Fair and reasonable value to shareholders as a whole

Can minority shareholders still hold out a takeover or share re-arrangement?

Ever since the decision of the High Court of Australia in Gambotto v WCP Limited (1995) 180 CLR 432 in which it recognised the right of minority shareholders to be treated fairly and equitably in the context of a "buy out" there have been queries raised as to just how effective various changes to the Corporations Law in 1998 and the CLERP Act 2000, might be in neutralising that decision in which a minority shareholder was able to neutralise an attempt to buy out minority shareholders. In two recent decisions Santow J in the New South Wales Supreme Court has indicated that as far as he is concerned the utility of that decision has been quarantined. In Re NMRA Limited (2000) 33 ASCR 595 (the first of two interesting judgments dealing with the demutualisation of the NMRA company) he ruled that the decision in Gambotto did not provide the relevant minority shareholders opposing the demutualisation any standing to successfully challenge the claim which the company had gone about its reorganisation. Now, in Winpar Holdings Ltd v Goldfields Kalgoorlie Limited ((2000) 18 ACLC 665) he has again indicated that the decision has very limited application in the context of minority shareholders' rights.

The Winpar case is an interesting one pointing out the way in which minority shareholders try to control, through very small shareholdings indeed, the ability of majority shareholders to reorganise company affairs so as to move forward in the most efficient and effective way possible. The shareholders concerned included two very famous shareholders who have been thorns in the sides of many companies seeking to reorganise their affairs - Dr Elkington and Mr Catto. The facts are from the CCH Company Law Report and are set out in some detail to give a flavour of the interesting scenario upon which the court had to adjudicate, on this occasion. Winpar Holdings Ltd held a minority shareholding (0.005 percent) in Goldfields Kalgoorlie Limited (GKL). The majority shareholding (87.7 percent) was held by GKL's parent and another group company (collectively referred to as the Goldfields Group). QBE also held a relatively large minority shareholding in GKL. GKL sought to acquire all minority shareholdings by implementing a selective reduction in capital, and then cancelling the acquired shares. Implementation of the proposal would have resulted in GKL being a wholly-owned subsidiary of GKL's parent company.

GKL had convened a general meeting of shareholders to consider a proposal for the selective reduction in GKL's capital. This proposal was that all the shares held by persons other than the Goldfield group were to be acquired and then cancelled in consideration for payment of $0.55 per share (which was eight cents in excess of an independent expert's report). In order to comply with section 256C(2) of the Corporations Law, two special resolutions had to be passed. First, a special resolution passed by shareholders, with no votes being allowed to be cast by shareholders who would have received consideration as part of the reduction, ie only the Goldfields Group shareholders were entitled to vote. Secondly, a special resolution passed by shareholders whose shares were to be cancelled, ie the minority shareholders, including Winpar. Both resolutions were carried by the required majority at a single meeting, the second resolution being carried by virtue of the relatively large minority shareholding of QBE. Winpar challenged the legal efficacy of the steps taken to implement the selective reduction in capital, and sought an injunction under section 1324 of the Law which section provides a very generous set out standing rules on who may challenge particular activity on the basis that there has been a breach of a statutory provision or duty.

Winpar argued that each resolution required a separate meeting to be held because section 256C(2) precluded the presence of shareholders other than those who were entitled to vote on the respective motions. GKL argued that any requirement to have two separate meetings would have introduced an element of artificiality, which ought to be avoided, and that there was no legislative intention to require two separate meetings for resolutions that in practice were likely to be interdependent and essentially identical. Winpar also argued that the acquisition under the selective reduction in capital provisions must not only be 'fair and reasonable to the company's shareholders as a whole', but also fair within the meaning of the principles laid down in Gambotto v WCP Limited. Winpar also argued that the selective reduction in capital was not fair and reasonable to shareholders as a whole because the cash equivalent of certain special benefits (such as significant savings in head office costs) that would be received by GKL's parent had to be shared pro rata between the majority and the minority, rather than being allocated wholly to the minority. GKL, supported by ASIC (as amicus curiae), argued that a pro rata allocation was not intrinsically unfair or unreasonable and, in the overall context of the selective reduction, the allocation was fair and reasonable.

It was also argued by Winpar that there had been insufficient disclosure in the expert's report that accompanied the notice of meeting, and that this failure constituted misleading and deceptive conduct. Inadequate disclosure was asserted to have occurred in relation to the economic upside resulting from the rationalisation of operations and the possible increase in the price of gold. It was also asserted that there had been inadequate disclosure in relation to an acquisition of a gold deposit that was announced after the expert's report but before the shareholders' meeting. Winpar also queried whether a court could conclude that a selective reduction in capital was fair and reasonable to shareholders as a whole in circumstances where a single shareholder (QBE) could determine the outcome of the vote, and where the consideration for the reduction was at a substantial discount to the long-term average market price of the shares. Santow J first reviewed the way in which the law had progressed since the decision in Gambotto. Santow J noted that under certain reforms to the law in 1998 the legislation had 'finally caught up with the commercial world. It was recognised for the first time that there is a distinct functional difference between a conventional return of capital on equal basis and a selective reduction of capital. the latter, despite the use of the term 'reduction' really amounts to takeover by another name ...'. Under the new law (section 256C) where shareholdings were to be cancelled, not only did you need a special resolution of all shareholders (other than those who were to receive compensation as part of the relevant reduction), but you also needed a special resolution passed at a meeting of shareholders whose shares were to be cancelled.

The critical issue here was whether the necessary special resolutions which are required where a group of shareholders were to have their shares cancelled had been passed in accordance with the section and whether the reduction was 'fair and reasonable' to the company's shareholders as a whole'. The challenge for Santow J not only concerned the question of whether the terms which accompanied the reduction of capital were fair and reasonable, but whether all relevant information material to making a decision had been supplied. Having considered all of the facts, Santow J went on to analyse the relevant issues. The critical question was whether there were two separate meetings required of shareholders - one of the minority shareholders alone because it was their shares that were being effected, and one of other shareholders, or whether one meeting was all that was necessary provided any outsiders present at the general meeting of shareholders did not themselves vote, or attempt improperly to influence the outcome of the meeting so that the minority shareholders could by a separate resolution consider the issue. In the view of Santow J it was unnecessary for two separate meetings to be held because the court could intervene if at the meeting at which the minority shareholders alone would be able to vote, the court could and would intervene in appropriate circumstances.

The decision in Gambotto did not apply at all because pursuant to amendments to the statute, Gambotto no longer applied to selective reductions of capital of the kind under consideration here. In any event, there was another case which was more directly on this point and it had made it clear that it was not inappropriate to have a reduction following the procedure adopted in this case. The question of whether the value attributed to the shares was fair and reasonable did not trouble Santow J either. In his view one looked at the shares of the company as a whole and did not attribute a special premium to a particular group of shares within that group because of a special value they might have in the context of the particular question being considered. He felt that the value attributed to the shares and the procedure followed were imminently fair and reasonable. A further question was whether more disclosure was needed in such a situation. He held the information given was sufficient to enable any shareholders to calculate the saving that accrued to the company by virtue of the reduction. The valuation methodology used by the expert was clearly supportable and the court could rule that the value attributed was reasonable. He was not deflected from this view by the fact that a decision by one shareholder to vote in favour of the selective reduction might have been influenced by a commercial strategy supported by those in control.

Santow J concluded by suggesting that the disclosure regime that had been adopted by the company in this case was sound, and that all in all the way in which the statute had been structured, and the manner in which the company had followed that structural and legal basis left little if any work for the Gambotto principle to do. In all the circumstances he dismissed the application and held that the way that the company had reduced capital, the information supplied, the meetings held and the consideration paid was fair and reasonable in the context of the legislation. In addition, Santow J held that a pro rata allocation between the majority and minority shareholders of any special value of the benefits accruing as a result of 100 percent ownership of the company coming to the acquirer was fair and reasonable. Unfairness, in this context, might arise (and probably would be successfully argued as arising) if minority shareholders were deprived of their share of the attribution value brought about by the reduction. In this case there was no evidence that any such differentiation or discrimination had occurred between the minority and the majority shareholders.

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