Case: Abrahams v Federal Commissioner of Taxation [1944] HCA 32 ; (1944) 70 CLR 23
Outcome: cited
In Abrahams v Federal Commissioner of Taxation [1944] HCA 32 ; (1944) 70 CLR 23 at 44 Williams J, sitting as a single Justice of the High Court, considered that the presence of restrictive Articles was not a factor that should depreciate value because directors were obliged to exercise fiduciary duties conferred by the Article in a proper manner, bona fide and for the benefit of the company. Such obligations are enforceable in the courts. Citing the Privy Council case of Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer Vizagapatam [1939] AC 302 , as applied by the High Court in Geita Sebea v Territory of Papua [1941] HCA 37 ; (1941) 67 CLR 544 , Williams J said (70 CLR at 44): ...the full value to the seller must be ascertained, however limited the market may be, even where there is only one possible hypothetical purchaser. To a prudent purchaser willing to give full value for the shares sooner than fail to obtain them, this restriction should not, to my mind, have many terrors. 44 Subsequently Gibbs J in Gregory v Federal Commissioner of Taxation [1971] HCA 2 ; (1971) 123 CLR 547 at 569, another single Justice case, rather departed from the approach of Williams J in Abrahams . Gibbs J said that even though powers given to directors were fiduciary that does not mean that the presence of restrictive articles has no effect on the value of a minority holding. From a practical point of view, the possibility of obtaining redress in the courts against a wrongful exercise of a power given by the articles is not a substitute for articles under which the power is not conferred. 45 This issue is extensively discussed by Young J in Mike Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd (1995) 122 FLR 294 at 303 et seq. His Honour quoted the view of the leading authority on share valuation in Australia, Mr Wayne Lonergan, in his work The Valuation of Businesses, Shares and Other Equity . The corresponding passage in the current edition (4 th ed, Allen &amp; Unwin, 2003) at 143: Few valuers today would share the views of Williams J, and in the light of the significant changes in the world's capital markets and in view of the comments of Gibbs J in Gregory's Case... I believe a modern court would, in the absence of a statutory direction to the contrary, generally discount the value of shares to take account of restrictive clauses. While accepting that he would have followed Abrahams were it not for what Gibbs J said in Gregory , Young J (122 FLR 304) made the following points, first in relation to proprietary company shares generally: &#8226; A reasonable purchaser would be influenced by restrictive provisions and there should be some discount; &#8226; Directors have fiduciary duties which can be policed; &#8226; Litigation to enforce compliance with directors' obligations will be expensive; &#8226; But it will also be expensive for the directors, so compromise "somewhere along the line" is likely; &#8226; Each case must be looked at in its own circumstances; &#8226; But a large discount merely because of the presence of restrictive clauses would not be appropriate. In relation to minority holdings: &#8226; The above remarks also apply to an extent; &#8226; If the holding is of a size less than that required to block a special resolution the holder is "at the mercy of the majority"; &#8226; But the courts are still able to contain the wrongdoing of the majority; &#8226; "To a great extent" directors will be able to make determinations as to retention of moneys, dividend policy and the direction of the company; &#8226; But there is an "area outside the line where the courts will exercise control"; &#8226; Where the valuation is on an assets backing basis, the smaller the value of the shares (without discount), the greater the discount that should be applied for the cost and risk of litigation. 46 An important element in the present case is the special value the shares would have to the majority shareholder nominally Mrs Weeden but, it is reasonable to infer, a holder under the practical control and direction of Mr Weeden. This factor is mentioned in the passage from Abrahams cited in [43] above. Nothing in Gregory casts doubt on it. In Mordecai , 12 NSWLR at 70, Hope JA, with whom the other members of the New South Wales Court of Appeal agreed, said: It is well-established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person. The property is not valueless or diminished in value because there would be no other buyers [Vyricherla and Geita Sebea cited]. On this basis the value of Morpak's goodwill is to be determined upon the basis of a hypothetical sale to the only persons to whom, on the appellants' submissions, it could be sold, and to whom the matters which they submit would render the goodwill valueless in any other purchaser's hands would be irrelevant. Young J applied the same principle in Mike Gaffikin Marine , 122 FLR at 304.