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Case Study of Gambotto v WCP Ltd

Question :

The law of corporation in Australia regulates the working of the companies and defines the rights and duties of employees, debtors, creditors, directors and shareholders. The shareholders have major rights and share in the companies. So is it necessary that majority and minority shareholders have the same rights? WCP Ltd v. Gambotto case provides the rights to minority shareholders and discusses the validity of the amendment in the Articles of Association.

  • Can the majority shareholders amend the articles of association of the company under section 76 of Corporation law?
  • What contribution does the case of Gambotto v. WCP Ltd have on the law of corporations in Australia?
  • Does the WCP Ltd & Gambotto case have any radical change to corporation law?
Answer :

Background

The case of Gambotto v. WCP Ltd is one of the most controversial case in the Australian legal history in context to corporate law. According to Gambotto case, WCP is the limited liability company which has a issued capital of 16,980,031 ordinary shares of the price 20 cents each. The Industrial Equity Limited (IEL) is the wholly owned subsidiary company of WCP which are the majority shareholders who hold around 16,929,441 shares which is approximately 99.7% of issued capital. The remaining shares of the company is held by the minority shareholders which have 50,590 shares. The IEL amended the Articles of Association of the company which stated to acquire the minority shares also which are held by minority shareholders.

Facts

The appellant Gambotto and Sandri holds minority shares in WCP Ltd with approx 15,898 shares. According to the Gambotto case, the subsidiary company of WCP which is Industrial Equity Limited (IEL) holds 99.7% of shares proposed an amendment in the Articles of Association for acquiring the shares of the minority shareholders. The shareholding in the company WCP was such that the subsidiary company IEL could not have acquired appellant's shares compulsorily under Section 701 or 414 of the Corporations Law.

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On 16th April, 1992, WCP notified the members about the general meeting which would be held in 1992, May 11 in order to consider the amendment which would be done in Articles of Association. The amendment was to insert the new Article 20A whose effect was to enable the member who was entitled to 90% or more of issued shares to acquire it compulsorily for the purpose of the Corporations Law before the date of 30th June, 1992 at the price of $1.80 per share. The appellants did not want to sell their shares. The majority shareholders are likely to vote in the favour of amendment. The appellant commenced the proceedings in order to prevent meeting and the resolution which was being passed. The proceedings were solved on interim basis. The company WCP gave the undertaking that if a resolution is passed in the meeting, the shares would not be acquired until the conclusion is reached for the appellant's action.

As per Gambotto case, the meeting was held on 11th May 1992 and three minority shareholders attended it and only one could vote for it who voted in favour of the resolution. The Appellant Gambotto and Sandri did not attended the meeting either personally or through proxy.

Decision of lower court

The court held that the amendment is invalid and also ineffective as its immediate effect and purpose was to permit shares of minority shareholders to be expropriated by majority shareholders. Hence the amendment amounts to the unjust oppression of the minority shareholders who object to it. McLelland J also opined that the power of the company to alter the Articles of Association in general meeting is apparent of section 176(1) of Corporations Law but it is constrained by principle of equity. The test 'bona- fide for benefit of company as a whole' which is being cited in the case of Allen v. Gold Reefs of West Africa Ltd is of primary restraint since its introduction as it is inappropriate in the situation where the conflict has arisen between description of shareholders or different classes which most relatable to like Gambotto case.

Grounds of appeal by appellants Gambotto and Sandri

The appellant appealed on the ground which are firstly that the amendment is oppressive and beyond the purpose and scope of power to alter the Articles of Association under Section 176 of the Corporations Law. Second ground of appeal was that the amendment imposes the restrictions on right to transfer the shares which is inculcated under section 180(3) of Corporations Law.

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Decision of appellant court

As per Gambotto case, the Court of Appeal held that the Articles of Association is capable of the amendment subject to equitable limitations and Corporations law. The Court agreed with the opinion of McLelland that the test of bona-fide for a benefit of company as a whole was inapt in the current case. However, Meagher J.A was of the opinion that the amendment was not oppressive and must be allowed to stand as the evidence to demonstrate that there was a tax advantage for the company WCP if it become the subsidiary of Industrial Equity Limited and also that the level of the compensation for the expropriation was also fair.

Meagher J.A also rejected the argument of appellant regarding the Article 20A which is impermissible restriction on the ability to transfer share. So, in the Gambotto case, it was held that the minority shareholders can transfer the shares freely until they receive the expropriation notice and also the shares will remain transferable without any restriction.

The majority judges laid down the two limbed test which must be satisfied when a company wants to amend the constitution in order to permit the expropriation. The two limbed test is that firstly the power is exercisable for the permissible purpose and secondly the exercise shall not operate as oppressive in relation to the minority sha

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