Have the rights of minority shareholders to claim a premium on their shares been finally quashed?
Ever since the High Court decision in Gambotto's case (which decided that it was inappropriate for a company to amend its articles of association to buy out a minority shareholder unless there was a statutory power to do so) there have been concerns that this placed a premium on minority shareholders' rights in a company. As a result of changes made to the corporations legislation following the Gambotto decision (Gambotto v WCP Ltd (1995) 13 ACLC 34), in the introduction of statutory rights to buy out minority shareholders providing fair value was paid for their shares, a question of whether a premium could still be captured by those who might be generally described as "greenmailers" has been the centre of attention in a number of cases. Now, as a result of decisions of the Victorian Supreme Court in Capricorn Diamond Investments Pty Ltd v Catto & Ors ((2002) 20 ACLC 931) and the Supreme Court of New South Wales in Re Goodyear Australia Limited; Kelly Springfield Australia Pty Ltd v Green (2002) 21 ACLC 983, the position of minority shareholders remain in a position of some doubt in situations where the majority shareholders wish to buy them out.
In the first case the facts were these. Capricorn Diamond Investments Pty Ltd was a subsidiary of Rio Tinto Ltd. It wished to acquire the remaining 3.05 percent of the units in Western Australian Diamond Trust offering $2 per unit. This offer was 78 above the highest valuation determined by the independent experts and 84 higher than the independent expert's preferred value. 60 percent of the minority unitholders objected to the acquisition of the units. In the proceedings Capricorn sought the approval of the Supreme Court for its compulsory acquisition under section 664F(1) of the Corporations Act. The application was opposed principally on the basis that the offer made did not give fair value. The expert obtained by the objectors argued that the fair value included a share of the "special benefits" arising from the acquisition of the remaining units and a premium for the forcible taking of those shares. The objectors argued that if the statutory scheme precluded or inhibited a proper allowance for both "special benefits" and the consequences that the acquisition was forcible, and allocated those allowances in a way which was unjust in all of the circumstances, then the relevant provisions contravened section 51(xxxi) (of the Commonwealth Constitution) and were invalid.
Section 51(XXX1) of the Constitution provides that property shall not be acquired by the Commonwealth unless fair value is provided. The argument was dismissed by the court as irrelevant because of section 1350 of the Corporations Act which, in the court's view, clearly provided constitutional certainty. The main issue that Justice Warren of the Victorian Supreme Court had to determine was whether the value fixed by the special valuer was fair value under section 667C of the Corporations Act, or whether a special value had to be allotted to the relevant share in the appropriate circumstances. Special value generally means the benefits that a particular acquirer of 100 per cent of the relevant securities of a company will gain from the full ownership of the company (by saving costs in relation to tax, administration, and general ability to run the company as a wholly owned subsidiary). Warren J dismissed the suggestion that special value did arise from synergies that flowed from a takeover, or these other benefits that flowed from accounting or tax considerations.
The claim that special value should be attracted to the relevant minority shares because of the synergies etc was ruled as not being available by virtue of the language of the legislation (section 667C of the Corporations Act) and the Explanatory Memorandum accompanying the legislation. In the Explanatory Memorandum (which one should not use unless there is some doubt as to what the meaning of the relevant section might be by looking at its plain language) it was stated that an expert who was to make the valuation in such a case should not take into account any premium arising from special benefits. Warren J held that "special benefits do not exist unless – and until – there has been a compulsory acquisition, therefore they are not part of the value of the company but are external to that value" and in that context only arise after the transaction has been completed and not before. Therefore they could not be included in the valuation of the company prior to the acquisition. In reaching her conclusion, she said the language of the section was clear and that there were cases which supported her view and in particular, she relied on the Queensland Supreme Court decision in Pauls Limited v Dwyer & Ors (2002) 19 ACLC 959.
She disagreed with a contrary view which had been expressed by Justice Kim Santow of the New South Wales Supreme Court, first in Wimpar v Goldfields Kalgoorlie (2000) 18 ACLC 665 and a couple of months earlier in 2002 in the case of Re Goodyear Australia Limited; Kelly-Springfield Australia Pty Ltd v Green & Ors, referred to earlier. In Wimpar, Santow considered that "special benefits" should be taken into account. However, he indicated that special benefits should be shared across the board among all the shareholders in the company. That view of special benefits that had been enunciated by Santow J in Wimpar had been disapproved by Douglas J in the Pauls case, referred to earlier. Notwithstanding that disagreement, but before Santow J had the opportunity of considering the views of Justice Warren in the Capricorn Diamonds case, he has recently confirmed his view in Re Goodyear Australia Pty Ltd; Kelly-Springfield Australia Pty Ltd v Green. The facts of that case (as described by Justice Warren in the Capricorn Diamonds case) were. Goodyear Australia Limited was an unlisted Australian company which had issued preference shares. Kelly-Springfield owned 93.16 percent of those shares.
The remaining preference shares were owned by 23 other shareholders and Kelly-Springfield wished to obtain the remaining shares pursuant to section 67C of the Corporations Act. The defendants in the Kelly-Springfield case launched similar arguments to those pursued in the Capricorn Diamonds case. In his judgment in Kelly-Springfield, Santow J observed that Douglas J in Pauls did not agree with him. Nevertheless, he concluded that an allocation of special value should be made, although under a different name. He held that as the intended outcome of the compulsory acquisition was a single shareholding, that will usually be a cost-saving (for example, savings on the stock exchange, etc). Santow J held that: "These savings as much benefit to the company as they would be to 100 percent shareholder, whose shareholding will be enhanced in value, thereby to the extent such savings are material. In that sense, the special value of the purchase to a particular purchaser is simply the reciprocal of the enhanced value of the company, hence my calling it 'reflexive value'. It is clearly to be taken into account under general principle in determining fair value. Section 667C(1)(a) simply reflects that reality." (Kelly-Springfield at para 71)
Santow J further added (enhancing the approach that the High Court took in evaluating the rights of minority shareholders in the Gambotto case and made these further observations: "Moreover, to exclude what I will hereafter call in this judgment the reflexive value derived from 100 percent ownership would not be in accordance with valuation principles for determining fair value. These require a "liberal estimate" to compensate a compelled vendor for the deprivation of its ownership interest in the capacity to share in any future benefits to the extent that those benefits would otherwise ensure to that vendor." (21 ACLC at para 72) Santow J, felt, that three basic principles applied in dealing with such cases. "First ... there can be no discrimination in favour of the shares to be compulsorily acquired, as against shares in the same class. Second ... that the allocation of a reflexive benefit is allowable, but only if carried out non-discriminatorily pro rata within the relevant class and fairly between classes.
Third, and in consequence, no premium for forcible taking of the kind [held to be mandatory by the valuer] is in fact required in order to pay fair value or is indeed allowable ..." (21 ACLC at para 87) So, while Santow J adopted a different approach to that of Warren J in Capricorn Diamonds, he did not suggest that greenmailers would necessarily get an added benefit as against other shareholders in the company. But that went even further than Warren J said was appropriate in cases of this kind. In her view, section 667C does not allow for premiums for special benefits for the forcible taking of shares, even though they are to be shared across the board. The legislation provides that where benefits are offered in addition to those in a takeover, then the consequences will follow to ensure that all shareholders share equally. But that is a different situation to where the court would order that shares be compulsorily acquired at special value. In commenting on these cases in the June 2002 issue of CCH Corporate News Justin Monnolini, a partner at Freehills Solicitors notes:
"Majority shareholders are now faced with a difference in approach between the New South Wales Supreme Court where it has been held that a liberal approach should be adopted in estimating fair value under section 667C of the Corporations Act and the Supreme Court of Victoria (and also the Supreme Court of Queensland)" (where no special value is to be included). As a result of this division of opinion it is important that the matter should be determined by a superior court as soon as possible. Because shareholders could go forum shopping (choosing which State might give them a more liberal or less liberal interpretation of the rules relating to valuation) we may find it quite difficulty to assess with certainty just what the result will be in cases of this kind. Indeed, it may also be that the Federal Court (which has yet to hear a case dealing with these issues since the satisfactory amendment) might adopt another variation in the approach to this particular question. In addition, it is important to note the fact that minority shareholders' rights are still regarded as special by virtue of section 232 of the Corporations Act which prohibits oppressive conduct.
Despite the fact that the decision in Gambotto now appears to have been overturned to a large extent by the recent legislation, in the context of compulsory acquisition, this disagreement in interpretation by the various courts means that we do not have a clear picture of which is the better approach in these cases. Most corporate lawyers will insist that the approach taken by Warren J and by the Queensland Supreme Court is the better approach. Those who still believe in the rights of minority shareholders and the fact that the remedies for oppression (and provisions in the Corporations Act which prohibit unacceptable behaviour by companies) would support the proposition that erring on the liberal side as suggested by Santow J in valuing shares in such cases will be appropriate so long as everyone enjoys that added benefit.
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