Whincop, Michael J --- "A Relational and Doctrinal Critique of Shareholders' Special Contracts" [1997] SydLawRw 18; (1997) 19(3) Sydney Law Review 314
[*] BCom (Hons), LLB (Hons), MFM (Qld) Faculty of Law, Griffith University.
[1] Macneil, I R, The Many Futures of Contracts (1974) 47 Southern California LR 691 at 729, n113 (hereinafter Macneil, Many Futures).
[2] [1995] HCA 12; (1995) 182 CLR 432.
[3] Bailey (as executrix of the estate of the late Dr Harry R Bailey) v New South Wales Medical Defence Union Ltd; New South Wales Medical Defence Union Ltd v Crawford (1995) 18 ACSR 521.
[4] A bibliography of analyses of the High Court judgments includes: Whincop, M J, Gambotto v WCP Ltd: An Economic Analysis of Alterations to Articles and Expropriation Articles (1995) 23 ABLR 276; Ramsay, I M (ed), Gambotto v WCP Ltd: Its Implications for Corporate Regulation (1996); Kevans, S, Oppression of Majority Shareholders by a Minority? Gambotto v WCP Ltd [1996] SydLawRw 6; (1996) 18 Syd LR 110.
[5] Macneil, I R, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical and Relational Contract Law (1978) 72 Northwestern U LR 854 at 862-4.
[6] The concept of projecting exchange into the future implies that parties make conscious choices that involve or affect a future exchange. Thus, bilateral promise involves a present reciprocal commitment by parties to undertake some future action: Macneil, above n1 at 712-20.
[7] Macneil, above n5 at 862.
[8] Macneil, I R, Restatement (Second) of Contracts and Presentiation (1974) 60 Virginia LR 589 at 589. Emphasis in original.
[9] Eisenberg, M A, Relational Contracts in Beatson, J and Friedmann, D, Good Faith and Fault in Contract Law (1995), 291 at 296.
[10] Sealy, L, The Enforcement of Partnership Agreements, Articles of Association and Shareholder Agreements in Finn, P D (ed), Equity and Commercial Relationships (1987), 89 at 90.
[11] Macneil, above n5 at 888-9.
[12] Id at 883-4.
[13] Id at 862 n24, and at 895.
[14] Maitland, F W, Equity: A Course of Lectures (Brunyate rev edn, 2nd edn, 1936) at 28-9.
[15] Langbein, J H, The Contractarian Basis of the Law of Trusts (1995) 105 Yale LJ 625.
[16] Id at 653-4.
[17] Coase, R H The Nature of the Firm (1937) 4 Economica 386; Macneil, above n1 at 759-67.
[18] Sealy, above n10 at 95.
[19] Joint Stock Companies Act 1856 ss7, 10. This approach survives in Corporations Law, s180.
[20] Contract eventually became the centre of a major corporate theory economic contractarianism. See generally Easterbrook, F H and Fischel, D R, The Economic Structure of Corporate Law (1991). Most contractarian research relies on the classical idea that contract permits a sharply differentiated ex ante allocation of risk between shareholders and other constituencies, which allocation is priced in exchanges between these parties: Macneil, I R, Economic Analysis of Contractual Relations: Its Shortfalls and the Need for a Rich Classificatory Apparatus (1981) 75 Northwestern U LR 1018. By contrast, this article adopts a relational view of contract, where ongoing issues of relational change and power dominate the importance of initial allocations.
[21] Macneil, above n1 at 760.
[22] Macneil, above n5 at 893.
[23] Id at 894.
[24] (1995) 18 ACSR 521 at 542.
[25] Id at 527.
[26] Id at 530. The problem, however, is that this intention of the parties changed when insurance contracts were renewed after the alteration. The majoritys analysis is consistent with these contracts enabling the Union unilaterally to refuse indemnity. This inconsistency makes one doubt that the contract at the date of the treatment should be determinative.
[27] Id at 539.
[28] Id at 546-7.
[29] [1843] EngR 478; (1843) 2 Hare 461.
[30] Above n3 at 547.
[31] Id at 547-8. These cases are discussed in more detail in text accompanying nn55-71 below.
[32] Id at 539.
[33] Id at 542. Cf Brennan CJ, Deane and Dawson JJ at 529-30.
[34] Macneil, I R, The New Social Contract: An Inquiry into Modern Contractual Relations (1980) at 8 and 40-1. See also Eisenberg, above n9 at 296.
[35] Macneil states that the use of promise to project exchange is always accompanied by nonpromissory means: id at 8.
[36] Macneil, above n1 at 750-3.
[37] Macneil, id at 800-4.
[38] (1995) 18 ACSR 521 at 530.
[39] This reasoning is consistent with the permissive approach to the amendment of an investment unit trust deed found in Gra-Ham Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65
[40] Macneil, above n5 at 891.
[41] Macneil, id at 891-2. Cf Perpetual Trustees of WA Ltd v Corporate West Management Ltd (1988) 13 ACLR 568 at 585.
[42] [1883] UKLawRpKQB 269; (1883) 12 QBD 176.
[43] Id at 192.
[44] These were examined in text accompanying nn29-31 above.
[45] It is difficult to see how Foss v Harbottle applies to enforcement by a member of a right conferred by the articles on a member.
[46] See text accompanying nn86-89 below.
[47] (1995) 18 ACSR 521 at 549.
[48] Accord, Kirby Ps judgment in Baileys case in the Court of Appeal, rejecting the existence of a special contract: (1993) 11 ACLC 1114 at 1117-8.
[49] This conclusion is doubly strange, given authority suggesting that agreements outside the articles that restrict the power to alter the articles are ultra vires: Russell v Northern Bank Corporation Ltd [1992] 3 All ER 161; Shapira, G, Voting Agreements and Corporate Statutory Powers (1993) 109 LQR 210.
[50] (1995) 18 ACSR 521 at 529.
[51] Id at 542.
[52] See, eg, Baily v British Equitable Assurance Co [1904] UKLawRpCh 30; [1904] 1 Ch 374 (CA).
[53] Ultimately, no text can provide entirely for its own interpretation: see generally Davidson, D, Belief and the Basis of Meaning (1974) 27 Synthese 309.
[54] See generally Finn, P D, Shareholder Agreements (1978) 6 ABLR 97; Goldwasser, V R, Shareholder Agreements Potent Protection for Minorities in Closely Held Corporations (1994) 22 ABLR 265.
[55] Sealy, above n10 at 98.
[56] The Lion Mutual Marine Insurance Association Ltd v Tucker [1883] UKLawRpKQB 269; (1883) 12 QBD 176 (see text accompanying nn42-43 above); Peninsular Co Ltd v Fleming (1872) 27 LT 93; Re The Maria Anna and Steinbank Coal and Coke Company (Ltd); McKewans case (1877) 37 LT 201.
[57] McKewans case id at 203. Emphasis added. James and Baggallay LJJ agreed.
[58] [1915] 1 Ch 881.
[59] Id at 897-8.
[60] Cf Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 6 ACLC 320 and Andy Kala Pty Ltd v EJ Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630. In the latter case, Vincent J affirmed the qua member test in connection with an article prescribing a mechanism for resolution of member disputes. Note that both cases involved disputes between members, not between the company and a member.
[61] Heron v Port Huon Fruitgrowers Co-operative Association Ltd [1922] HCA 20; (1922) 30 CLR 315; Pakenham Upper Fruit Company Ltd v Crosby [1924] HCA 55; (1924) 35 CLR 386.
[62] Heron id at 323; Crosby id at 400.
[63] Heron id at 339-42; Crosby id at 393.
[64] [1924] NZLR 561.
[65] Cf The Lion at nn56-57, above. It is notable that these cases have been explained as involving special contracts: Biddulph and District Agricultural Society v Agricultural Wholesale Society [1925] 1 Ch 769 at 792-3. However, the rhetoric of special contracts never appears in these judgments.
[66] [1971] NZLR 552.
[67] [1930] NZGazLawRp 183; [1931] NZLR 216.
[68] Id at 246-7.
[69] Id at 247.
[70] Id at 246-7.
[71] Accord, Kirby P in Baileys case in the Court of Appeal: (1993) 11 ACLC 1114 at 1118.
[72] [1900] UKLawRpCh 37; [1900] 1 Ch 656 at 673.
[73] Ibid.
[74] [1905] UKLawRpAC 72; [1906] AC 35 sub nom Baily v British Equitable Assurance Co [1904] UKLawRpCh 30; [1904] 1 Ch 374.
[75] [1905] UKLawRpAC 72; [1906] AC 35 at 38.
[76] Ibid.
[77] Id at 42.
[78] See, eg, Biddulph above at n65; Hickman above at n58.
[79] See s78 Companies Act 1981 (Cth), prior to its amendment by Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth).
[80] However, references are sometimes made to extrinsic material indicating to the contrary: See Australian Corporation Law: Principles & Practice (1996), Butterworths looseleaf service, 2.4.0150.
[81] See nn28-31 above.
[82] [1900] UKLawRpCh 37; [1900] 1 Ch 656 at 671.
[83] Above n2 at 445-7.
[84] Above n82: see also, British Equitable Assurance Co v Baily [1905] AC 35.
[85] Whincop, above n4 at 279-84.
[86] Macneil, above n5 at 895.
[87] Ibid.
[88] Neoclassical economic theory sought to demonstrate that fiat was irrelevant to corporate contracts, and the contracting advantages of the corporation: Alchian, A A, and Demsetz, H, Production, Information Costs and Economic Organization (1972) 62 Amer Econ R 777. This approach strips contracts of their relational quality. It has been trenchantly criticised: Williamson, O E, The Mechanisms of Governance (1996) at 98-100; Macneil, above n5 at 865.
[89] Macneil, above n5 at 895-6.
[90] Miller, M and Modigliani, F, Dividend Policy, Growth, and the Valuation of Shares (1961) 34 J Bus 411.
[91] OKelley, C R, Filling Gaps in the Close Corporation Contract: A Transaction Cost Analysis (1992) 87 Northwestern U LR 216. It is unsurprising to find that a number of cases on members rights provisions (eg, Corporations Law, s260) involve allegations of distributional unfairness: eg, Re City Meat Co Pty Ltd (1983) 2 ACLC 149; Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421; Morgan v 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222; Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394.
[92] Corporations Law, ss176, 253.
[93] Macneil, above n5 at 859-61. It might be said that the shareholders contracted on terms that the articles were subject to alteration by special resolution; thus, they have agreed to be bound by such changes: WCP Ltd v Gambotto (1993) 11 ACLC 457 at 459. Such an approach is highly suspect from a classical paradigm. It amounts to an agreement to agree.
[94] Above n3 at 530. See n26 above.
[95] [1965] NSWR 240 at 244. See generally Sealy, L, Bona Fides and Proper Purposes in Corporate Decisions [1989] MonashULawRw 16; (1989) 15 Monash U LR 265 at 266. Contra, Fischer v Easthaven Ltd [1964] NSWR 261. Analysing alterations to shareholders rights by reference to the old judicial review method of analysing the existence of fraud on the minority.
[96] Schwartz, A, Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies (1992) 21 J Leg Stud 271.
[97] Above, n74.
[98] Macneil, above n20 at 1049-62.
[99] See, eg, Sidebottom v Kershaw Leese & Company [1920] 2 Ch 124 at 136; Shuttleworth v Cox Brothers & Company (Maidenhead) [1927] 2 KB 9 at 22, 26.
[100] Above n74 at 42; see n77 above.
[101] Drury, R R, The Relative Nature of a Shareholders Right to Enforce the Company Contract [1986] 5(2) Camb LJ 219.
[102] See generally Sunstein, C, The Partial Constitution (1993) at 134.
[103] See generally Hill, J, Protecting Minority Shareholders and Reasonable Expectations (1992) 10(2) Companies and Securities LJ 86.
[104] Johnston, JS, Opting In and Opting Out: Bargaining for Fiduciary Duties in Cooperative Ventures (1992) 70 Washington ULQ 291; OKelley, above n91; Kevans, above n4.
[105] See, eg, Farnsworth, E A, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations (1987) 87 Columbia LR 217; Finn, P D The Fiduciary Principle in Youdan, T (ed), Equity, Fiduciaries and Trusts (1989) at 1; Brownsword, R, Two Concepts of Good Faith (1994) 7 JCL 197; Waddams, S M, Good Faith, Unconscionability and Reasonable Expectations (1995) 9 JCL 55.
[106] Summers, R, Good Faith in General Contract Law and the Sales Provisions of the Uniform Commercial Code (1968) 54 Virginia LR 195 at 201. Cf Brownsword, above n105. In the USA, good faith is the substantive test of contractual modifications: Uniform Commercial Code, 2- 209.
[107] Macneil, above n5 at 892.
[108] Id at 895.
[109] OKelley characterises American law in a similar way: [C]orporate law does not give majority shareholders absolute discretion. Nonetheless, corporate law is tilted in favour of the majority. (Above n91 at 240). This permits the corporation to be more adaptable than other organisational forms.
[110] Macneil, Social Contract, above n34 at 44-7.
[111] Id at 44.
[112] Macneil argues that restraint of power is a norm common to any contract law system: id at 56-7.
[113] Peters American Delicacy Company Ltd v Heath [1939] HCA 2; (1939) 61 CLR 457 at 513.
[114] Above n103.
[115] Contra, Waddams, above n105 at 59.
[116] Macneil, above n34 at 9. Macneil adds desired to this list.
[117] See n20 above.
[118] See text accompanying n96 above.
[119] Re G Jeffery (Mens Store) Pty Ltd; Re G Jeffery Pty Ltd (1984) 2 ACLC 421 at 426. The reference in Thomas v HW Thomas Ltd (1984) 2 ACLC 610 at 618 to visible departure[s] from the standards of fair dealing elevates the importance of observable abuses of power over the protection of reasonable expectations, consistently with Schwartzs theory.
[120] [1985] HCA 68; (1985) 61 ALR 225.
[121] Accord, Gra-Ham Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65 at 81 per Malcolm CJ. (The fact that the alteration diminished, prejudiced or altered the rights of unitholders was not sufficient to prevent the alteration from being validly made.)
[122] Macneil, above n5 at 899-900.
[123] See references in n4 above.
[124] A proposal has been outlined to deal with issues raised by Gambotto v WCP Ltd: Legal Committee of the Companies and Securities Advisory Committee, Compulsory Acquisitions Report (1996) Companies and Securities Advisory Committee, Sydney. However, consistently with the theme of this article, Baileys case shows these issues extend to relational change generally, and are larger than issues of compulsory acquisition.
[125] Ayres, I, Making a Difference: The Contractual Contributions of Easterbrook and Fischel (1992) 59 Chicago U LR 1391.