Is there any value in greenmailing?

Another nail is driven into arguments of minority shareholders

In the June 2002 issue of Law Reporter we commented on major cases in Victoria and New South Wales in which the judges disagreed on whether minority shareholders-who had not sold their shares in a takeover- could demand a premium for the compulsory acquisition of their shares. In that note "Minority shareholders still on shaky ground" we also commented on the fact that a judge in Queensland had favoured the Victorian approach that there should be no premium paid for the shares of a minority shareholder.

Now that Queensland decision has been upheld on appeal by the Queensland Supreme Court, and that court has ruled in favour of the Victorian approach. (See Pauls Ltd v Dwyers & Ors ([2002] QCA 545; judgment delivered on 13th December 2002).

The facts of the case were similar to those in the two cases we discussed in the June issue. The basic question was whether the price of $2.57 per share represented fair value for the remaining preference shares in Pauls Victoria Limited which were being acquired by the holding company in the Pauls Group.

The valuer (an accountant with Ferrier Hodgson) stated that in his opinion the terms proposed in the compulsory acquisition notice gave a fair value for the preference shares being offered. Certain minority shareholders (including well-known minority shareholders in the other cases including Mr Catto and the Elkingtons) submitted that the valuation by the accountant was not the correct basis for valuing the shares. It was argued that a premium should be paid for th e shares. The same arguments were in effect put forward similar to those outlined in the June Law Reporter.

The Full Court in dismissing the arguments brought by the minority shareholders indicated that it was not prepared to give anything other than a literal interpretation of the statutory provisions which had been introduced into the legislation following the decision in the Gambotto case (Gambotto v WCP Limited (1995) 13 ACLC 34). The court rejected that any special value should be attributed to a class of shares because of the special value which they, or in this case a number of them, may have had for the majority shareholders who wished to acquire the whole of the capital of the company.

The terms of section 667C(1)(c) of the Corporations Act in parti cular required that the allocation of the value of each class of shares should be distributed pro rata among the shares without any premium or discounts in respect of particular shares. This, in the view of Davies JA, who delivered the major judgment of t he Queensland Full Supreme Court, ensured "that even within a class of shares, no special premium will attach to some shares in that class because of any special benefit which their acquisition will have for the majority shareholder." (para 24)

He concluded this part of his decision by making these comments which were agreed to in principle by the other members of the Full Supreme Court.

"This construction of section 667C(1) [ie that no special value should be given to any particular shareholder] in my opinion accords with the literal meaning of the provision and with its purpose. It accords with its purpose by excluding from the fair value of the shares to be acquired the premium reflecting the additional amount which the majority shareholder would pay beca u se it would thereby be acquiring the whole of the minority [shares]. And it follows from this construction that [the valuer] did not err, in assessing fair value of the [relevant] shares, in failing to include any part of the administration costs which [t he relevant companies] would save upon all [relevant] shares becoming owned by the [relevant company]" (para 30)

Justice Davies agreed that the view that he was expressing had not been shared by Justice Santow in the Supreme Court of New South Wales.

The s econd part of the case dealt with whether the acquisition of shares following a takeover (or a scheme of arrangement) by use of the compulsory acquisition provisions of the Corporations Act breached the terms of the Australian Constitution which required that property could not be acquired from anyone without providing them with just and fair terms. Section 51(XXXI) of the Commonwealth Constitution provides that the Commonwealth cannot acquire property unless it is on just terms. However, the members of the Full Supreme Court agreed with previous interpretations on this issue. In their view the acquisition pursuant to section 667C of the Corporations Act did not depart in any way from the requirement that the acquisition should be on just and fair terms. As Justice Davies noted, there is:

"a range of values which may be said to be both fair value and, so far as that value fixes the consideration for an acquisition, just terms. Moreover, a measure of discretion must be left to the legislature which determines the method of valuation for the purpose of such acquisition, in determining what is just. I think it was reasonable for Parliament to conclude that, for the purpose of the compulsory acquisition of minority securities in a public company, it was both fair and just to fix their value so as to exclude any premium for which such minority security holders might be able otherwise to hold out because the acquisition of all of the minority securities would result in some advantage to the majority security holder.

Having reached that conclusion I think that section 667C was a way of achieving that result while still providing for a price which is just to minority security holders." (para 42)

In his view, and this view was shared by the other members of the Full Court, there was acquisition on just and fair terms.

The fact that we now have a Full Court (that is a Court of Appeal) decision in this matter suggests that perhaps the majority views will take sway. However, it would not surprise, to see Catto, Elkington and others seeking leave to appeal this decision to the High Court of Australia which after all had set the framework against which these statutory changes were introduced in Gambotto so that it can again look at this question. We will await with interest further developments in this area of the law.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.