Evaluating Minority Investor Protection in Australian M&A Transactions

This essay critically evaluates the legal framework in Australia designed to protect minority investors during mergers and acquisitions (M&A) and change of control transactions. It examines the key aspects of minority shareholder rights, including remedies for oppression, self-dealing, and the impact of corporate governance standards. The essay analyzes specific provisions within the Corporations Act 2001, such as section 236 regarding derivative actions and section 232 and 233 concerning oppressive conduct, and assesses their effectiveness in safeguarding minority interests. It also explores the significance of common law principles established in cases like Foss v Harbottle and their exceptions, such as fraud on the minority and the requirement of justice. Furthermore, the essay discusses the role of ASX listing rules and the Takeovers Panel in protecting minority shareholders. Through this comprehensive analysis, the essay aims to determine the impact of these rules on how M&A transactions are conducted in Australia and whether the legal protections are sufficient to prevent abuse and ensure fair treatment of minority investors. The essay also addresses minority shareholder dilution and the preemptive rights. The essay concludes by summarizing the strengths and weaknesses of the current legal framework and suggesting potential areas for improvement.

Running Head: MERGER AND ACQUISITION
MERGER AND AQUISITION
Name of the Student
Name of the University
Author Note

1MERGER AND ACQUISITION
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Minority Shareholders............................................................................................................2
Minority Shareholders’ Protection in Australia.....................................................................5
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

2MERGER AND ACQUISITION
Introduction
Merger and acquisition are part of the corporate finances, strategy and management
that deals with joining with or purchasing the other entities. M&A is the general term used
for describing consolidation of the assets or entities with the help of different types of the
financial transactions such as consolidation, mergers, tender offers, assets purchase and
acquisition of management. Further, minority interest or minority investment is referred to
non-controlling share in the entity held by the investor or the other entity such as private
equity firm is having non-controlling share in company. Usually, the minority investment is
less than fifty percent of total company’s outstanding shares1. Hence, this assignment will
evaluate the ways in which laws seeks for protecting minority investors in context of the
changes in control transactions and evaluation will be done on the effectiveness of rules and
their impact on way transactions are conducted in the Australia.
Discussion
Minority Shareholders
A minority shareholder is the equity holder in the entity, who is not having control of
voting. Generally, they hold less than fifty percent interest in the company. Minority
shareholders often suffers oppression and the abuse in face of the leading majority
shareholders. The remedies of minority shareholders are increasingly becoming vital. The
major objective of the remedies of minority shareholders is providing mechanism for the
minority shareholders for enforcing and protecting their rights, when they are having
reasonable level of grounds for believing the fact that they have been violated by majority
shareholders or directors. In addition, strongest available remedies in action against board
1 Harry Gray, Chad Greenway and Robert Feeney, "Portfolio Company Best Practices—Post-Acquisition
Transition: Preserving Customer Relationships When Company Founders Depart" (2015) 19(1) The Journal of
Private Equity.

3MERGER AND ACQUISITION
members and management for the unfairly or oppressive prejudicial conduct is the oppression
remedy2.
Self-dealing is the key issues in corporate governance. It is the company insider’s use
of the corporate assets for the personal gain. The most common examples of this includes
related-party transactions. Informal relations of business and higher ownership concentration
can help in creating perfect environment for such kind of transactions. This allows the
controlling shareholders to get profit at the expense of financial health of entity. It is because
the assets of company are sold at the excessive lower price, assets are being purchased at the
inflated price or the loans, are given by entity for controlling shareholders on the terms that is
far better than offers of market3.
The empirical research indicates that the stricter regulations of the self-dealing is
related with the greater investment of equity and the lower concentration of ownership. This
particular conclusion is in line with the view that the stronger protection of law makes the
minority investors much more confident regarding their investments. This helps in reducing
requirement for concentrated ownership for mitigating flaws in the corporate governance.
Another aspects of the corporate law are the indicative of strength of the minority
shareholders protections. Hence, standards of corporate governance in some of the areas are
important, for instance those related to the board independence and composition, entity
disclosure and transparency and shareholders rights relating to management and boards of
directors. In these particular corporate governance areas, sound rules and regulations help in
minimizing agency problem in between the minority and majority shareholders and that
between minority shareholders, management and board of directors4.
2 Dariga Tokpayeva, "Legal Protection For Foreign Investors In Kazakhstan" [2015] SSRN Electronic Journal.
3 Satu Matikainen, "The British Parliament And Minority Protection Under The League Of Nations, 1929-33"
(2016) 35(1) Parliamentary History.
4 Ugur Lel, "Can Institutional Investors Restrain Earnings Management Activities In Weak Investor Protection
Countries? The Role Of Foreign And Domestic Institutional Investors" [2013] SSRN Electronic Journal.

4MERGER AND ACQUISITION
The protections of investors matter for abilities of entities to raise required capital for
growing, innovating, competing and diversifying. In absence of protections of investors, the
markets of equity fail for developing and banks become the only finance sources. The
economies having dynamic capital markets seeks for protecting the investor in effective
manner. The investors receive that financial information, which they could trust upon. They
intends to participate in company’s major decisions and there is accountability of directors
for the managerial decision. In case, if law don’t provide such kind of protection then
investors may get reluctant for investing, until and unless they became the controlling
shareholders5. The minority investor’s protection can have significant implications on the
valuation of firm. The research in 27 economies in 539 firms indicates that the valuation of
firm is more in the economies with the better protection of investor than in those with the
poor protections. The other research indicates that firm’s growth rates and corporate risk-
taking are related positively to quality of investor’s protection system6. The better system
may lead towards corporation for undertaking riskier but investments that are value-
enhancing. Further, one study found that investment in the entities is less sensitive towards
financial constraints and it enables great level of growth in the profitability and revenue in
economies with the stronger protections of investors. The research also suggests that
regulating the conflicts of the interest is important for successfully empowering the minority
shareholders7.
5 DÉBORA CHAVES MARTINES FERNANDES, "Investors´ Protection In The U.S.: The Issue Of Mandatory
Arbitration Clauses In Contracts Between Investors And Brokerage/Advisory Firms" (2017) 13(2) Revista
Direito GV.
6 Chung, Dae-Seop, "Legislative Suggestion For Introducing Of Investors Protection Fund" (2017) 23(3) 법법법법.
7 Doris Toyou, "Protection Of Private Equity Investors Under The Dodd-Frank Act" [2018] SSRN Electronic
Journal.

5MERGER AND ACQUISITION
Minority Shareholders’ Protection in Australia
The legal system of Australia provides good protection for the minority shareholders.
In Australia, section 236 of Corporation Act 2001 permits the shareholders for bringing
proceedings on the company’s behalf in representative suit. The empirical research indicates
importance of the remedies of shareholder to investment and the economic development.
The Corporation Act 2001 helps in providing certain minority shareholder protections
and rights. These protections and rights may get modified by constitution of company. Hence,
Corporation Act is required to be considered along with statutes of relevant entity. The
minority shareholders derive the protections from the common rules of law that operates in
absence of the statutory powers. The utility of various common doctrines of law has been
reduced because of introducing different statutory mechanism in Corporation Act8. Generally,
listed or public companies are subject to the stricter requirements under listing rules of ASX
such as, with respect to information disclosures to market, the panel of takeover may act as a
source of all shareholders protection in company’s acquisitions context. However, disputes of
minority shareholders frequently arise in the unlisted proprietary entities because of market
exit option. Further, the appropriate person or body for enforcing such kinds of rights
depends on rights in the questions. Under Corporation Act, some of the protections are
enforceable personally by shareholders. The enforcement of other protections is done by
court, ASIC or the panel of takeover. This is done usually at request of the minority
shareholders9.
The company’s constitution provides the shareholders with the pre-emptive rights. It
allows the shareholders for participating in share issuance in the proportion of current
8 Kavita Pradhan, "Protection Of Investors: An Analysis" [2014] SSRN Electronic Journal.
9 Wenjia YAN, The Role Of Representatives Of Minority Shareholders In The System Of Corporate
Governance (Peter Lang GmbH, Internationaler Verlag der Wissenschaften, 2016).

6MERGER AND ACQUISITION
shareholding in company. Hence, if it is present in constitution of company, the minority
shareholders or any shareholders can avoid dilution of their shareholdings. Under the section
232, for the ranges of orders, shareholders can apply to court if conduct of entity’s affairs,
proposed or actual act by entity or resolution consisting of proposed resolution of the
company’s members is oppressive towards, unfairly discriminatory against, members or
members10. These particular elements are considered merely as the different aspects of the
significant criterions such as commercial. In situation where the share issuance dilutes
minority shareholdings then court founds that conduct falls within provision scope. However,
these findings are dependent upon objective assessment of the fact that whether impugned
conduct is so much unfair that the directors, who considers this matter would not be having
thought of fair to make decisions having balanced significance of furthering corporate object
on the one hand and burden or disability that would be imposed on member or the members
on other hand. This particular section is not restricted towards minority shareholders11.
Under section 233, the court make the brooder ranges of the orders pursuant to
finding oppression under the section 232, comprising but is not limited to winding up of
entity, repealing or modifications of entity’s constitutions, entity’s future conduct regulations,
compensation and order for purchasing shares. While not pertaining exactly to minority
shareholding dilution, rights attached to the share in class of the shares may be cancelled or
varied according to the set-out procedure in constitution of entity12. The section 246D
explains that if members in class does not agrees to cancellations or variations of their rights
or the modification of entity’s constitutions for allowing their rights to get cancelled, the
members having at least ten percent of the votes in class may applies to court for having
10 Susanne Olberg, The Protection Of Minority Shareholders In Vietnam, Thailand And Malaysia. (Duncker &
Humblot, 2014).
11 Alexander M Franke, Private Equity Minority Investments (Diplomica Verlag, 2013).
12 Asx.Com.Au (Webpage,2020) <https://www.asx.com.au/documents/rules/gn08_continuous_disclosure.pdf>.

7MERGER AND ACQUISITION
modifications, cancellations or variations set aside. Then the court set aside modifications,
cancellations or variations, if satisfied then it would be considered unfairly prejudicial to
applicants. Therefore, protection is granted to minority shareholders, with the respect to
variations of the attached rights to the shares13.
Further, in the Australia, legal protection concept of the minority shareholders has its
origin in the case of “Foss v Harbottle (1843) 2 Hare 461”. Under this particular case, the
action was brought up on the behalf of Foss and Turton and all the other shareholders against
the defendants that is constituted of the five directors. The architect and solicitor alleged that
by illegal and concerted transactions they have caused property of company to be lost. There
was no proper constitution of the board of directors. Further, damages were claimed by the
plaintiffs from the defendants to be paid to entity and asked for receiver appointment. It was
held by the court that actions would not be shareholders responsibility when there was
nothing for preventing entity itself bringing actions14. Hence, two principles were generated
in ruling of “Foss v Harbottle”, which are “Internal Management Rule” and “Proper
Plaintiff Rule”. In the “internal management rule”, if there is any breach of the duties by the
majority of shareholders in their internal affairs, then conducts is required to be settled within
entity itself by GMS. However, case cannot not be forwarded to the court by minority
shareholders, if court refuses for intervening in such kind of matter. The case will subject to
the litigation, if cannot be ratified by the court. Moreover, in case of “Proper Plaintiff Rule”,
any of the damages done to entity will shows that entity itself as the victim is proper plaintiff
for the legal proceedings. Until and unless the breach falls under the exception or it affects
13 Lodgement Of Financial Reports | ASIC - Australian Securities And Investments
Commission, Asic.Gov.Au (Webpage, 2020) <https://asic.gov.au/regulatory-resources/financial-reporting-and-
audit/preparers-of-financial-reports/lodgement-of-financial-reports/>.
14 Ekka Sakti Koeswanto and Muhammad Taufiq, "Legal Protection Of Investors Investment Virtual Currency"
(2018) 9(2) JURNAL ILMIAH LIVING LAW.

8MERGER AND ACQUISITION
the personal rights of shareholders, whereby shareholders are entitled for taking action of
court, then the proper plaintiff would be entity15.
There are some of the common exceptions of law in the Foss V Harbottle. The legal
actions against company’s management is permitted in the following situations:
 Illegal or the Ultra Vires: In case, when management proposes or acts illegally that
is beyond stated power of entity, then shareholders are having the ability for taking
action of court against them.
 Special Majority: If the written law of company requires special resolution of
majority in the GMS for solving matter, in which the rights of shareholders are abused
and the majority does not met then that case shareholders may seeks relief by courts16.
 Personal Rights of Members: If the personal rights of shareholders have been
infringed, “Foss v Harbottle” exception is granted. The personal rights are the rights
of individual that are the result of legal contracts or the document or shares held.
 Fraud on Minority: It happens when majority shareholders’ act results in the
unpredicted expenses on the part of minority. This particular expense is required to be
irreparable by the GMS.
 Requirement of Justice: The Justice requirement has been one of the controversial
subject. It has still remained open exception to Foss v Harbottle rule. The company’s
technical rule may impede legal proceedings for the same type of conduct by the
majority of shareholders17.
15 Olivia Dixon and Jennifer G. Hill, "The Protection Of Investors And The Compensation For Their Losses:
Australia" [2018] SSRN Electronic Journal.
16 Alison George, Akaash Sachdeva and Doug Holmes, "Climate Change In Australia - Implications For
Business And Investors" [2013] SSRN Electronic Journal.
17 Franklin Gevurtz, "The Protection Of Minority Investors And Compensation Of Their Losses" (2014)
62(1) American Journal of Comparative Law.

9MERGER AND ACQUISITION
 Statutory Derivative Actions: In this, person might bring the proceedings on the
company’s behalf or intervene in any of the proceedings for which entity is the party
for purpose to take responsibility on entity’s behalf for those proceedings of for the
specific step in those proceedings. It happens, if person is former member, or member
or the person entitled for getting registered as company’s member or the related body
corporate or the former officer or officer of the entity and if person acts with the leave
granted under the section 237. It significantly effects shareholders power for taking
actions on company’s behalf18.
The exceptions of common law explained above appears to be impractical from
perspective of shareholders. Further, shareholders are required for qualifying for one of the 5
conditions before thinking of any legalized actions. Therefore, following are the set of
statutory exceptions:
 Injustice or Oppression: Section 232- For the shareholders, who are not treated
fairly in the Australia, it is the most powerful remedy, as contained in the section
232.
 Inspection of Books: Section 247- In “section 247A(1)(a)(b)”, the shareholders
of entity in capacity as the members or as the registered management of the
scheme of investment, the court can grant the rights for examining scheme or
books of compony or authorizing other person for inspecting company’s books on
the behalf of applicant19.
 Winding Up: Section 461- The section 461 helps in proving grounds for court for
winding up company. There consists of four grounds of principal in just and
18 Katarina Sikavica and Esther Kessler, "Beyond External Constraints On Expropriation Of Minority Investors:
Preference Heterogeneity, Locus Of Control And Firm Valuation" [2013] SSRN Electronic Journal.
19 Umakanth Varottil, "The Protection Of Minority Investors And The Compensation Of Their Losses: A Case
Study Of India" [2014] SSRN Electronic Journal.

10MERGER AND ACQUISITION
equitable category, which includes substratum failure, deadlock in management or
operation of entity, breakdown in confidence and mutual trust of members and
misconduct, fraud or oppression in management and conduct of company.
 Injunctions: Section 1324- The section 1324 helps in empowering court for
granting order for restraining person from engagement in the conduct that
constitutes, constituted or would constitute20.
Conclusion
Therefore, this report reaches at the conclusion that minority shareholders have
minority interest in the entity and they are having percentage of the ownership, which is
significant. It has been analyzed that when minority investors take on the equity in closely
held entity then they are having limited control over the management. If there is failure of
business, they will not be able for selling shares for good price. The owners of business are
required to takes the consideration of various financial, legal and operational factors before
taking on minority investor. Further, this report has analyzed that Australian legal system
helps in providing good protection for minority shareholders. Lastly, it can be said that the
legal system of Australia entitles the shareholders for bringing the proceedings on company’s
behalf in the representative suit.
Reference
Asx.Com.Au (Webpage,2020)https://www.asx.com.au/documents/rules/
gn08_continuous_disclosure.pdf
20 Stephane Rousseau, "The Protection Osf Minority Investors And The Compensation Of Their Losses In
Canada" [2014] SSRN Electronic Journal.

11MERGER AND ACQUISITION
CHAVES MARTINES FERNANDES, DÉBORA, "Investors´ Protection In The U.S.: The
Issue Of Mandatory Arbitration Clauses In Contracts Between Investors And
Brokerage/Advisory Firms" (2017) 13(2) Revista Direito GV
Chung, Dae-Seop, "Legislative Suggestion For Introducing Of Investors Protection Fund"
(2017) 23(3) 법법법법
Dixon, Olivia and Jennifer G. Hill, "The Protection Of Investors And The Compensation For
Their Losses: Australia" [2018] SSRN Electronic Journal
Franke, Alexander M, Private Equity Minority Investments (Diplomica Verlag, 2013)
George, Alison, Akaash Sachdeva and Doug Holmes, "Climate Change In Australia -
Implications For Business And Investors" [2013] SSRN Electronic Journal
Gevurtz, Franklin, "The Protection Of Minority Investors And Compensation Of Their
Losses" (2014) 62(1) American Journal of Comparative Law
Gray, Harry, Chad Greenway and Robert Feeney, "Portfolio Company Best Practices—Post-
Acquisition Transition: Preserving Customer Relationships When Company Founders
Depart" (2015) 19(1) The Journal of Private Equity
Koeswanto, Ekka Sakti and Muhammad Taufiq, "Legal Protection Of Investors Investment
Virtual Currency" (2018) 9(2) JURNAL ILMIAH LIVING LAW
Lel, Ugur, "Can Institutional Investors Restrain Earnings Management Activities In Weak
Investor Protection Countries? The Role Of Foreign And Domestic Institutional Investors"
[2013] SSRN Electronic Journal
Lodgement Of Financial Reports | ASIC - Australian Securities And Investments
Commission, Asic.Gov.Au (Webpage, 2020)

12MERGER AND ACQUISITION
https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-
reports/lodgement-of-financial-reports/
Matikainen, Satu, "The British Parliament And Minority Protection Under The League Of
Nations, 1929-33" (2016) 35(1) Parliamentary History
Olberg, Susanne, The Protection Of Minority Shareholders In Vietnam, Thailand And
Malaysia. (Duncker & Humblot, 2014)
Pradhan, Kavita, "Protection Of Investors: An Analysis" [2014] SSRN Electronic Journal
Rousseau, Stephane, "The Protection Of Minority Investors And The Compensation Of Their
Losses In Canada" [2014] SSRN Electronic Journal
Sikavica, Katarina and Esther Kessler, "Beyond External Constraints On Expropriation Of
Minority Investors: Preference Heterogeneity, Locus Of Control And Firm Valuation"
[2013] SSRN Electronic Journal
Tokpayeva, Dariga, "Legal Protection For Foreign Investors In Kazakhstan" [2015] SSRN
Electronic Journal
Toyou, Doris, "Protection Of Private Equity Investors Under The Dodd-Frank Act"
[2018] SSRN Electronic Journal
Varottil, Umakanth, "The Protection Of Minority Investors And The Compensation Of Their
Losses: A Case Study Of India" [2014] SSRN Electronic Journal
YAN, Wenjia, The Role Of Representatives Of Minority Shareholders In The System Of
Corporate Governance (Peter Lang GmbH, Internationaler Verlag der Wissenschaften, 2016)