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Proprietary Norms in Corporate Law: An Essay on Reading Gambotto in the United States Deborah A. DeMott Gambotto v. WCP, Ltd: Its Implications for Corporate Regulation (Ian M. Ramsey, ed., 1996). |
ABSTRACT:
Gambotto v. WCP, Ltd. was an Australian case involving an attempted freeze-out of a small minority shareholder by a majority shareholder corporation. After the minority shareholder blocked compulsory acquisition of the minority shares, the majority shareholder amended the articles of incorporation to give it the right to acquire minority shares at a set price. The dissident shareholders did not vote on the change and successfully challenged the action in court as an oppressive action and therefore beyond the statutory powers of amendment. The High Court of Australia held that an amendment can be used to eliminate minority shareholders only when their continued presence is detrimental to the corporation, basing its opinion on a proprietary notion of shareholding. Professor DeMott compares the outcome of this litigation in Australia to prevailing legal norms in the United States, both in states that follow the Delaware line of cases and those that do not. In her comparison, Professor DeMott remarks first on the absence of an oppression statute in all states, leaving minority shareholders in such a case to proceed on grounds of a breach of the fiduciary duty owed to them by the majority shareholder. She then proceeds to analyze the cases in the United States on freeze-out merger transactions, detailing the requirement in Delaware of showing the "entire fairness" of the transaction to the minority, consisting of requirements of fair dealing and fair price, as well as the added requirement in some other states of a "business purpose" test.
In particular, the article uses an analysis of both procedural and substantive corporate law in Australian and U.S. courts in the context of the Gambotto case to demonstrate the implications of the Australian concept of proprietary rights of shareholders versus the prevailing normative theory of liability-based rules that exists in the United States. In its broadest form, the proprietary rule allows for minority shareholders to have a veto over a proposed transfer of their entitlement to the detriment of all other shareholders, whereas the liability rule gives a non-entitled party the right to purchase entitlements from the minority at a court-determined price. Professor DeMott examines the statutory and socio-cultural differences that exist between the countries in an effort to explain the differences between the two approaches, including an overview of current American law in the area of mergers effected by majority shareholders, a comparison of the limitations on the prevailing theories in both countries, and a sense of the implications of the different theories for the various parties involved in corporate transactions in each legal tradition. Ultimately, she concludes that a difference in the primary concerns of each country has led to the divergence in the treatment of the issue of shareholder rights by the respective courts and points out the importance of understanding the not only the differences between the legal norms of various nations, but also the origins of those differences.
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