Gambotto v WCP Ltd: Impact on Minority Shareholders in Corporation Law

This case study examines the landmark Australian corporation law case of Gambotto v WCP Ltd. The case revolves around the attempted expropriation of minority shareholders' shares by the majority shareholders of WCP Ltd. The High Court of Australia overturned the lower court's decision, establishing stringent tests for the validity of amendments to a company's constitution that allow for the compulsory acquisition of minority shares. The court ruled that such amendments must serve a proper purpose and not operate oppressively. The decision, a significant victory for minority shareholders, clarified the narrow definition of 'proper purpose' and emphasized the importance of procedural and substantive fairness in the expropriation process. The case highlights the protection of shareholder rights and the responsibilities of majority shareholders and company management, making it a pivotal decision in Australian corporate law.

Running Head: Corporation Law 1
Corporation Law

Indigenous community 2
Introduction:
Gambotto v WCP Ltd was considered as the important case of corporate law in the
Australian history. In this case, High Court rejected the amendment made in the constitution of
the company because amendment allowed the majority shareholders of the company to
compulsorily acquired or expropriate the shares hold by minority shareholders of the company.
High Court of Australia took historical decision on 8th March 1995, and in this decision
High Court empowered the minority shareholders under the Corporation Act of Australia. In this,
Mr. Giancarlo Gambotto representing himself and achieved great success against the Industrial
Equity Ltd (IEL) for expropriate the share hold by Mr. Gambotto in WCP as minority
shareholder by altering the Articles of Association of WCP. This victory was considered as
remarkable victory because it shows the interventionist approach, which was usually avoided by
the Courts in corporate context. Decision of High Court in this case was also important because
High Court introduced the new stringent rule for the purpose of testing the validity of such
alterations made under companies AOA and MOA.
Facts of the case:
Litigation in this case was related to the attempt made by majority for obtaining the 100
percent stake in the WCP limited. In these majority shareholders of the wholly-owned
subsidiaries of IEL holds almost 99.7% shares of the share capital of the WCP and the appellant
that were Giancarlo Gambotto and Eliandri Sandri holds almost 0.094% shares of the issued
share capital of the WCP. IEL wants to get the 100% control of the WCP for the purpose of
obtaining taxation and administrative benefits which includes saving in income tax of almost $4
million and accounting fee savings of almost $3,000 per year.

Indigenous community 3
It becomes possible for IEL to purchase the appellant’s shares under the process of
alternative compulsory acquisition, and because of this IEL insert provision in the constitution of
the company which allowed any member of the company who hold 90% or more of the issued
shares to acquire the shares on compulsory basis before thirtieth June 1992, all the issued shares
in WCP at a price of $1.80 per share. WCP also send notice to the shareholders of the meeting
which was held on 11 May 1992 for the purpose of considering the amendment to its effect.
Experts valued the share at $1.365 per share, and this price was considered fair valuation by the
appellant. Appellants do not desire to sell their shares and file suit against the respondent before
the meeting for the purpose of preventing the resolution being passed. This meeting took place
subsequently, but Court directed to the WCP that it was not possible to acquire any shares by
WCP on the basis of this mechanism till the Court’s decision in this regard. In the meeting,
company approve the amendment but IEL did not vote its shares in the meeting (Mitchell, 1994).
First decision:
As per the judge McLelland J in the Supreme Court of New South Wales, stated that
section 176 (1) of the Corporation Law give power to the company to made amendments in the
constitution of the company, but the exercise of power was constrained by the equitable
principles. He further stated that main aim of amendment made by WCP was to allow the
majority shareholders to expropriate the shares of the minority shareholders.
As per the opinion of the judge, this amendment results in unjust oppression to those
minority shareholders who object this decision. Judge noted if this amendment was permissible
and if it was allowed to expropriate the minority shareholders by the majority shareholders, the
procedure related to compulsory acquisition stated in the corporation law under section ss 414
and 701 would be unnecessary (Austlii, 1996).

Indigenous community 4
Decision by NSW Court of Appeal:
NSW court of appeal unanimously overturned the decision taken by McLelland J’s
decision, and in this appeal leading decision was taken by Meagher JA. His Honour stated that
company had power to alter its constitution but this power was constrained by some equitable
principles.
Judge further stated that view of McLelland J’s was only consider the fact that
expropriation of shares was a malum in se. Corporation law stated provisions which expressly
allowed the expropriation, which means expropriation was not contrary to the law. Meagher also
stated that various benefits would be get by the company from the expropriation, and fact related
to amount paid for shares was inadequate was not considered by the Judge. Therefore, no reason
shows because of which Court should intervene.
In this Priestly JA agreed with the decision take by Meagher JA, and stated that person
after becoming the member of the company and he also agreed to bind by the duly passed
resolutions of the company. However, resolution related to expropriation of shares passed by
amending the constitution of the company and it was considered as real sense and not the
divestment against the will of the shareholders.
Court of Appeal decided with the majority that as long as sufficient compensation was
provided by the company, then it was possible for majority shareholders to expropriate the
minority’s shares.

Indigenous community 5
High Court Decision:
High Court overturned the decision of Court of Appeal by stating that amendment made
by the company was invalid because amendment was not made for proper purpose. This decision
was taken by the majority of judges that were Mason CJ, Brennan, Deane and Dawson JJ, who
initiated their analysis by framing the question of fundamental importance as “whether, and if
yes in what situations the taking of a power by majority shareholders by amendment to the
articles to acquire compulsorily the shares of the minority shareholders will be held invalid
on the basis that it is oppressive”.
For answering this question, judges considered the judgment taken by Lindley MR in
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at 671. In this case, Lindley MR stated
that power of the shareholders to amend the constitution of the company by passing special
resolution must be exercised not only as per the procedure of the law but also in the benefit of
the company as a whole. By following the judgment taken by Peter in American Delicacy Co
Ltd v Heath, majority of the judges of High Court in this case rejected the notion that test laid
down by Lindley MR in Allen as “bona fide for the benefit of the company as a whole” was
inappropriate while considering the rights and interest of the shareholders. Court made the
difference between the two type of alterations made in the constitution. Court stated that those
alterations which does not involve expropriation of shares or of valuable proprietary rights which
were attached to the shares, can be made by passing regular special resolution and such
resolution was not ultra vires, not beyond any purpose contemplated by the constitution nor
oppressive (Ramsay & Saunders, n.d.).
On the other side, if alteration involves the expropriation of shares or any valuable property
rights which were attached to the shares then it was not sufficient to regularly pass the SR, and

Indigenous community 6
on these different considerations was applied. Majority of judges in High Court stated two tests
which must be conducted while making amendment to the constitution of the company which
permits expropriation of shares, and these two tests were stated below:
 Company exercises this power for proper purpose.
 If company exercises its power then it will not operate oppressively in relation to the
minority shareholders of the company.
The first factor of the test which stated that Company must exercises this power for proper
purpose means that expropriation of shares will only justified in that case in which it was
reasonably proved that continued shareholding of the minority cause damage to the company and
affairs of the company and expropriation of shares was necessary for the purpose of eliminating
and mitigating that detriment.
Majority further stated that it would not be considered as sufficient justification if
expropriation of shares would advance the interest of the company or ensures any commercial
advantage for the company. An expropriation of shares will only be valid if it saves the company
from detriment of any harm. Majority of judges provide two examples which clarify the meaning
of proper purpose such as when shareholders of the company is competing in the company, in
case when it was necessary to ensure that company is complied with the regulatory provisions
such as residency requirement of shareholder.
The second factor of the test states that expropriation of shares must be fair and not
oppressive in nature, which means it must include both procedural and substantive aspects. The
process through which expropriation was conducted must be fair, and it requires the majority to
disclose all the necessary information. It also includes valuation of shares by independent expert.

Indigenous community 7
On the other side, substantive fairness includes price to be paid for the shares. Majority stated
that market value cannot be considered as sufficient indicator for the purpose of determining the
fair value of the shares. It must be noted that other factors must be considered such as assets of
the company, dividend, nature of the company, and expected future.
In this case, fairness was not challenged by the appellant but it could not be established
that expropriation of shares was conducted for proper purpose. Majority also stated burden to
prove is lie on the party who intended to expropriate for the purpose of proving that power was
validly exercised.
Key Aspects of the Decision:
This decision of High Court was considered as historic decision in context of corporation
law in Australia, and following are some key aspects of this decision:
 Firstly, High Court defines the proper purpose narrowly and also stated the test which is
known as stringent test for satisfying the proper purpose of expropriation of shares. Court
also stated objective test which ensures that inquiry does not limit in relation to the
subjective good faith of the majority. It can be said that Court framed the test in such way
which makes it unattractive for the majority shareholders for the purpose of avoiding the
protections which is stated in the statutory expropriation mechanisms. The test for proper
propose stated by the High Court has no equivalent in the statutory mechanism for
expropriation of shares.
 Secondly, majority of judges placed focus on the concept related to shares as property,
with the holder which has proprietary rights in the property. Judges stated that they does
not consider, in the case of amendment of the AOA by authorizing expropriation of

Indigenous community 8
shares. They further stated that it is sufficient justification related to expropriation of
shares that expropriation must be fair and also ensure the interest of the company as legal
as well as social entity. However, this approach does not justify the property nature of the
shares.
 Thirdly, principles stated in this case were considered valid only if they were inserted by
amending the constitution of the company and do not apply to the constitution from the
incorporation of the company. If constitution of the company stated about the
expropriation of shares from the time of incorporation of the company then such
provision in the constitution is valid.
Conclusion:
Experts stated that this case was the most important case in the history of corporate law
of Australia because this case empowers the minority shareholders of the company. In this case,
High Court not only empowered the minority shareholders but also impose responsibility on the
majority shareholders and management of the company to conduct expropriation of shares for
proper purpose only, and not the for the benefit of majority shareholders. In this High Court
protect the interest of minority shareholders.
The decision taken by High Court was considered as significant victory for the minority
shareholders of the company. In this High Court provide the power to the minority shareholders
of the company. This decision is considered as new provision in the protection of minority
shareholders of the company.

Indigenous community 9
References:
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 at 671.
American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 481.
Austlii, (1996). Oppression of Majority Shareholders by a Minority? Gambotto v WCP Ltd.
Retrieved on 17th November 2017 from:
http://www.austlii.edu.au/au/journals/SydLRev/1996/6.pdf.
Corporation Act 2001- Section 414.
Corporation Act 2001- Section 701.
Gambotto v WCP Ltd (1995) 182 CLR 432; 127 ALR 417; 16 ACSR 1; 13 ACLC 342.
Mitchell, V (1994). Gambotto and the Rights of Minority Shareholders. Retrieved on 17th
November 2017 from: http://epublications.bond.edu.au/cgi/viewcontent.cgi?
article=1091&context=blr.
Ramsay, I. & Saunders, B. What do you do with a high court decision you don’t
like? .legislative, judicial and academic responses to Gambotto V WCP Ltd. Retrieved on
17th November 2017 from:
http://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709610/42-
WhatDoYouDoWithAHighCourtDecisionYouDontLike1.pdf.