Can minority shareholders claim special value for shares that give total control in that company? Greenmailing (the art of buying some shares in a company and holding out for a higher price in a takeover or a scheme of arrangement for one's minority shareholding in the company) has been a popular "commercial sport" in Australia.
A number of very clever operators have utilised this method in holding up a complete takeover of particular companies, or the complete rationalisation of companies into a group with no outstanding minority shareholders in the corporate group thus impacting on the tax treatment of that group, or in other ways affecting the commercial treatment of the group as one entity. There has apparently been an opportunity for a small group of shareholders to play havoc in the takeover activity of a company even with the changes of the law (post 2000). Some courts continued to provide special treatment of minority shareholders in such scenarios (there has been a string of cases in which minority shareholders have successfully held out for larger payments). Now, with the decision of the Queensland Supreme Court in Pauls Ltd v Dwyer & Ors ((2001) 19 ACLC 959), a more practical resolution of this issue would seem to be closer. The judgment of Douglas J suggests that the law now is that these groups of shareholders will not (legally) be able to claim or obtain special value in their shares.
It is appropriate to deal in summary with the facts of the case and then to discuss briefly the judgment of Douglas J. Pauls Ltd (Pauls) sought to compulsorily acquire the remaining preference shares it did, already own in another company, Pauls Victoria Ltd (PVL). Those preference shares carry a 7 percent cumulative value and right to an annual dividend but limited voting rights. The value offered by Pauls was arrived at by an independent expert as required by the provisions of the relevant legislation at the time (the same rules apply now under the Corporations Act). Pauls applied through an order approving its acquisition of the preference shares at a specified value. Certain minority preference shareholders (including well-known "greenmailers") lodged objections. The minority preference shareholders sought to establish that the preference shares which were not in control of the Pauls management should be given a special value when assessing the total valuation. The question before the court was whether PVL was worth more to Pauls with 100 percent ownership – and therefore Pauls should pay a premium to acquire such ownership – or whether the shares were worth the same as other shares. The preference shareholders would not have achieved greater than par value if it had not been for the compulsory acquisition order.
Pauls successfully argued before the court that no special value should be placed on the shares. In the judgment of Douglas J the importance of the part played by the well-known "greenmailers" is highlighted by his use of the words "the dramatis personae". It is not necessary to set out who the dramatis personae were. Douglas J reviewed the relevant legislation and made these comments: "The CLERP amendments were designed to as far as possible outlaw the concept of 'greenmailing'. Such a practice has been the modus operandi [of certain of the dramatis personae], a fact which they readily accept." In the judge's view the valuation had to be pursued under the terms of the relevant provisions of the legislation – Part 6A.2 of the then Corporations Law (now the Corporations Act). In reaching his conclusion that preference shareholders should not receive any special valuation Douglas J made these further comments: "It must be remembered that the rights of the preference shareholders of PVL are very limited. They are entitled to a cumulative annual dividend of 7 percent which may or may not be franked, and they had the right to attend and speak, but not vote, at annual and general meetings of the company. They have voting rights in respect of capital reductions and priority to a redemption of their capital on a winding up of the company. It is clear that other than by acquisition, the preference shareholders cannot even achieve greater than par value for their shares."
The objectors have relied on an older case Melcann Ltd v Superjohn Pty Ltd ((1995) 13 ACLC 92) to support their position. In a later case, Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd ((2000) 18 ACLC 665), Santow J reviewed the Melcann case and noted that premium value was only to be applied (if at all) if it could be shown that the relevant shares would have commanded a special value. In this case, as we noted from the quotation above, the preference shares did not have any special value. Douglas J, however, went one step further. In his view the statements of Santow J in Winpar Holdings "do not fit easily with the explanatory memorandum [to the CLERP legislation which introduced the statutory changes]". He disagreed with the comments of Santow J in Winpar Holdings. In any event, if special value was to be given to the relevant shares then they should be applied to all the shares in the company and the value distributed or allocated pro rata. In all the circumstances, notwithstanding that certain synergies would flow from the fact that Pauls would have 100 percent ownership of all the shares in PVL, the evidence of those synergies was vague at best in this matter and the shares did not warrant special value being applied to them. Finally, in his view, any special value being attributed to them would go against the thrust of the legislation. It is unclear whether this decision is being appealed – we will certainly follow that particular appeal as it is likely to put "the finishing touches" to the arguments in this type of matter.
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