Whitehouse v. Carlton Hotel Pty. Ltd. [1987] HCA 11; (1987) 162 CLR 285 at
300-301). But it is not always a satisfactory test for determining
whether a proposed alteration of the articles of a company is valid. A
power to alter articles is one that can be used to alter the rights of
shareholders inter se, and one which, in many circumstances, must give
rise to conflicts of interests. In Peters (52 (1939) 61 CLR at 481,
512), Latham CJ and Dixon J both pointed out that the test of
"benefit of the company as a whole" cannot be adopted as the criterion
in every case. Indeed, Dixon J said (53 ibid. at 512) :

"If the challenged alteration relates to an article which does or may
affect an individual, as, for instance, a director appointed for life
or a shareholder whom it is desired to expropriate, or to an article
affecting the mutual rights and liabilities inter se of shareholders
or different classes or descriptions of shareholders, the very subject
matter involves a conflict of interests and advantages. To say that
the shareholders forming the majority must consider the advantage of
the company as a whole in relation to such a question seems
inappropriate, if not meaningless, and at all events starts an
impossible inquiry."

9. Dixon J went on to say that "unless the subject matter is held
outside the power, the purpose of the resolution, as distinguished
from the motives of the individuals, often must be to resolve the
conflict in favour of one and against the other interest" (54 ibid. at
513). It is clear, however, that his Honour did not intend to hold
that an alteration of articles of association was valid as long as the
subject matter and the purpose of the alteration were within the scope
of the power. His judgment makes it plain that, although a shareholder
may vote to alter the articles so as to serve his or her own interests,
the exercise of the power must not involve any oppression of the
minority shareholders, or any unjust or reprehensible appropriation of
their rights, or be for a purpose outside the scope of the power of
alteration (55 ibid). Thus, neither the subject matter nor the
purpose of the alteration exhausts the tests for determining whether an
alteration is a "fraud on the power". Indeed, when the sole purpose of
the alteration is to enable the majority shareholders to acquire the
shares of minority shareholders, those tests will seldom prove
helpful.

10. In my opinion, a company may alter its articles of association
for the purpose of enabling a shareholder to acquire the shares of
existing shareholders only when the acquisition is necessary to
protect or promote the interests of the company and when the alteration
will not be oppressive to those shareholders. In the absence of
statutory authorisation, a general contractual power to alter the
articles of a company would not authorise an amendment empowering the
compulsory acquisition of a member's shares. "(C)lear judicial
authority, clear legislation or clear principle and necessity would
seem to be required" (56 Hole v. Garnsey (1930) AC 472 at 491) before
a general power to alter the articles of a company could be construed
as authorising such a far reaching alteration. The power to alter the
articles of association of a company, however, does not depend upon
contract. It is, and long has been, authorised by statute. But, wide
though that power is, its application is, as I have indicated, subject
to restrictions. One of them is that it does not extend to an
alteration whose purpose is to expropriate the shares of an existing
shareholder unless the expropriation is necessary for the protection or
promotion of the company's interests.

11. In the absence of an unambiguous expression of legislative
intention, a general statutory power such as s.176 is not to be
construed as authorising the expropriation of private rights. This
presumptive rule is strengthened when the recipient of the power is a
private citizen or group of private citizens. Legislative authority
for one citizen or group of citizens to acquire the private property
of other citizens compulsorily is a rare and exceptional occurrence (57
cf. Elkington v. Shell Australia Ltd. (1993) 32 NSWLR 11 at 14 per
Kirby A-CJ). A legislative grant of power to private citizens should
not be taken to authorise the compulsory acquisition of the property
rights of other persons unless the intention to do so appears from
express words or by necessary implication (58 cf. Clunies-Ross v. The
Commonwealth [1984] HCA 65; (1984) 155 CLR 193 at 201). Section 176 of the
Corporations Law lacks any express or necessarily implied indication
that the power to alter the articles of a company can be used generally
for the purpose of enabling one shareholder to acquire the shares of
another. Moreover, the presence of ss.701-703 in the Act tells
strongly against the intention to grant such a power in s.176. The
section should be construed, therefore, as authorising the
expropriation of shares only when it is necessary to do so in the
interests of the company.

12. Unsurprisingly, the courts have refused to uphold the validity
of resolutions purporting to alter the articles to allow the
expropriation of a member's shares in the absence of circumstances
affecting the interests of the company. Thus, in Brown v. British
Abrasive Wheel Co. (59 (1919) 1 Ch 290), Astbury J, after referring
to the English equivalent of s.176(1) said that its "language, though
very wide, must obviously be read with some qualification" (60 ibid.
at 295). His Lordship restrained a company and its directors from
holding a meeting to pass a resolution altering the articles so that
the two majority shareholders, who held 98 per cent of the share
capital, could acquire the shares of the remaining shareholders.
Astbury J held that it was not for the benefit of the company as then
constituted to add the article to the articles of association even
though the company was in need of capital and the majority shareholders
were prepared to provide it only if they could acquire all the shares
in the company. His Lordship said (61 ibid. at 296) :

"The proposed alteration is not directly concerned with the provision
of further capital, nor does it ensure that it will be provided. It
is merely for the benefit of the majority."

Similarly, in Dafen Tinplate Co. v. Llanelly Steel Co. (62 (1920) 2 Ch
124), Peterson J. held void a resolution purporting to alter a
company's articles so that the shareholders in general meeting could
determine that a member's shares should be offered for sale by the
directors to such person as they thought fit at the fair value as
determined by the directors. His Lordship said (63 ibid. at 141) :

"It may be for the benefit of the majority of the shareholders to
acquire the shares of the minority, but how can it be said to be for
the benefit of the company that any shareholder, against whom no
charge of acting to the detriment of the company can be urged, and who
is in every respect a desirable member of the company, and for whose
expropriation there is no reason except the will of the majority,
should be forced to transfer his shares to the majority or to anyone
else?"

13. To hold that the power conferred by s.176 cannot be used
generally to acquire a member's shares does not mean that the power
conferred by that section can never authorise the compulsory
acquisition of a member's shares. Literally, the power to alter the
articles of association extends to any alteration. Although, for the
reasons that I have given, the generality of the power does not
authorise an alteration providing for the expropriation of a member's
shares by majority vote, no reason exists for holding that the power
does not extend to those alterations that are necessary to protect or
promote the company's interests. Thus, alteration for the purpose of
expropriating a member's shares may be permissible if it is necessary
to protect the company against direct competition from a member or
from a company of which the member is a director (64 Sidebottom (1920)
1 Ch 154). Similarly, alteration for the purpose of expropriation may
be permissible if the character or status of a member will cause harm
to the company or prevent it from pursuing a legitimate commercial
interest.

14. No distinction should be drawn between an expropriation that
will enable a company to pursue a beneficial course of action that
would otherwise be denied to it and an expropriation that avoids a
detriment to the existing interests of the company. I see no
difference between an expropriation that will enable a company to
renew an existing licence to do something and an expropriation that
will allow the company to acquire that kind of licence. Nor in a case
like the present, can I see a valid distinction in principle between
an expropriation that would allow a company to escape the incidence of
a particular tax and an expropriation that would allow the company to
reduce its potential tax liability. In both cases, the proper
conclusion is that the expropriation is commercially necessary to
protect the assets of the company. That does not mean that an
expropriation will be valid whenever the expropriation will
financially benefit the company. Independently of any question of
oppression, the alteration of articles for the purpose of expropriating
a member's shares will be valid only if it will enable the company to
pursue some significant goal, or to protect itself from some action,
that is external to the company. Administrative convenience or cost,
for example, could never by itself justify an alteration for the
purpose of expropriation.

Oppression

15. Moreover, the fact that an expropriation is necessary for the
protection or promotion of the company does not prevent it from being
oppressive to the shareholders whose shares will be acquired. When
the articles of association contain no power to expropriate the shares
of a member of the company, any resolution granting such a power is
prima facie oppressive to those shareholders who do not wish to sell
their shares. In the absence of an article authorising the
expropriation of a member's shares, members have a legitimate
expectation that, unless some exceptional circumstance should arise,
they will be able to retain their shares until they wish to sell or
until the company is wound up. Once the articles are altered to give
the power of expropriation to the directors or the majority
shareholders, a shareholder whose shares are liable to be expropriated
is placed in the position where he or she can be forced to accept cash
or debt in exchange for the shares while the majority retain their
shareholding (65 Spender, "Compulsory Acquisition of Minority
Shareholdings", (1993) 11 Company and Securities Law Journal 83). Any
benefits that will flow to the company from the acquisition will flow
only to the remaining shareholders (66 ibid. at 91). Furthermore,
those given the power to acquire are usually not bound to exercise
their power. Often, the expropriators can time the acquisition to suit
their own convenience and purposes. In periods such as that which
followed the stock market "crash" of October 1987, the price of shares
may be artificially depressed giving the expropriators the chance to
acquire the shares at a price below their "fundamental value" (67 cf.
Digby, "Eliminating Minority Shareholdings", (1992) 10 Company and
Securities Law Journal 105 at 124). Usually, the expropriator is a
person who controls the company and who often has access to information
that is denied to other shareholders and to the stock market.

16. Under these circumstances, to require shareholders to sell their
shares against their will is an infringement of their rights as
autonomous beings to make their own decisions and to carry out their
own actions. In a society and under a legal system that is predicated
on its members being free and equal agents any interference with the
autonomy of any individual needs to be justified if it is not to be
regarded as oppressive. Because those proposing an alteration for the
purpose of expropriation must justify their action, the onus must be
on them to establish that there has been no oppression.

17. To prevent an alteration for the purpose of an expropriation
being oppressive, the expropriators will need to act fairly. In a
leading American case, Weinberger v. UOP Inc. (68 (1983) 457 A 2d 701),
the Supreme Court of Delaware, in dealing with a statute that enabled
a corporation that was a majority shareholder in another corporation to
buy out the minority shareholders and merge the two corporations,
pointed out (69 ibid. at 711) that the "concept of fairness has two
basic aspects: fair dealing and fair price".

Fair price

18. Payment of compensation which accords with the market value of
the expropriated shares will go a long way to preventing the
expropriation from being classified as oppressive. The market price
of shares on a security exchange is cogent evidence of value
(70 Elkington (1993) 32 NSWLR at 22) particularly when the
shares have traded in a fairly narrow band over an extended
period. But the market price or even a price above the market
price is not decisive of the fair value of the shares for the
purpose of an expropriation. A price sufficiently high to prevent an
expropriation being characterised as oppressive will need to take into
account numerous factors. In Weinberger (71 (1983) 457 A 2d at 711),
the Supreme Court of Delaware said that a fair price included "all
relevant factors: assets, market value, earnings, future prospects,
and any other elements that affect the intrinsic or inherent value of a
company's stock". Consideration of these factors may lead to the
conclusion that the market price or a higher price is not the fair
price of the shares.

19. In Re Sheldon; Re Whitcoulls Group Limited (72 (1987) 3 NZCLC
100,058), however, Holland J held that the compulsory acquisition of
shares at $2 per share was fair because at the time the current market
price had been $1.65. That was the lowest price the shares had been in
"the preceding three years". Six months later the acquiring
shareholder contracted to sell its shareholding for $2.65 per share.
In addition, the three independent directors of the company had
asserted at the time of the acquisition that the price of $2 was
"inadequate in the light of the company's asset backing".
Nevertheless, his Honour held that the minority shareholder had failed
to prove that the price of $2 was inadequate. The learned judge said
(73 ibid. at 100,060) :

"In the case of a company with shares quoted on the Stock Exchange it
would be rare indeed that a Court could be satisfied that a price
substantially higher than that ruling on the public market was
anything other than a fair value for those shares."

20. With great respect, I do not think that that dictum should be
followed in Australia. Sharemarkets are driven by many factors, not
all of them rational or fair. Even the share prices of long
established and profitable companies may fluctuate by as much as 50
per cent in the space of a year. A share is an interest, however
small, in an underlying business. Outside the context of the
stockmarket, it would not occur to the owner of a business to think
that the fair value of his or her business could move up and down,
sometimes violently, not only from week to week or day to day but
during the course of a day. No doubt in the long term the share price
of a company will reflect its fundamental earning capacity or value.
But the histories of stockmarkets are overrun by examples of companies
whose intrinsic value remained unnoticed by the market for long periods
of time. The "herd mentality" exists in the stock market as in other
areas of life. Judges cannot delegate to the market the duties of
courts to fix a fair price for shares.

21. Wyn-Parry J asserted in In re Press Caps Ltd. (74 (1949) Ch 434
at 447) that "the final test of what is the value of a thing is what it
will fetch if sold". But what it will fetch depends on when it is
sold. Shareholders whose shares are expropriated have no say
concerning the timing of the expropriation. In Catto v. Ampol Ltd. (75
(1989) 16 NSWLR 342 at 361), Rogers A-JA was correct, in my
opinion, in refusing to accept the current market price as reflecting
the fair price of shares in an application to approve a capital
reduction scheme under which the minority shareholders would receive a
price of $2.78 per share which was in line with the current market
price. His Honour thought that the facts of that case indicated that a
price of $4.00 per share paid by the majority shareholder 18 months
earlier was a surer guide to their true value (76 See also the remarks
of Bryson J in Kingston v. Keprose Pty. Ltd. (No.2) (1987) 6 ACLC 111
at 114 and those of Jacobs J in Mercantile Mutual Life Insurance Co.
Ltd. v. Actraint No.85 Pty. Ltd. (1990) 1 ACSR 569 at 578).

Fair dealing

22. In Weinberger (77 (1983) 457 A 2d at 711), the Supreme Court of
Delaware said that the notion of fair dealing embraces questions of
when the transaction was timed, how it was initiated, structured,
negotiated and disclosed and how approvals to the transactions by
directors and other shareholders were obtained. In the forefront of
the requirement of fair dealing is the necessity for the majority
shareholders through the company to make a full disclosure of all
matters that may affect a judgment as to the fairness of the proposed
alteration (78 Re John Labatt Ltd. (1959) 20 DLR (2d) 159). This
will usually mean the disclosure of the purpose of the transaction, the
giving of full reasons for rejecting alternative means of achieving
that purpose and for concluding that the compensation offered will be
fair to those affected, and the obtaining of an independent valuation
for the shareholders. In most cases, full disclosure will also
require information concerning the current and historical market prices
of the shares where they are applicable, the net book value of the
assets, and the value of the company both as a going concern and on a
liquidation together with any reports or appraisals prepared in
relation to the alteration and any firm offers for, or serious
inquiries about the purchase of, the assets of the company (79 cf. the
requirements in the United States Securities and Exchange Commission
Rule 13e-3 cited by Digby, op. cit. at 128-129 and the disclosure
requirements in s.672(3) of the Corporations Law.). If litigation
concerning the alteration ensues, these matters will need to be
verified on oath if the company is to discharge the onus of proving
that the alteration was valid.

The present case

23. In the present case, the principal goal sought to be achieved by
the alteration was in my view a legitimate business objective and one
that would justify the expropriation of each appellant's shares
provided that it was otherwise fair to that person. The alteration of
the articles and the expropriation of the minority shares would enable
the company to save over $4 million dollars in taxes.

24. In my opinion, however, the company has failed to prove that the
expropriation was not oppressive. It is true that upon the evidence
before the Court and having regard to the concessions of the
appellants the price of $1.365 per share may well have been a fair
price for the shares. But the onus is on the company to prove that the
price was fair, that the appellants have been dealt with fairly and
that a full disclosure of all matters in relation to the alteration
and expropriation has been made. The evidence falls far short of
proving that the company and the majority shareholders have dealt with
each appellant fairly. Almost no attempt was made to make the full
disclosure that is required in this class of case.

25. It follows that the resolution adopting Art.20A was invalid.
The appeal should be allowed.