What rights do minority shareholders have now in a compulsory acquisition case? Not many it seems.
As a result of the significant reforms introduced into the Corporations Law by the CLERP Act which becomes effective on 13 March 2000 the rights of minority shareholders to hold on to their shares in a company which has been the target of a successful takeover, or a scheme of arrangement would seem to be fairly minimal. Recently, in a case decided before the new provisions come into effect (and they will make the position of minority shareholders even less "attractive"), Santow J in the New South Wales Supreme Court delivered a judgment which suggests that minority shareholders may have some difficulty in arguing that their rights should be protected on "terms" that had been endorsed by the High Court decision in Gambotto v WCP Ltd ((1995) 182 CLR 432). In Re GIO Australia Holdings Ltd ((1999) 33 ACSR 283) a scheme of arrangement was entered into following the takeover of the GIO by the AMP Society. This was the background against which the relevant application for relief by a minority shareholder was brought. A scheme of arrangement had been proposed under which the GIO would become a wholly-owned subsidiary of AMP. As readers may recall, AMP had been largely successful in the takeover of GIO but a significant number of shareholders had held out. Scheme meetings were held and the scheme was approved by 97.2 percent of the holders of the shares in GIO. Shareholders who voted in favour of the scheme represented 51.28 percent of the minority shares on issue. All statutory formalities had been satisfied including the approval from the Australian Securities and Investments Commission.
Despite issues raised concerning the conduct of GIO and AMP in implementing the scheme proposal, and its previous foreshadowed opposition to the scheme, a company which held approximately 2.5 percent of the total issued share capital in GIO, told the court it did not wish to deprive other minority shareholders of their rights to realise shares. It also advised that none of its concerns went to the question of fairness of the scheme. A further issue before the court was the effect of the deterioration in the financial position of GIO subsequent to the issue of the scheme documents. This deterioration had been foreshadowed in those documents. The extent to which GIO should continue to disclose information relating to the change of its financial position was also put to the court as an issue it should take into account. Although GPG did not oppose the scheme another GIO shareholder raised additional concerns about whether pursuant to the scheme AMP could validly expropriate that person's shares; the shareholder also raised concerns about the level of disclosure that should be contained in the scheme documents.
Santow J approved the scheme. In his view, there was no other information that was material to a shareholder in making a decision in relation to a scheme and there was an overwhelming majority of shareholders who had voted in favour of the scheme. ASIC also had no objection. In these circumstances the court should generally approve a scheme. However, he recognised that shareholders should be properly informed of matters material to their decision to approve the scheme. It was appropriate that officers of both the GIO and AMP companies provide affidavit evidence confirming that the material inspected by the opponent to the scheme was not such as to give rise to a more favourable picture of the position than had been disclosed. But, in his view, there were limits to the degree to which a court "is able to probe into the accuracy or completeness of scheme documents. In so doing it is prompted by the matters revealed by the documentation itself or otherwise drawn to its attention in what is usually not an adversarial process unless the scheme is contested." In this case Santow J did what he practically could to ensure that the scheme was approved in that context. He affirmed the view put forward by Renard and Santamaria in their book on Takeovers and Reconstructions in Australia that the court should not take the place of the shareholders in determining whether a scheme should be approved. One other matter needs to be dealt with briefly. The member opposing the scheme raised the question of whether a scheme could validly expropriate his shares in light of the decision of the High Court in Gambotto v WCP Ltd. In that case the High Court ruled in effect that a company could alter its articles of association in such a way to lead to the expropriation of the minority's shares. The short answer, in the view of Santow J, was to be found in the majority judgment in the Gambotto case. It was clear, in his view, that the High Court "did not intend to preclude such compulsory acquisition as is provided for under schemes of arrangement or other such statutory schemes where fairness is appraised, though takeovers masquerading as selective reductions of capital without the safeguards of associated schemes remain for future consideration. That of course assumes that the scheme of arrangement satisfies the relevant requirements."
In his view the relevant scheme did satisfy the relevant requirements and in all the circumstances he was not prepared to disallow the scheme. There may be potential for other litigation in matters similar to this when the issue in the Gambotto case will be raised for additional consideration. However the new provisions in the Corporations Law as a result of the CLERP Act referred to earlier may reduce the range of matters that may be raised for consideration at a future date.
Trust and confidence vital for survival
Breaches of fiduciary duty of directors to other directors - can they be paid for their work?
In proprietary companies where there are only a few shareholders who are usually also directors, trust and confidence in each other is vital if the company is to survive. Where directors lose faith in each other or do not support the company in which they are principals, the court is often forced to act as an adjudicator in such disputes leading to difficulties, costs and not much satisfaction in most cases. If some directors are in breach and, say, make a gain at the expense of others, can they still demand a payment for their services where the company has benefited? An interesting case dealing with this issue is the recent decision of Hanson J in the Victorian Supreme Court in Llewellyn & Anor v Derrick & Ors ((1999) 33 ACSR 213). The facts of the case are taken from the Butterworths Company Law Reports. The proceedings concerned the breakdown of a business venture between three principals, Llewellyn, Derrick and Gleeson. That business had been undertaken by way of a unit trust in which units were held by their respective corporate vehicles (RA for Llewellyn, TA for Derrick and G for Gleeson). Another entity, Uniti, was the corporate trustee of the relevant unit trust that had been established.
On 25 September 1998, in an earlier proceeding before the court, it had held that payment by Uniti to TA of $300,000 (pursuant to a directors' resolution in 1997) was in fact income of Uniti which had been wrongfully paid to TA under an invalid resolution. The court further held that Derrick and Gleeson had wrongly diverted business opportunities of the unit trust which resulted in TA earning fees for certain matters. The court also held that Llewellyn had wrongly diverted another fee to himself and an associated company. As a result of the litigation the court on 27 April 1999 gave judgment on the question of relief and held that Llewellyn and his company RA, should be granted relief on the basis of a constructive trust arising from breaches of fiduciary duty by Derrick and Gleeson. But the court also held that an allowance should be made in favour of Derrick and Gleeson for their time and skill in relation to the earning of the fees by the company producing the $300,000 and certain other fees. Such a finding is unusual because courts usually suggest that where there is a breach of trust or duty, little allowance if any should be made for the work put in by those who are accused of breaching the trust in gaining that income. How does a court justify this in a case such as this? Hanson J felt that it was a question of balancing one "injustice" against another "injustice".
In his view there was evidence both at the trial and in affidavits that considerable time and skill had been expended by Derrick and Gleeson in gaining income for the unit trust. In fact, the fee paid to the company established by Derrick (namely $300,000) "was reasonable having regard to the amount of work done by Derrick and Gleeson." What allowance if any should be made for the skill and effort put in by Derrick and Gleeson in considering the payments to be made to Llewellyn? In the judge's view it was not inappropriate for Derrick and Gleeson to be rewarded for the work that they had done. In his view they had established that they should at least receive some reward in this case. However, the fact that the judge was prepared to make such a finding in this case should not be taken as a factor that may arise in every case. The judge had a difficult task to evaluate the relevant issues and to make a Solomon-like ruling in this case. He said it was "always inherent in the arrangement between the three parties that one or the other may perform a greater amount of work overall or in relation to a particular matter than another. To allow for that as being a possibility is not to deny that each of the three principals were to devote their full time and effort to the affairs of Uniti. Further, in the way of things it was probable that one of the principals could be more involved in a particular matter becoming a successful application than the other principals. Yet that possibility, or indeed the fact that one or other of them may not have been involved in a particular matter that turned out to be successful, was not a reason that disqualified that one or the other from participating in a distribution of profit derived from such a successful matter." (at para 42 of the judgment)
In all of the circumstances the judge was prepared to balance out the fact that there had been a breach of duty with the need to make "some allowance in favour of Derrick and Gleeson" - the failure to do so would lead to a greater injustice. As the judge noted the three principals were better off and so were their companies by reason of the efforts of all three of them to complete the matters even though there had been a breakdown in the Uniti venture. The judge was prepared to accept their arguments that they worked long hours and he was not prepared to deny their claim on that basis. To deny them any reward in such a case would in his view have been unreasonable in all the circumstances. But, as noted above, such a result may not always be the solution to a dispute of this kind. In most cases, directors who do breach their duties are left without a satisfactory result in their favour.
When a founding father dies
Company law - a classic case of oppression in a company dispute and a re-affirmation of the duties of directors in a group context
From time to time major Corporations Law cases arise for consideration by our courts. Sometimes they involve a very simple scenario; at other times they involve a complex and interesting set of facts. In both scenarios it is not unusual for interesting issues to be thrown up for the courts to consider. A recent case, Re George Raymond Pty Ltd; Salter v Gilbertson ((2000) 18 ACLC 85) involves a more complex scenario. Byrne J in the Victorian Supreme Court held that there had been oppressive conduct and made a very interesting set of rulings not only on the question of oppression but on directors' duties. We set out the facts of this case in full from the CCH headnote. They are both interesting and give a background against which the judge's orders were made. A diagrammatic version of the facts as taken from the CCH case is also set out. RJ Gilbertson Pty Ltd (RJG), a family business, operated a number of abattoirs and meat processing plants. On the death of the founder of the business, the management of RJG passed to its second generation family members, represented by five family groups.
One of those family groups was George Raymond Pty Ltd (GRPL), which represented the Robert Gilbertson family and its associated companies. GRPL was not an active trading company but held a 20 percent share in RJG (Holdings) Pty Ltd (Holdings) that, in turn, held 46.6 percent interest in RJG, which operated the Gilbertson meat business. GRPL was divided into four groups of families each holding approximately 25 percent of the total shares. Two of those groups were the George Gilbertson sub-group and the Joy Salter family sub-group. Each "head" of these family groups was also a director of GRPL. George Gilbertson had been a director of various Gilbertson family companies for over 30 years. As a director during that period, George Gilbertson had made decisions on behalf of all the family groups, including at times having held a power of attorney for his sister, Joy Salter.
In this application, Salter sought a declaration under section 246AA(2) of the Corporations Law (see now section 232) that the conduct of George Gilbertson had been oppressive and unfairly prejudicial to the Salter family as minority shareholders in GRPL. In particular, the oppressive conduct was alleged to have occurred in the following transactions:
The Itoman reorganisation In 1988, as a result of falling returns from the meat business, three of the family groups wanted to withdraw from RJG. To achieve this reorganisation, it was agreed that the other two groups would buy them out at a cost of $37.6 million by setting up a new company, Marwen Investments Pty Ltd (Marwen). As part of the proposed restructure, Itoman & Co Ltd, a Japanese company, would become a 40 percent shareholder of Marwen, with the remaining shareholding being held by cousins of George Gilbertson. These family members would also become the directors of Marwen. The outgoing shareholders were to be partly paid by an Itoman loan of $9 million, which was to be personally guaranteed by the Marwen directors. The remaining funds amounting to some $15.4 million were to be borrowed from other family companies including GRPL. This proposed restructuring was discussed at a meeting held at the home of George Gilbertson in December 1988. The Salters were aware of the proposed buy-out, using Marwen as a vehicle, and aware of the proposed directorship of Marwen. According to the Salters, George Gilbertson indicated that Marwen was a temporary takeover vehicle and the 60 percent of Holdings was to be held on behalf of all family members and was to be subject to the family groups' controls. George Gilbertson argued that Marwen was established to hold the majority of shares in RJG for the Gilbertson families who had been invited to take up shares in Marwen, but had declined. As a result, the Marwen directors had taken on unlimited exposure to the Itoman loan until it could be repaid in 5 years.
Uncommercial loans Moneys to the order of $1.7 million were lent to Marwen by GRPL (at the direction of George Gilbertson) on an interest free and unsecured basis. It was found that there was no valid directors' meeting or annual general meeting that authorised these transactions. The financial statements of GRPL did not record the making of these director-related interest free loans until some years after the loans were made. At the 1992 AGM of GRPL, Salter questioned George Gilbertson about the loans and the beneficial ownership of Marwen assets and was told that only Marwen's shareholders and not GRPL shareholders would benefit from these director-related interest free loans. Salter indicated then that her family wanted to sell their GRPL shares.
Furthermore, in 1993, GRPL obtained a $110,000 overdraft from the ANZ Bank, which was secured by land owned by GRPL. The purpose of the loan was ostensibly for the purpose of allowing GRPL to apply for an extractive industries licence for the land to increase its potential sale value: however, the overdraft was almost entirely used to fund moneys advanced to Marwen on an interest free basis to enable it (Marwen) to pay a creditor.
The share swap By 1996, the Gilbertson group was in financial distress to the order of $31 million. ANZ Bank had indicated an intention to withdraw financial support from the group. At a meeting of GRPL and another Gilbertson family company, it was decided that George Gilbertson would negotiate with a Japanese group, Sumikin, to buy the assets of the meat business. If the assets of the meat business could be sold at a reasonable price, this would have enabled the Gilbertson group to repay ANZ. A share restructure of Marwen was proposed in which shares held by GRPL (among others) in Holdings would be exchanged for shares in Marwen. This would have consolidated all the Gilbertson family shareholdings within Marwen. Salter was not informed about the transaction until after it had occurred and had not been informed about the GRPL directors meeting, which purportedly authorised the share restructure. The meatworks were sold to Sumikin, and the share restructure was implemented. The directors of Marwen were issued with 10,000 shares each at par value. GRPL (and another family company) exchanged their 344,590 shares in Holdings for 16,650 shares in Marwen at a transfer price of $407 per share. A second transaction in which RJG shares owned directly by Gilbertson family groups and associated trusts were sold to Holdings at a price of $3.40 per share in return for an issue of shares in Marwen Investments at a premium of $404 per share.
It was found that the GRPL contribution to the restructure was understated by $5.031 million and the Marwen directors' contribution was overstated by $12.268 million. This was because the share allocation ignored the negative net asset position of Marwen, and the consequent valuation of the contribution of the Marwen directors to the reorganisation of the company. The Salter family argued that these series of transactions (among others) amounted to oppressive conduct because they, the Salters, were excluded from the decision-making processes. The Salters also criticised the under-value of shares received by GRPL for its Holdings shareholding and the inflated value of shares adopted for the RJG shares in the Marwen reorganisation. The Salters sought an order that their shares in GRPL be compulsorily purchased by George Gilbertson (or others). The judge ruled that a case under section 246AA (see now section 232 of the Corporations Law) had been made out by the applicant. In his view, the conduct of the affairs of the company GRPL had to be understood against the background that dealings between family members were often informal and that loans may not always be made on a commercial basis. And while the judge ruled that the initial reorganisation involved had not amounted to oppressive conduct, it had set the scene for some of the conduct that followed. The loans in this case were made to a company in which George Gilbertson had a material personal interest and that company later became insolvent. In the court's view the making of these loans amounted to a breach of fiduciary duty. The fact that the loans were uncommercial and often made without the consent of the Salter family which had brought the proceedings and without making appropriate disclosure amounted to conduct that was both unfair and prejudicial to the Salter family.
The parties agreed Justice Byrne should deal "with all the issues in the case". He was to determine "whether, and if so, in what respect oppression has been made out and what is the appropriate remedy". Winding up was not an appropriate remedy in this case. The applicants alleged that the affairs of the company had been conducted in a manner which was unfair, discriminatory and oppressive against them as minority shareholders. In cases such as this the court should focus not so much on the intent behind the acts of the majority as their effect upon the minority.
The law tends to be severe in these cases but, nevertheless, the court has to assess it in the context of broad policy of company law that directors owes fiduciary duties to their companies and should not allow their interests to conflict with those of the company. In all of the circumstances, and in the context in particular of the loans that were made to Marwen Investments by the group company were uncommercial. Byrne J made the following statement of principle which is a sober reminder of the duties of directors, especially directors in a company comprising different interests: "The law imposes many burdens on company directors. The court, however, will be reluctant to interfere with commercial or management decisions made by them provided these are within power and, more importantly, provided they are not in breach of fiduciary duty. It is well established that directors commit breaches of such a duty where they make uncommercial loans to companies in which they have a personal interest. A company such as GRPL is entitled to expect that its director will have no divided loyalty or conflict of interest. Where such exists in respect of an act or decision of the director then the duty of the director is to disclose it to those whose interests are or may be affected and to obtain their informed consent to the act or decision in question." (para 55)
The case is an important example of an area of the law where under CLERP there will be now even greater requirements for directors to disclose their material interests in contracts and to obtain appropriate approval if there is a conflict of interest arising. A diagrammatic scheme of the arrangements in this case is set out to explain the way the loans were structured.
George & Margaret Gilbertson Ian & Wendy Gilbertson 20% 20% 100%
Marwen Investments 60% 100%
Holdings Marwen Properties 36% RJG 24%
Family trusts and individuals in family 40% Itoman
The need for relief
When is it appropriate for proprietary companies not to comply with the need to lodge annual accounts?
Under what was the former section 313 of the Corporations Law ASIC could make an order relieving a company (or the directors of a proprietary company) from the obligation to lodge annual accounts in appropriate circumstances (see now sections 341 and 243 of the Corporations Law). In October 1996 the applicant company, Incat Australia Pty Ltd (Incat), in Re Incat Australia Pty Ltd v Australian Securities and Investments Commission ((1999) 33 ACSR 132) applied for such relief and was refused by ASIC. It sought a review of ASIC's decision from the Administrative Appeals Tribunal arguing that compliance with the accounting obligations would impose "unreasonable burdens on the company, and the officers of the company and that it would be inappropriate in all the circumstances for them to have to comply". In particular, it was submitted that compliance would enable the customers of the company to dissect financial information in the accounts of the company to the disadvantage of the company. These customers (especially large companies) would be able to use this information to squeeze Incat's profit margins.
Deputy president Forrest rejected the application for relief. He made a number of very interesting observations about the powers of ASIC to relieve. He noted that it was necessary to identify any burden that would be imposed on the company to have to comply with the obligations to lodge accounts. It was necessary to evaluate the economic detriment likely to be caused to the company against the value of the information to the users of it. While the Corporations Law did not prescribe standards or criteria of unreasonableness it was up to the court to assess these matters on a case-by-case basis. After assessing all of the evidence, especially the evidence that Incat would be under some difficulty to compete successfully if its profit margins were squeezed as a result of pressure that might be brought on it by its large customers once they acquired the financial information, the deputy president rejected the application. While Incat was a major player in the production of fast ferries and was economically significant in the market in which it operated, the fact that the information would not be provided to creditors in particular, was a matter that he had to take into account. At the end of the day the relevant provision which contained points of differentiation for large and small proprietary companies was aimed at ensuring that companies which have a large and significant economic impact should be required to lodge accounts so that the public could refer to those accounts. This would include not just shareholders but creditors, potential creditors and customers. In all of the circumstances the application was refused.
The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.
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