Gambotto v WCP [1995]
Share
In Gambotto v WCP [1995] 127 ALR 417, the Australian High Court addressed the issue of share expropriation clauses in a company's articles of association. This principle, often referred to as the Gambotto rule, was later rejected by the UK Privy Council in Citco Banking Corp v Pusser’s Ltd [2007].
The case involved WCP Ltd, where the majority shareholders, subsidiaries of Industrial Equity Ltd (IEL), owned about 99.7% of the company's shares. Giancarlo Gambotto and Eliandri Sandri, holding approximately 0.094% of the shares, resisted attempts by IEL to acquire their shares for taxation and administrative benefits. IEL proposed amending the company's constitution to allow majority shareholders with over 90% of shares to forcibly acquire minority shares. Despite a reasonable offer of $1.85 per share, Gambotto and Sandri opposed the sale and initiated legal proceedings.
The High Court of Australia ruled that the proposed amendment was invalid, emphasising the importance of a proper purpose for constitutional amendments. The Court rejected the traditional bona fide benefit test from Allen v Gold Reefs of West Africa Ltd [1900], stating that a fair expropriation advancing the interests of the company or the majority alone was insufficient justification.
Instead, the High Court established a two-limbed test for constitutional amendments permitting share expropriation. The power must be exercisable for a permissible purpose, and its exercise must not operate oppressively in relation to minority shareholders. The Court asserted that expropriation could be justified if the continued shareholding of the minority was reasonably seen as detrimental to the company or its affairs, and if expropriation was a reasonable means of eliminating or mitigating that detriment.
This decision introduced a third category for alterations of articles, distinct from those affecting company-shareholder and shareholder-shareholder interests. It underscored the nuanced approach required for amendments involving the expropriation of minority shares, emphasising proper purpose and protection against oppressive consequences.
The case involved WCP Ltd, where the majority shareholders, subsidiaries of Industrial Equity Ltd (IEL), owned about 99.7% of the company's shares. Giancarlo Gambotto and Eliandri Sandri, holding approximately 0.094% of the shares, resisted attempts by IEL to acquire their shares for taxation and administrative benefits. IEL proposed amending the company's constitution to allow majority shareholders with over 90% of shares to forcibly acquire minority shares. Despite a reasonable offer of $1.85 per share, Gambotto and Sandri opposed the sale and initiated legal proceedings.
The High Court of Australia ruled that the proposed amendment was invalid, emphasising the importance of a proper purpose for constitutional amendments. The Court rejected the traditional bona fide benefit test from Allen v Gold Reefs of West Africa Ltd [1900], stating that a fair expropriation advancing the interests of the company or the majority alone was insufficient justification.
Instead, the High Court established a two-limbed test for constitutional amendments permitting share expropriation. The power must be exercisable for a permissible purpose, and its exercise must not operate oppressively in relation to minority shareholders. The Court asserted that expropriation could be justified if the continued shareholding of the minority was reasonably seen as detrimental to the company or its affairs, and if expropriation was a reasonable means of eliminating or mitigating that detriment.
This decision introduced a third category for alterations of articles, distinct from those affecting company-shareholder and shareholder-shareholder interests. It underscored the nuanced approach required for amendments involving the expropriation of minority shares, emphasising proper purpose and protection against oppressive consequences.
