COMPULSORY ACQUISITION OF MINORITY SHAREHOLDINGS
P E T A S P E N D E R
Faculty of Law, Australian National University
The House of Representatives Standing Committee on Legal and Constitutional Affairs, in its report of November 1991, recommended that the Companies and Securìties Advisory Committee investigate ways in which protection against compulsory acquisition on unfair terms be made consistently available for minority shareholders. The Australian Securities Commission in its submission to the Committee, stated that ss 701 and 702 provided elaborate safeguards for minority interests.
In this article it is argued that the compulsory acquisition provisions in Ch. 6, Corporations Law, though elaborate, may not in fact provide an adequate safe- guard for minority shareholders.
In Anglo- Australian jurisprudence the law of compulsory acquisition of minority shares following a takeover evolved from a premise which greatly favoured the majority shareholder. This favouritism has intensified as the law has evolved to the extent that it is now almost impossible for the minority to resist acquisition of its shares.
Since compulsory acquisition involves the forcible expropriation of a property right, the reasons for the expropriation must be justified
Minority rights and the development of policy in this context have been swamped by an assumption that takeovers are desirable and that compulsory acquisition is necessary to facilitate them.
It is therefore important that this distortion be recognised and a critical evaluation of the efficacy of the rights of the minority be made.
Introduction This article will examine the present
"Freezeouts, by definition, are coercive: Australian law on the compulsory acquisition of minority stockholders are bound by majority minority shareholdings following a takeover bid rule to accept cash or debt in exchange for to establish the inadequacy of the "special safe- their common shares, even though the price guards" adopted by this jurisdiction. The they receive may be less than the value they development of the letter of the law which is assign to those shares. . . . [MJembers do not now encapsulated in ss 701-703, Corporations receive identical treatment: the controlling Law will be traced, together with the stockholders retain their equity but force the philosophical context which shaped this develop- minority to accept cash or debt. . . . All freeze- ment. Reference will be made interstitially to outs, then, involve the distinct possibility that the American law on this area which provides a self-interested majority stockholder or con- an interesting point of comparison.
trol group has ruled unfairly, and all require special safeguards to ensure that minority
stockholders receive equal though not The Nature of the Problem
identical treatment."1 ^1 f l r ,. . t . , The problem of dissenting shareholders is an ι ν ο Λ A X4 r^u ι • » A D » » • f entrenched theme of company law. In the 1. V. Brudney and M. Chirelstein, A Restatement of . ι_·_υ ι r n * ι c
Corporate Freezeouts" (1978) 87 Yale LJ. 1,354 at situation where a bidder seeks full control of 1,357-1,359. the company and a takeover bid has received
83
90 per cent acceptance, the difficulty arises the rights of the minority shareholders and the where a small minority is unwilling to part with bidder, it may be that the pendulum has swung its holding. Arguably, the major objective of the too far in favour of the bidder,
law in this area should be to balance the interests The matter is not just of academic interest, of the majority and the minority; to ensure that since minority freezeouts were recently the majority commits no fraud on the minority investigated by the House of Representatives but also to empower the majority where its will Standing Committee on Legal and Constitutional is thwarted by a bloody-minded minority. The Affairs (Lavarch Committee) who produced a issue has been further highlighted by the recent report in November 1991. The Committee activities of certain participants in Australia's considered the following methods of compulsory securities industry whose investment strategy acquisition and minority freezeout:
involves taking a minority interest in target . a c q u i s i t i o n p u r s u a n t t o a c o u r t a p p r 0ved companies in the anticipation that the company J of arrangement under 5. 414, will become the subject of a full bid.2 ^ , e
. . J, „ . . . . . . Corporations Law;
In a recent Note,3 Kent and Vary submitted . a c q u i s i t i o n following a takeover under the that the compulsory acquisition provisions takeovers legislation, resulting in a corn- contained in ss 701 -703, Corporations Law are , acquisition under ss 701 and 702, not philosophically sound in terms of the Corporations Law-
objectives of the law of compulsory acquisition. . c o m puiSory acquisition under s.411, They stated: Corporations Law;
"It is at least arguable that over recent · reduction of capital to cancel minority years courts have been more disposed in holdings under s. 195, Corporations Law;
favour of offerors and majority shareholders and
to the exclusion of what some would · selective buy-back under s. 206JA, Cor- consider to be inalienable property rights."4 porations Law.6
"Recent developments . . . lead one to The Committee made the following recom- conclude that the legislature and the mendations:
judiciary are paying greater credence to "Recommendation 10
commercial efficiency and are imposing a T h e C o m m i t t e e recommends that, in lesser burden on the offeror."5 relation to a court approved scheme under If the notion of commercial efficiency is a s. 414, the Law be amended to provide the primary criterion in determining the legitimacy rights of compulsory acquisition are not of a proposed forcible acquisition, then the party available unless the thresholds and their seeking total control of the company will almost calculations are determined in the same certainly prevail. As a consequence, once 90 per manner as would apply to compulsory cent of the shareholders have accepted the bid, acquisition under s. 701.
prima facie activating the compulsory Recommendation 11
acquisition provisions of the Corporations Law, T h e C o m m i t t e e recommends that, in the burden on the dissenting shareholders to resist r d a t i o n t o t h e c o m p uis o ry acquisition of the acquisition of their shares will be almost s h a r e s p u r s u a n t t o schemes of arrangement, insurmountable. Considering that the obligation seiective reduction of capital or pursuant to of the judiciary and the legislature is to balance a p o w e r i n s e r t e d in the articles, the Attorney-
General ask the Companies and Securities Advisory Committee for it to report on ways 2.Q.Digby,^liminatingMinorityShareholdings"(1992) i n w h k* P a c t i o n against compulsory
10C.&S.L.J. \05 *x \06;Nicron Resources Ltd v. Catto acquisition on unfair terms can be made (1992)8 A.C.S.R. 219.
3. W. Kent and L. Vary, "Compulsory Acquisition of • Shares" (1991) 9 C.&S.L.J. 261.
4. Ibid., at 267. 6. Report of the Lavarch Committee, Corporate Practices 5. Ibid., at 262. and the Rights of Shareholders, AGPS, Canberra, p. 75.
1993 Compulsory Acquisition of Minority Shareholdings consistently available for minority share- However, with the passage of time, the laws holders."7 of both jurisdictions converged. American law The Australian Securities Commission (ASC), rec°gnised t h a t t h e r u l e o f u n a n i m i t v
in its submission to the Lavarch Committee, "created intolerable holdout problems and commented that ss 701 and 702 provide frustrated many efficient corporate trans- elaborate safeguards for minority interests. The actions, [so] it was ultimately jettisoned in Committee clearly adopted this assessment in favour of a rule that allowed the majority making Recommendation 10 and it appears that to freeze out minority shareholders".1 * the "safeguards" in s. 701 will be a focus for D . . A I • *u · · ι further reform of the other provisions of the B u\ i n a concurrent development, the principle Corporations Law referred to in Recommenda- fkvo,ved t h a t a f lÌu c i a i7 o b!jga t l o n «owed by tion 11. But are the safeguards mandated by t h e ™ ^ i n h a n d h n8 t h e ProPerty o f t h e
ss 701-702 as effective as the ASC would have T W ' A . r ! , A ^ us believe? Anglo-Australian common law evolved the
principle of fraud on a minority. A provision in Historical Background t h e a r t i c , e s o f a s s o c i a t i o n o f t h e company enabled the majority to acquire the shares of Perhaps the safest way to determine the objec- the minority against their wishes13 but it was tives of ss 701-703 is to explore the source of prudent for the enabling provision to be in the the law, the main source being the recommenda- articles from the time of the company's formation tions of the Greene Committee in 1926. How- because any attempt to amend by the majority ever, the common law also plays a significant often led to allegations of fraud on a minority.14 rôle in this area and it will be examined first. Although the majority owes no fiduciary duty per se to the minority and the power to amend The Common Law the articles is not fiduciary in character, the τ .. , rr . . . . A . doctrine of fraud on a minority will invalidate In the law of freezeouts, it appears that Anglo- *ι ι · c *u
A „„, ,. , A \ F F ^a ivu a i ^»s1^ a n y apparently regular exercise of the power to Australian and American jurisprudence u u· u n c ·
^m m A M~ ~ , i f A-ce . u JU 1 I 3FI U U C» ^ alter which is really a means of securing some IZZ , Γ ; ? ? , T, ? Ζ0 t h e Phonal gain« In other words, the power to E Î n T TZg ν Í Γ ϊ ? ? ' E anl y ° T remove the shareholding of the minority "must I A ^ h ? f r t h e be exercised bona fide for the benefit of the com- majonty free rein in the management of the com- a s w h o l e» i6
pany on the basis that shareholders were able rJl 4 *r ., , c± c *u
L· Lu ^ ^n c *u u c\u The concept of the benefit of the company to sell or transfer their shares if they were » ι F * u u *· · / Ai*~™—~—A »*u *u .u as a whole appears to be somewhat inappropriate discontented with the way the company was i_ i. ii_ · ·* A *U · ·* u *u . · ox , A . J ^wiiipaujr wa» h e r e w h e n ^ m aiority and the minority both being run.8 In early Amencan common law, the , ι · u· L n ·* · M
^11-To „ ; ^ „ ^ u w ^»»«vv, Ui^ h claims which are equally meritorious.17
courts viewed share ownership as a form of ^ * · ι *u Λ ι «. c
„^*OA ^ u *u * i A * u * ι ¿ I Certainly the notion is not novel to cases of vested nght that could not be taken without J
consent. Therefore, all shareholders not only had
the right to retain their shares in a corporation, n FH Easterbrook and D. R. Fischel, "Corporate Control but a l s o h a d t h e right t o v e t o a n y f u n d a m e n t a l Transactions" (1982) 91 Yale LJ. 698 at 723.
c h a n g e in the nature o f the corporation's b u s i n e s s 12. Sterling v. Mayflower Hotel Corp. 33 Del. 293,93 A. 2d ΟΓ the terms of its existence.9 Majority share- ΙΟΊ; Perlman v. Feldman 2\9 F. 2d 173(1955).
holders were powerless to overcome dissenters' 1 3 P¿fpsv' Ma"ufacturersSecurities^(1917) H6L.T.
opinions, except by buying them off.10 14. Brown v. British Abrasive wheel Co. [1919] l Ch. 290.
15. Peters' American Delicacy Co. Ltd v. Heath and Ors
" (1939) 61 C.L.R. 457 at 511, per Dixon J.
7. Ibid., p. 80. 1 6· Allen v· GM Reefs °f West AS™0 Ltd [1900]1 Ch. 656.
8. Kent and Vary, supra, n. 3 at 261; L. Gower Gower's 1 7· T h i s i n d e e d w a s d i s c u s s e d bY D i x o n J· i n t h e Peters' Principles of Modern Company Law (4th ed., 1979), American Delicacy case, supra, n. 15, when he stated
expropriation, since it underpins the modern law benefit of the company as a whole" was of oppression of the minority.18 However, its lack inappropriate, especially (citing the words of of utility is illustrated by the cases which are Dixon J. in Peters'American Delicacy) since "the often cited in this area: Brown v. British Abrasive very subject matter involves a conflict of interests
WheelCo.i9 andSidebottom v. KershawLeeseand and advantages".23
Co. Ltd.20 Therefore it became increasingly obvious that In Sidebottom's case the proposed amendment the common law was, and still is, inadequate to the articles would compel shareholders who to solve the problem ofa small minority of share- were business competitors to transfer their holders thwarting the will of the majority, shares. In such a case assessing the bona fide
interests of the company as a whole was quite The Legislative Response simple because the legitimate business interests . .
of the company (as a separate entity to the share- American jurisdictions enacted merger holders) would be promoted by eliminating the statutes which enabled majority shareholders to power of competitors to obtain inside force minority shareholders to relinquish their information. However, Browns case is a more shares in exchange for cash. Where the total typical example of expropriation where each holdings of insiders aggregate the amount party has a legitimate claim. In that case the necessary for a short-form merger (for example, majority had capital which was needed by the 90 per cent in Delaware; 95 per cent in New company, but only wished to inject it if they York), the insiders form Newco ,which adopts could acquire a 100 per cent shareholding. The a short-form merger with Pubco . Under the minority simply did not want to sell their shares. merger agreement the stockholders of Newco An attempt by the majority to amend the articles r e m a i n t h e sole stockholders of the surviving failed since it was not for the benefit of the com- enterprise in the merger. Minority stockholders pany as a whole, merely for the majority's benefit. i n P u b c o r e c e i v e c a s h o r securities in return for It is difficult to assess what is in the company's their stock. The merger itself is adopted by a interest when it cannot be easily separated from simple resolution of the Board of Directors of its parts. As Kent and Vary have quite rightly Newco.24 If the initia holding of the insiders pointed out, the decision is anomalous given that Pri°r to the merger is less than 90-95 per cent, the only alternative to the injection of capital * long-form merger is necessary which requires was to wind up the company.21 adoption by a Pubco stockholders meeting,
The situation arose again in the recent case involving proxy statement essentially in of Gambotto v. WCP Ltd}2 where the majority prospectus form, which must be filed with the shareholders, who held 99.7 per cent of a com- Securities Exchange Commission."
pany passed a resolution purporting to alter the In relation to both forms of merger, minority company's articles to permit the expropriation shareholders are granted a right of appraisal ofminorityinterests.lt was held by McLelland J. which is similar to the right conferred on that, since the immediate purpose and effect of dissenting shareholders under s. 701(6), the amendment was to permit expropriation of Corporations Law. The remedy requires the the minority's shares, it amounted to unjust corporation to facilitate the shareholders' with- oppression of the minority and therefore was drawal by buying back their shares at fair value invalid and ineffective. His Honour further or its equivalent as determined by appraisal commented that the test of "bona fide for the proceedings.26
18. See, e.g., Greenhalgh v. Arderne Cinemas Ltd [1951] 23. Supra, n. 15 at 512.
1 Ch. 286; Peters' American Delicacy, supra, n. 15; 24. M. Lipton and E. Steinberger, Takeovers and Freeze- Ngurli Ltd v. McCann (1953) 90 C.L.R. 425; s. 260, outs (1978), Law Journal Seminar Press, New York, Corporations Law. pp. 422-423.
19. Supra, n. 14. 25. Ibid.
20. [192O]Ch. 154. 26. H. Kanda and S. Levmore, "The Appraisal Remedy 21. Supra, n. 3 at 262. and the Goals of Corporate Law" (1985) 32 U.C.L.A.
22. (1992)8 A.C.S.R. 141. L.Rev. 429. Note that in 1975 a statutory appraisal
The cash merger statutes have been described itself to the vast majority of their fellow
a s shareholders, with the result that the trans-
"the ultimate expression of the enabling action fails to materialise Jn our opinion this philosophy, dominant in twentieth century position-which is in effect an oppress^n American corporate law, which promotes °f ^majority by a minority-should be statutes that grant those who control m e "
corporations almost unlimited power and There are a number of elements to these leaves to the courts the prevention of comments which are of interest:
exploitation of the minority's interests".27 /1X ^1 . - ,
(1) The characterisation of the dissenting Although the tendency of Australian corporate shareholders as being either greedy or legislation in the last decade has been to apathetic.
intricately define the rights and powers of (2) The overwhelming significance of the participants in corporations, the practical effect acceptance of the bid by the vast of our compulsory acquisition provisions is the majority of the shareholders.
same. (3) The legitimacy of the desire of the The Australian legislative framework had its majority to require 100 per cent of the origins in 1928 with the recommendations of shareholding.
the Greene Committee, set up by the United ^1 , , • •
Kingdom Board of Trade. The Greene T h e s e t h e m e s r e c u r constantly through the Committee had a reference extending to the development of the law in this area and will whole field of company law, but the issue of ^ examined more closely later.
dissenting shareholders was examined in respect Jh e Committee recommended that where a of simplifying the process of reconstruction and 8 ^ e of amalgamation involving the transfer amalgamation between companies. As stated by 0^ sharfs had been sanctioned by the holders the Committee: y of at least 90 per cent of the shares, the
purchasing concern should be entitled as of right
"The acquiring company generally desires within a limited time to acquire the shares of to obtain the whole of the share capital of the non-assenting shareholders, with a right of the company which is being taken over and appeal to the court on any question of value in some cases will not entertain the business or oppression. The procedure was only available except on that basis . . . . It has been where the purchasing concern was a company represented to us that holders of a small and did not apply where the company already number of shares in the company which is held more than 10 per cent of the shares which being taken over (either from a desire to it desired to acquire.29
exact better terms than their fellow share- The Cohen Committee in 1945 recommended holders are content to accept or from a lack that the legislation be extended to enable of real interest in the matter) frequently fail compulsory acquisition where a company to come to an arrangement which commends initially holds more than 10 per cent of the shares,
provided that the offer is made to all the holders concerned and is accepted by not less than 75 26. comd per cent in number of the holders, holding
right was also enacted in Canada in the Canada Business between them not less than 90 per cent of the Corporations Act. Upon the happening of certain funda- value of the shares to be acquired30 The
s^ASSâït^^^ij; Commítt r a ' so rec r ised the va í e e f r n *
buy their shares. The appraisal right was adapted from reciprocal rights to the minority shareholder to
similar provisions in New York's Business Corporation Law and was intended to strike a new balance between majority and minority shareholders. For an excellent
coverage of the appraisal right in Canada, refer to 28. Board of Trade, Company Law Amendment Committee J. G. Macintosh, "The Shareholders' Right of Appraisal Report (1925-1926), p. 43.
in Canada: A Critical Reappraisal" (1987) 24 Osgoode 29. Ibid., pp. 44-45.
Hall L.J. 201. 30. Board of Trade, Report of the Committee on Company 27. Weiss, supra, n. 9 at 625. Law Amendment {\945), Cmd 6659, par. 141.
87
compel acquisition of their shares where they By contrast, the Attorney-General's Depart- would be "boxed in" by a bidder obtaining 90 ment believed that the change to the test in per cent of the shares.31 cl. 701 produced greater certainty. As stated in
Australian jurisdictions copied the United evidence by Mr Davies from the Department:
Kingdom legislation, apparently without any "It is a difficult area because you will always independent debate or discussion as to its merits. h a v e shareholders saying 4I want to hold on Subsequently, further amendments were made t 0 m y sha r es'. It is a balance that we have by the Eggleston Committee which enabled t r i e d t 0 s t r i k e between the interests of the individuals to take advantage of the compulsory company and the interests of the share- acquisition procedure.32 The Jenkins Committee holders "35
in the United Kingdom declined to do the same
because it considered that the amendment was Thus, each submission had a different percep- an impermissible departure from the original aim tion as to the point at which the line should be of the legislation which was to facilitate company drawn. If the test was to be relaxed to increase mergers.33 market efficiency, an increased number of share-
Further amendments were made pursuant to holders would be unhappy as a result of having the Joint Select Committee on Corporations their property compulsonly acquired. The NCSC Legislation (Edwards Committee) Report warned that "you^will be causing more anguish concerning the requirement that 75 per cent of than is justified".36
the target shareholders must participate in the The Committee concluded that certainty is of offer where the offeror holds greater than 10 prime importance and that there should be no per cent of the shares (the provisions of confusion or difficulty of application of the legis- s. 42(2)(b) Companies (Acquisition of Shares) lature's intention. With the stated aim of fulfilling Code, the precursor to s. 701 (2)(c), Corporations the legislature's intention, the Committee Law). The deliberations of the Committee tend adopted a test which favours market efficiency to illustrate the comments made above by Kent over shareholder protection,
and Vary.
The Committee took submissions on a The Statutory Provisions
proposed amendment that the 75 per cent figure "Dissenting shareholders" in the context of should include all shareholders selling out Ss 701-703 means shareholders who do not regardless of whether to the offeror or to a rival a c c e pt , or fail to respond to, a takeover offer.37
bidder. The National Companies and Securities where an offeror who owns less than 10 per Commission (NCSC) in its submission c e n t o f t h e shares of a target company makes considered that the benefit to acquirers under a fuH takeover offer an entitlement to acquire the clause was effected at the expense of rights f u l l o w n e r ship arises where more than 90 per of minority shareholders. It stated that it had centofthe shareholders accept the offer.38 Where received a lot of complaints since the 1987 crash a n 0fferor holds in excess of 10 per cent at the and its concern was that acquirers of shares were t i m e t h e b ¡ d i s m a d e j it w¡n ais o be necessary taking advantage of low share prices to take full f()r 7 5 p e r c e n t o f t h e offerees to have disposed ownership of companies. Shareholders were o f t h e i r s h a r e s t 0 the offeror or that 75 per cent being forced to sell at a loss or under value.34 o f t h e registered holders of the shares are not
so registered at the expiration of one month after the end of the offer period.39 Thus where less than 10 per cent of the shareholders have not
32. Company Law Advisory Committee, Report to the
Standing Committee of the Attorneys-General on "
Disclosure of Substantial Shareholdings and Takeovers
(28 February 1969), pp. 12-13. 35. Ibid., par. 13.45.
33. Board of Trade, Report of the Committee on Company 36. Ibid., par. 13.39.
Law Amendment (1962), Cmnd 1,749, par. 283. 37. Hespe v. Surfers Paradise Forests Ltd (1985) 10 A.C.L.R.
34. Report of the Joint Select Committee on Corporations 182 at 186, per Carter J.
Legislation (Edwards Committee 1989), pars 13.35- 38. Section 701(2), Corporations Law.
13.36. 39. Ibid.
1993 Compulsory Acquisition of Minority Shareholdings accepted or responded to the offer the offeror Compulsory acquisition of shares under may compulsorily acquire all the shares of those ss 701-703 constitutes a rare example where a shareholders. private person can acquire the property of
Pursuant to s. 701(2) the offeror is obliged another against the will of that other, purely to give notice to dissenting offerees before the because the acquirer wishes to have total control end of two months after the end of the offer of a commodity. To use the language of Black- period. One month after the notice has been stone, "the public good" which justifies the served under subsection (2) the offeror is entitled compulsion is the facilitation of takeovers. In to become registered as holder of the shares,40 this sense the nature of the public good is one unless dissenting shareholders have made step removed from most situations where applications to the court under s. 701(6) that compulsory acquisition of property interests is their shares not be compulsorily acquired. In utilised.44 Therefore, not only must it be clear order to facilitate this right to approach the court, that the power to compulsorily acquire the dissenting shareholders may seek a written encourages takeover activity, but that takeover statement from the offeror of the names and activity is in itself good for the public at large, addresses of all other dissenting offerees.41 Although there has been significant research
Following an acquisition of 90 per cent of conducted as to the merits of takeover activity, the shareholding, s. 703 enables remaining the scope of the research is still narrow45 and shareholders and holders of non-voting shares, the normative issue as to whether takeovers are renounceable options or convertible notes to beneficial remains unresolved.46
require the offeror to purchase their holding. The Therefore, it could be suggested that the extent offeror is also obliged to give notice to these 0f the public good does not warrant the parties one month after the end of the offer
period, and the notice to holders of notes and options must contain an expert's report stating
whether in the expert's opinion the terms of the 4 4· I^ generally, Law Reform Commission of Canada, . . . r · , , , ,Λ Report on Expropriation (1976), Ottawa.
acquisition are fair and reasonable.« 4 5 F ^ M c D o u^a lT , "Some Evidence on the Determinants and Effects of Corporate Takeovers in Australia" in T h e P o l i c y BaSIS for t h e C o m p u l s o r y Takeovers and Corporate Control Towards a New
ACQUisition Of S h a r e s Regulatory Environment ( 1987), Centre for Independent
M Studies, p. 123:
In this section the policy behind the com- "[T]he effect of takeovers on issues such as produc- pulsory acquisition provisions will be explored, tive capacity, competition, external balances, in order to isolate the philosophical and social business investment, research and development and
"objectives" referred to by Kent and Vary. Γ Α Α ! · ^ ^ ^ " "^** ** " ' ^ * -ru A -r- r\ χ ss ι 46. Compare the following comments:
The Agony: The Concept of Compulsory ( a ) B y McDougaii, ibid., P. 121:
cquisilion „A strategy of corporate acquisition resulted in a deterioration in the performance of the merging (a) The Public Good firmSî both compared to their pretakeover
"AWL ^ · ^r- ι · · · ™ * experience and compared with the experience of What justifies compulsion IS in Blackstone S t h e m a tching non-merging firms . . . . Further, the p h r a s e , ' t h e general good of the whole com- actual returns received by shareholders in the munity', 4the public good'. . . . Adequate acquiring firms were little different from those compensation balances the acquisition, but e a r n e d b v„ shareholders in the non-merging only 'the public good' can balance the firms
r o m n n k i n n "43 (b) By S. Bishop, P. Dodd and R. Officer, Australian
ψ U Takeovers: The Evidence, ¡972-1985 (1987) Centre for Independent Studies, p. 80:
"Large increases in shareholder wealth are generally 40. Section 701(10), Corporations Law. associated with takeovers. Th[e] evidence is 41. Section 701 (9), Corporations Law. consistent with the view that takeovers, on average, 42. Section 703(5), Corporations Law. lead to more profitable uses of company assets, and 43. K. Davies, Law of Compulsory Purchase and Compensa- as such they play a vital role in the capital allocation
tion (1984) Butterworths, London, pp. 6 and 7. process."
89
expropriation. What about the other side of the an association with a number of persons for a equation; that is, should shareholders' right to common object, that object normally being the hold their property be given primacy? economic gain of its members. As stated by
Bryson J. in Nicron Resources Ltd v. Catto,5]
(b) The Private Interest „a n e y e n t ,¡ k e t h a t [ t h e e x p u l s i o n o f t h e
"Small wonder, then, that attempts by minority] could be interpreted as according governments to acquire or 'resume' land held less than appropriate value to the standing by individuals should occasionally meet with of shares as property which should be resistance. In the Melbourne suburb of respected and not subjected to expropriation, Camberwell, a house owned by a Mrs even with compensation unless there is Campigli stands as a lonely island in a sea lawful authority; and also less than of car-parking, a monument to an elderly appropriate value to continuing membership lady's resistance."47 and freedom from expulsion".52
It seems that the issue of compulsory On the other hand, a shareholder in a public acquisition of shares would never conjure up company is quintessential^ a "mere purchaser figures such as Mrs Campigli. The image of Mrs of income"53 and, in this context, a share is Campigli and her struggle to keep her property merely a capitalised dividend stream.54
is likely to invoke public sympathy and the This notion of the share as a source of income suffering caused by the disturbance of a property means that fair compensation to dissenting right to land is compensable in many juris- shareholders will always be assessed by reference dictions. The Victorian legislation provides for to the price of the shares. There is no right per a "solatium" for the compulsory nature of the se to the form of the investment rather than its acquisition which is paid in addition to the value. Again as succinctly stated by Bryson J.
market value of the land.48 In Canada a citizen in the Nicron case, "[t]he courts appear to me may claim damages for injurious affection even to have equated the payment of the fair when no land is ultimately taken.49 In contrast, equivalent in money of the value of the shares it has been held that conditions cannot be with fair and equitable treatment".55
attached to the compulsory acquisition of shares Shareholders who desire to retain ownership so as to afford solace to the individual.50 of the shares in specie will receive little sympathy This differential treatment of land and shares because the assumption is that they are merely raises important questions as to the nature of holding out for a higher price. For example, in the property that is sought to be compulsorily Re Shoppers City Ltd and M Loeb Ltd56 a share- acquired. Certainly the nature of the property holder testified that the 13 shares he held were being defended in each case is qualitatively a Christmas present from his wife and he planned different. Mrs Campigli's resistance appears to to give them to his three year old son on his be a manifestation of the human urge to acquire 21 st birthday. The court held that personal or and defend territory, whereas it is difficult to sentimental attachment was not a sufficient argue that the ownership of shares satisfies such reason for blocking a compulsory acquisition, a deeply ingrained need.
The nature of the property in a share varies with the nature of the company from which it
is issued. On one hand, the purchase of shares 52 13^228-229.
in a company clearly connotes participation in 53 B.C. Hunt, 77K? Development of the Business Corporation in England 1800-1867 (1936), Harvard Univ. Press, p. 130.
54. Sanford v. Sanford Courier Service Pty Ltd (1986) 47. G. L. Fricke, Compulsory Acquisition of Land in 10 A.C.L.R. 549 at 563, per Waddell CJ. See, also,
Australia (2nd ed., 1982), The Law Book Co. Ltd, p. 1. D. D. Prentice, "The Theory of the Firm: Minonty 48. Ibid. Shareholder Oppression: Sections 459-461 of the 49. Law Reform Commission of Canada, op. cit., η. 44, Companies Act 1985" (1988) Oxford J. of Legal
p. 29. Studies 55.
50. Re Deans [1986] 2 N.Z.L.R. 271; Manning v. Harris 55. Supra, n. 2 at 229.
Steel Group Inc. (1989) 63 D.L.R. (4th) 125. 56. (1968), [1969] 1 O.R. 449 (HC).
1993 Compulsory Acquisition of Minority Shareholdings
The difficulty with the assumption that price economies of scale, centralised management and is at the core of the conflict is that there will corporate planning or economies of be a blunted perception of oppression of minority information.61
shareholders. In particular there is a risk of an T h er e are also advantages in firms going unfair appropriation of hidden values in the p r i v a t e ) s u c h a s the elimination of costs due to enterprise by majority shareholders.5? As stated p u b l i c ownership; for example, legal and auditing by Brudney and Chirelstein:5* f e e S 5 shareholder relations and the disclosure
"[T]he likelihood that public investors will obligations mandated by the Corporations Law be treated unfairly is greater when they a n d t h e Australian Stock Exchange. The avoid- receive cash or debt, with the insiders in a n c e o f disclosure obligations can benefit the effect receiving or retaining the equity . . . company if it has to sacrifice prospective business [Experience suggests that payouts to the opportunities where disclosure is required.62 public in cash or securities often reflect a It is generally accepted that the advantages temptation to undercompensate the public available under the grouping provisions of the investors."59 Income Tax Assessment Act 1936 (ITAA)
constitute one of the main attractions associated The Ecstasy: The Advantages of Full with a successful bid for all the outstanding Ownership shares in the target company. Section 8OG, ITAA,
«τ . . n . , enables losses to be transferred from one com-
„ ϊ ™ ί !"hi IT* a Γ "!f Tl b e Pany to another within the group so that the
Γ Η „ h Í
a ny P"
v a t e t u n d^aking; f
ranysferee can d a i m a deduct¡on f£ ^
|osses 63 and in other instances different parties may I n ANZ ^ ^ & Tmstees ud v Humes UdMbe able to make more productive use of an · Λ ., Λ ^_ . ._ «.
ooo^ *u~ ui u Z evidence was adduced that the target company asset than is possible by the current w o u,d s a v e b e t w e e n $ 6 m a n d $*8 m a \' ¿ ZZ ;„H ' ΟΓ. T f íe q u e n t l y if the group could take advantage of s. 8 0 G «
arise and are commonly about the extent 6 K 6
to which a right is protected or accorded Ultimately, the desire to attain full ownership preference over another entitlement."60 o f companies reflects the increasing dominance of the group context of corporate life. The Full ownership of companies simply means capacity to have full access to a company's cash that the shareholder has total control of the use flow means that funds may be lent to other to which the company can be put. Thus, the com- companies in the group on unsecured terms or pany's assets or cash flow may be freely used, sometimes even without a promise to repay. The and the agency costs of management are reduced. presence of minority shareholders means that The purchaser may also recoup the costs of the directors have to be more careful about fulfil- acquisition by appropriating the gains from the ment of their fiduciary duties and majority share- transfer of control. The value of the combined holders must be aware of potential oppression.66 Ξ ί ^ "Dépite the established legal theory which values of the parent and subsidiary due to s a y s ft¿ e a c h c o r p o r a t e e n ü t y\ {0 b e ¿g a f d c d
57. Macintosh, supra, n. 26, states at 229:
"The risks if opportunistic redistribution are 61. Easterbrook and Fischel, op. cit., η. 11, at 706.
heightened due to asymmetric possession of 62. Ibid.
information regarding company value. The majority 63. B. Santamaria, "Takeover bidders—beware convertible shareholders or managers may possess inside notes" (1989) B.C.L.B. 361.
information disclosing hidden values that are not 64. (1989) 15 A.C.L.R. 392.
reflected in the market price of the company's 65. Ibid., at 394.
securities and may wish to capture these values for 66. See, e.g., Perpetual Trustee Co. Ltd v. Bell Resources themselves by excluding the minority." Ltd (1990) 2 A.C.S.R. 337, where the plaintiff who 58. Supra, n. 1. held 1.9% of the shares in the company complained 59. Ibid., at 1,359. of a breach of fiduciary duty by the directors approving 60. J. L. Knetsch, Property Rights and Compensation (\9%3) a $600 m loan to another company in the group on
Butterworths, Canada, pp. 1-2. an unsecured basis.
91
as legally distinct from other corporations, the "Section 42 permits certain property rights economic reality is quite different. A Perth based of shareholders to be removed in the interests corporate lawyer noted that 'there is a tendency of commercial efficiency. . . . The under- to have regard to the interests of the group qua lying assumptions are that the very high group, rather than the company as such' . . . . success of the offer implies that the terms As one Adelaide based chief executive noted: of the offer (and consequently of the com- 'groups are being treated as if they are an pulsory acquisition) are very favourable and individual entity. This does not matter so much that, having achieved such a favourable when the going is good but in bad times this response from accepting shareholders, a is a problem as money is moved around as if bidder should be allowed to achieve the there were no difference between the companies benefits of total ownership of the in the group.' "67 company . . . ."69
The Law of Compulsory Acquisition of , T h e <** ., a w o n f 701-703, Corporations Shares: Developments Since the Greene Luaw a n d theiur equivalents in other jurisdictions Committee abounds with judicial warnings to minonty
shareholders as to the overwhelming odds they Adopting the themes derived from the Greene face in attempting to bypass the will of the Committee and elaborated above, the manner majority. It seems to be almost mandatory for in which the law has developed to embrace these judges hearing applications under s. 701(6) to themes may be traced. refer to the very high evidentiary burden suffered by the dissenting shareholder.70 For example, The Significance of Ninety Per Cent Acceptance Maugham J. in In Re Hoare & Co?l stated:
The rule that the bidder is required to obtain " . . . it seems to me impossible to suppose acceptances from 90 per cent of the shareholders that the court, in the absence of very strong has meant that an assumption has arisen that grounds, is to be entitled to set up its own the acquisition is fair. The rights of individual view of the fairness of the scheme in minority shareholders are therefore viewed in opposition to so very large a majority of the context of the decision of an overwhelming shareholders".72
number of shareholders to sell their shares. It
is not clear from the deliberations of the Greene Vaisey J. in In Re Evenite Locknuts13 also made Committee how the figure of 90 per cent was the following comments:
arrived at and, as stated above, this threshold M[¡]t c a n n o t b e rf h t t h a t o n e s h a r e h o l d e r, figure varies m different junsdictions.6« Clearly o w n j one-seven-hundredth part of the acceptance by 90 per cent of the offerees is shares affected, should be entitled to stand evidence the bid is fair, but 10 per cent still ¡ n s t t h e d e d s ¡ o n o f 5 9 9 / 7 0 0 ^ of remains a significant minonty and the 90 per t h e ^ ¡ t a, m e r e, b e c a u s e h e has> a s
cent acceptance should not override an indepen- h e t h i n k ^ n l e f t s o m e w h a t i n the dark dent assessment as to whether compulsory ¡n rf t o fte m a t e r i a l f a c t s „74
acquisition on the terms of the bid is in tact ° fair.
An example of the persuasiveness of the 90 per cent acceptance is the comment of the NCSC
in its Release No. 139: 6 9 NCSC Policy Statement, Companies (Acquisition of Shares) Act and Codes- Section 42 Compulsory Acquisition, Release No. 139, 2 December 1986, p. 1.
70. For example, Blue Metal Industries Ltd v. Dilley [ 1969]
All E.R. 437; Re Grierson Oldham & Adams Ltd [1968]
Ch. 17; Eddy v. W.R Carpenter Holdings Ud (1985) 67. R. Tomasic and S. Bottomley, The Fiduciary Duties of 10 A.C.L.R. 316.
Directors in Listed Public Companies, Discussion Paper 71. [1933] All E.R. 105.
1/1991, Centre for National Corporate Law Research, 72. Ibid., at 107.
p. 9. 73. [1945] Ch. 220.
68. For instance, it is 95% in New York State. 74. Ibid., at 224-225.
1993 Compulsory Acquisition of Minority Shareholdings The extent of the dissentient shareholding will for relief, since the trends seem to indicate that, always be a relevant consideration, but it sub- in the absence of fraud or other impropriety, it mitted only within the context of balancing the is almost certain that dissenting shareholders will interests of the minority and the majority. An not succeed in defending the acquisition of their example is TNT Ltd v. NCSC15 where TNT property. Since there are other, more efficacious acquired greater than 99 per cent of the shares remedies available where fraud or impropriety through its holdings and that of an associated can be established,76 one might ask whether by company. Unaware that it was entitled to the process of further amendment and judicial compulsorily acquire the remaining shares, TNT interpretation, the legislative provisions are now made a subsequent bid for them, only yielding useless to protect the dissenting shareholder.
66 per cent of acceptances. TNT appealed to
the Supreme Court after the NCSC refused to The Characterisation of the Dissenting modify the Companies Code under the pre- Shareholders: Apathetic v. Dissenting decessor to s. 730. In dealing with the applica- A ,. , , A , A 4 .. , tion, Gobbo J. took the following matters into k A s discussed above Anglo-Australian law in consideration· ™s a r e a developed from a premise that the
majority should be allowed free rein in the
• the history of the dealings in the out- management of the company and, unlike United standing shares, including the many States law, there was no heritage of vested rights attempts made by TNT to communicate in the minority shareholder. In the context of with the shareholders in question and the ss 701-703, by focussing on the will of the absence of any real interest in the affairs majority (as manifested by the 90 per cent of the company; for example, none of the acceptance), the issue of the property rights of relevant shareholders had attended the dissenting shareholders or, generally, of their company's recent general meetings; oppression, becomes subsidiary. The oppression
• the significant burden and cost of issue becomes subsumed into the issue of price, servicing the remaining shareholders; Therefore, the issue becomes not whether
• the uncertainty inherent in the situation minority shareholders should retain their shares, and the inhibitions this had created in the but at what price is it fair to compulsorily acquire commercial planning of TNT; them. By corollary, the shareholder tends to be
• the unchallenged expert evidence that the characterised as either uninterested in the price offered for the shares was very acquisition or attempting to coerce the majority generous; into paying a higher price. This was the premise
• the considerable inconvenience, long- adopted by the Greene Committee, as discussed term uncertainties and impracticability of above.
the only alternative seriously proposed A number of issues are raised by this charac- (that is, amendment of the articles); and terisation of the rights of the minority share-
• the fact that there were only nine holder. Firstly, the question arises as to whether dissenting shareholders with 2652 shares shareholders should be entitled to the form of out of 77 million. their investments as well as their value. Secondly,
U û M u t j · Λ Λ .u ..- should there be a differentiation between share- Hence, his Honour considered that the circum- ι , , U , w. Al · «. * Λ AtU
O T O_ „ 'r.u " .· i" J J j holders who are lost/dead/uninterested and those ί ϊ Ξ Ι Ϊ W e.r e e x t c eSl o n a l a n d,d , d who genuinely do not want to sell their shares?
oTpro ert ri hte™ ^ Pr e s e r v a t , o n The case of TNT Ltd v. NCSC demonstrates that P P J & - there can be little complaint if the acquisition Although the facts of the TNT case may be is just a mopping up exercise, especially where exceptional, its outcome is not. In fact, it is not the shareholding is fragmented and the share- surprising that judges issue stern warnings to
dissenting shareholders who bring proceedings
76. For example, s. 260 in cases of oppression or injustice by members or officers, s. 232 in relation to the officers of the company or at general law if fraud on a minority 75. (1986) 11 A.C.L.R. 59. or breach of directors duties can be established.
93
holders have no involvement with the company. SCI was unable to avail itself of the compulsory But should there be different rules for share- acquisition provisions because s. 703 only gives holders in this category and those who genuinely the right to the minority holder to have those do not want to sell? securities purchased by the bidder. There is no An interesting point of comparison to the 77V7 corresponding power in the bidder to acquire case is the case of ANZ Executors and Trustees them compulsorily even when the 90 per cent Ltd v. Humes Ltd11 where there were identifiable threshold is passed.78 The NCSC did not have holders of convertible notes who were threaten- the power under s. 58 to modify s. 42 in the ing to convert them to shares so as to ruin the way suggested by SCI. Any attempt would have owner's tax benefits under s. 80G, ITAA. There- been a "highly questionable exercise of the fore, the noteholders were not only in a very discretion".
strategic position, but were clearly aware of their SCI argued that PS had not come to equity bargaining power. with clean hands and therefore should be denied
In that case the defendants represented the a remedy. Brooking J.'s comments on this interests of the Smorgon family who succeeded submission are very instructive:
in 1988 in obtaining all 223 million shares in tt ., # u . . u
Humes Ltd. There were also a large number of ; : : * 1S s a'd t h e r e ^Tn ^ ^ convertible notes on issue, created by a trust deed w h l c h 1^ f " ™ 0xf°rdA Ό**>™?Α t e l 1* made 29 April 1987 between Humes and ANZ. ™ J "e a n s f.b a r e'y h o nf ^ T \ iff "0 t When the Smorgons made the takeover bid in f1!1* anything done by the plaintiff here March 1988, they made a corresponding offer f a i r l>; " J " « t h a t d ^ H ' ih Γ ΐ ΐ ί tn opnnjro oii »Κα Ληη,,^ίκι. • TU u · ι no doubt the plaintiff hoped that the to acquire all the convertible notes. The vehicle c \A r A *u \ A for the acquisition was a company called SCI Smorgons would find themselves under Acquisitions Pty Ltd and it acquired 98.8 per Pr e s s u r e · · · .t h a t Sr o UP w a S "0 t. !"
cent of the notes. A company called PS (Enter- necessitous circumstances or engaged in prises) Nominees Pty Ltd held 50,000 of the g° °d T n * " Tf & " f i notes but refused to sell. m , l , , o n d°1 , a r c o m m e r c'a l enterprise which
C^1 , . .c , ... was used to . . . having available to it the SCI was concerned that .f the convertible notes b e s t o f, , a n d o t h e r % t a d v i c e. " 79
were converted into shares Humes would cease
to be a subsidiary of SCI. Hence, s. 80G would Therefore, in TNT the bidder was allowed to no longer apply because the grouping provisions tidy up after the acquisition by use of apply only to companies whose beneficial owner- expropriation, whereas in ANZ the judicial ship is identical throughout the relevant year of response was to let the market decide. Although income. SCI asked the NCSC to exercise its the decision in ANZ was predicated on a discretion under s. 58 (s. 730, Corporations perceived inadequacy of the law, the comments Law) to modify the Companies Code to enable of Brooking J. indicate generally that the it to compulsorily acquire the notes but, after perception of the minority shareholders coercing representations by PS, the NCSC refused. the majority may be far-fetched.
Upon an application to the Supreme Court,
Brooking J. awarded specific performance of the Valuation of Shares and Securities contract to allot the shares to PS, rejecting SCI's ( ς,
argument that damages would be an adequate 'a' ¿hares
remedy. The issue of the assessment of damages If price is indeed the fulcrum of the rights was "replete with difficulties" since it would of the minority shareholder, then the calculation focus on what price SCI would be prepared to of that price will clearly be crucial. Pursuant pay to rid itself of the problems occasioned by
an outside shareholder and no one would be better able to quantify that loss than SCI itself.
78. But note the ASC Practice Note, Release 8/91, Takeover Bids for Non-voting Shares (6 June 1991), CCH Australian Securities Commission Releases,
to s. 701(5), once the bidder has given notice The question of the appropriate valuation of of its intention to acquire the shares, an obligation shares held by minority shareholders upon a arises to acquire the shares on the terms applying takeover bid arose in the recent case of Hawker under the takeover scheme or pursuant to the De Havilland Ltd v. ASC.*6 In that case, BTR takeover announcement immediately before the PIc (BTR) proposed to make a bid for all the end of the offer period. There must be some shares in Hawker Siddeley Group (HSG) in the issue as to whether this test is sufficient, since United Kingdom. This would result in a down- a dissenting (as opposed to apathetic) share- stream acquisition of 73 per cent and 85 per holder would presumably have accepted the bid cent respectively in two Australian companies, in the first place. The two companies sought an exemption under
In comparable legislation in Canada,80 the s· 7 28 , Corporations Law and one of the statutes allow shareholders who initially failed conditions that the ASC put upon granting the to tender into the bid to elect to take either the exemption was that BTR make a bid for the same consideration offered in the bid or a court minority shareholdings.
determination of "fair value". It has been argued The Administrative Appeals Tribunal con- that allowing shareholders to make this election sidered that the companies and the ASC should may render successful takeover bids more both appoint a valuer. The valuers should rely difficult by offering the hope to minority share- upon NCSC Release No. 102 as to the method holders of realising a better price by declining of valuation to be adopted. Although this Release to tender into the bid and claiming the appraisal pertained to reports prepared by target corn- right on a second-step cashout.81 Hence, paying panies for the preparation of Pt B statements, dissenters the same price offered in the initial the principles were just as useful in this context, takeover offer is quite adequate.82 If a range of values was given by the appointed
The United States authority of Weinberger v. valuers, the top of the range should prevail.87 UOP IncP construed the Delaware statute and
found that the price offered must be fair, which (b) Securities
Ì 7 n0n ÌS e d- -0 n aff 0 r m U l aHb UJ Γ " ? "0 T l 0 " I" Australia, a court which is called upon to a consideration of a myriad of factors, including m a k e d e t e r m i n a t i o n u n d e r ¡, 703(3) with Z^Zl, υ ' ' T V af Í ' ?d e n d S' Τ ' " 8 aspect to the acquisition of securities has very prospects the nature of the enterprise and any ,¡ f i d e ^ e x e r c ¡ s e o f ¡ t s d i s c r e t i o¿
other facts which were known or which could Awu u •» *u
. _ o • · J c.u A . c .u j Although an expert s report must accompany the be ascertained as of the date of the merger and · u >u WAA A S ¿ / C \ ι· ι .1 ,. u. ._ - / υ j notice given by the bidder under s. 703(5) S í ^ W ™ t ^ ΐ0 n erf t h' " " ' Τ * indicating whether the terms of the acquisition F^^Jr^*\ V1?" "? i n a r e f a i r a"d reasonable, Bryson J. of the Supreme
t recognised that a shareholder s equity interest Court ofNew South Wales has expressly rejected ZL^SS Tnn°Th VÎe S O l e , y b y t h e this approach as not being appropriate to a 3 Ξ jr a d i n g h V a l u K e· ™!S 1St b e c a u sf. Τ ™1* judicial determination.88
shareholders when bought out, immediately lose in Kingston v. Keprose Pty Ltd™ Bryson J.found all future rights and benefits they may receive t h t. 6 y J J
from participation in the corporation's business.85
(1) The words used in the provision confer a very wide discretion on the court and the court may have regard to any con-
80. Canada Business Corporations Act, s. 199; Ontano sideration which is not extraneous to the
Business Corporations Act, ss 187-188. purposes of the Companies Code.
81. Macintosh, supra, n. 26 at 238, discussing Re Whitehorse Copper Mines Ltd v. Lueck (1980) 10 B.L.R. 113 (BCSC).
82. Ibid., at 239.
83. 457 A. 2d 701 (Del. 1983). 86. (1991) 6 A.C.S.R. 579.
84. Ibid., at 713. 87. Ibid., at 591 -592.
85. M. Phillips, "Weinberger to Rabkin: Fine Tuning the 88. Kingston v. Keprose Pty Ltd (No. 2) (1987) 12 A.C.L.R.
Doctrine of Corporate Mergers" 11 Del. J. Corp. L. 599, per Bryson J.
839 at 842. 89. Ibid.
