Corporate_wk2_Minority Protection

Corporate Week 2Minority Protection

Minority Rights

1. Introduction

1.1. Not every shareholder is a member The fact that a person owns shares does not mean he is a member. Two ways to become members: s19(6) of the Companies Act

(i) Subscribers to the memorandum – they are members ipso facto on the incorporation of the company.

(ii) Any person who agrees to become a member and whose name is on the register of members.

Capacity to be a member of a company is co-extensive with capacity to contract. Company may not be member of itself Subsidiary cannot purchase shares in its holding company, cannot be member of its

holding company – s21(1)

1.2. Relationship between members and board of directors Decisions of members of a company – reflected through the resolutions that they pass

at the general meeting. General meeting – board is not considered subordinate to the general meeting.

o Rule in John Shaw & Sons (Salford) Ltd v Shaw: If management of company is vested with board of directors by virtue

of the articles of association, the members may not give instructions to the directors or override their decisions.

o John Shaw & Sons (Salford) Ltd v Shaw : if powers of management are vested in the directors, they and they

alone can exercise these powers. The only way in which the general body of the shareholders can

control the exercise of the powers vested by the articles in the directors is by altering the articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove.

o I.e. members cannot interfere with management of company if powers of management are vested in the board of directors

o Rationale: it is the bargain among members that directors should manage the company. Therefore, members not entitled to interfere with directors’ managerial discretion without changing the articles.

Automatic Self Cleansing Filter Syndicate Co Ltd v Cunninghame: (i) Company articles vested management and control of business to board.(ii) Board of directors had express power to sell company’s property.(iii) Members passed resolution to instruct directors to sell company’s business to another

company.(iv)Directors refused to give effect to resolution.Court of Appeal held: Articles had conferred mandate upon the directors and shareholders had no power to give instructions on a matter left to the director by the articles

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2. Members’ informational rights

2.1. What are some of the members rights?

(i) Have articles and memorandum observed Statutory right. S39(1) CA Reason: Memorandum and articles are a contract among the members inter se

and between the members and the company.

(ii) Restrain ultra vires and illegal acts – s25 CA, s409A(1)

Ultra vires transactions25.—(1) No act or purported act of a company (including the entering into of an agreement by the company and including any act done on behalf of a company by an officer or agent of the company under any purported authority, whether express or implied, of the company) and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do such act or to execute or take such conveyance or transfer.

S25 preserves the validity of ultra vires act vis-à-vis outsiders, specifically that the company’s incapacity may be raised in proceedings against the company to restrain an ultra vires transaction.

S25(3) If the unauthorised act, conveyance or transfer sought to be restrained in any proceedings under subsection (2) (a) is being or is to be performed or made pursuant to any contract to which the company is a party,

the Court may,

if all the parties to the contract are parties to the proceedings and if the Court considers it to be just and equitable,

set aside and restrain the performance of the contract and may allow to the company or to the other parties to the contract, as the case requires, compensation for the loss or damage sustained by either of them which may result from the action of the Court in setting aside and restraining the performance of the contract but anticipated profits to be derived from the performance of the contract shall not be provides awarded by the Court as a loss or damage sustained.

Injunctions409A.—(1) Where a person has engaged, is engaging or is proposing to engage in any conduct that constituted, constitutes or would constitute a contravention of this Act, the Court may, on the application of —

(a) the Registrar; or

(b) any person whose interests have been, are or would be affected by the conduct,

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grant an injunction restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

As members have the right to have articles and memorandum observed, they would therefore have a right to restrain ultra vires and illegal acts.

However, when a third party is involved, avoidance of a transaction depends on whether the third party knew of the breach.

This also does not mean that every act in breach of the memorandum or articles is ipso facto void.

o Injunction is a discretionary remedy.o s392(6)(a) Court has power to validate any act which would

otherwise be a contravention of the memorandum or articles. If the breach was procedural in nature Or the person committed the breach acted honestly Public interest Court must also ensure that no substantial injustice has been

done or is likely to have been caused to any person.

Procedural irregularities rule. Btw: Note that in Singapore the statutory procedural irregularities rule is in s 392

MacDougall v Gardiner: o If the thing complained of is a thing which in substance:

a. the majority of the company are entitled to do, or b. if something has been done irregularly which the majority of the company

has been entitled to do regularly, or c. if something has been done illegally which the majority of the company

are entitled to do legally, o there can be no use in having a litigation about it. Rationale: ultimate end is

that a meeting has to be called and the majority gets its wishes.o Qualifier:

a. if the majority are abusing their powers,b. depriving minority of their rights,

then the minority has the right to maintain their rights but if what is complained of is something which the majority are

entitled to do has been done or undone irregularly, then nobody has the right to set that aside except the company itself.

(iii) Access to company records and have certain information provided to them

(iv)Attend and vote at general meetings(v) To be treated fairly(vi)Right to bring an action on behalf of the company.(vii) Right to apply to court to restrain an impending breach of memorandum or articles

NOTE: these are personal rights and company or any other person cannot interfere with the exercise of such rights.

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Rule in Foss v Harbottle does not preclude a member bringing an action to enforce his right as member (qua-member)

2.2. A members has the right to inspect the following pursuant to the Companies Act

What are some of the members’ informational rights?

To enable members to be fully informed of what is happening in the company. Access to registers and records that company must maintain. Inspection of registers by members may be made free of charge.

(i) Rights of access to certain records Register of members and the number of shares they hold, amount paid on shares

etc – s192(2) Register of directors, secretaries, managers, auditors (without charge or payment

of $2) – s173(5) Register of directors’ shareholdings – s164(8) Register of substantial shareholders – s88(2) Register of debenture holders – s93(3) Register of charges – s138(3)

(ii) Members are entitled to be informed of the company’s financial position

Members entitled to be sent, free of charge, a copy of the last audited profit and loss account and balance sheet, not less than 14 days before the general meeting at which the accounts are to be presented – s203(1)

Members of company entitled to balance-sheet, etc.203.—(1) A copy of every profit and loss account and balance-sheet of a company or,

in the case of a holding company, a copy of the consolidated accounts and balance-sheet (including every document required by law to be attached thereto), which is duly audited and which (or which, but for section 201C) is to be laid before the company in general meeting accompanied by a copy of the auditor’s report thereon shall —

(a) not less than 14 days before the date of the meeting; or (b) if a resolution under section 175A is in force, not less than 28 days before

the end of the period allowed for the laying of those documents,

be sent to all persons entitled to receive notice of general meetings of the company. Note that members are also entitled to a copy of the auditor’s report and the

directors’ report on the accounts.

(2) Any member of a company (whether he is or is not entitled to have sent to him copies of the profit and loss accounts and balance-sheets, or consolidated accounts and balance-sheet) to whom copies have not been sent and any holder of a debenture shall, on a request being made by him to the company,

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be furnished by the company without charge with a copy of the last profit and loss account and balance-sheet of the company, or a copy of the consolidated accounts and balance-sheet, as the case may be (including every document required by this Act to be attached thereto) together with a copy of the auditor’s report thereon.

Entitled to auditor’s report s203(2) Entitled to directors’ report on the accounts – s201(5)

201(5) The directors of a company shall cause to be attached to every balance-sheet made out under subsection (3) or (3A) ( b ) a report made in accordance with a resolution of the directors and signed by not less than 2 of the directors with respect to the profit or loss of the company for the financial year and the state of the company's affairs as at the end of the financial year.

*NOTE: members have no rights to accounting records of company – only available to directors and auditors.Directors:

199(3) The records referred to in subsection (1) shall be kept at the registered office of the company or at such other place as the directors think fit and shall at all times be open to inspection by the directors. Auditors:

207(5) An auditor of a company has a right of access at all times to the accounting and other records, including registers, of the company, and is entitled to require from any officer of the company and any auditor of a related company such information and explanations as he desires for the purposes of audit.

Note: in theory only. In practice, members often kept in the darko Solutions – appoint nominee to the board of directors (but usually kept

in the dark too)

(iii) Attendance at general meetings and voting Member has right to attend and speak at general meeting

s177(4) So far as the articles do not make other provision in that behalf notice of every meeting shall be served on every member having a right to attend and vote thereat in the manner in which notices are required to be served by Table A.

Private company may by resolution passed with unanimous consent, dispense with holding of AGM.

Members that are entitled to attend and vote at meeting is entitled to due notice of general meetings – s177(4)

o Rights cannot be limited by memo and articles.o Ignoring members’ rights is not a mere procedural irregularity, it is an

infringement of the member’s personal rights in respect of which he can maintain a personal action.

o These rights cannot be limited by memorandum or articles.

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As to member’s rights at meetings180.—(1) Subject to subsection (2), every member shall, notwithstanding any provision in the memorandum or articles, have a right to attend any general meeting of the company and to speak and vote on any resolution before the meeting

except that the company’s articles may provide that a member shall not be entitled to vote unless all calls or other sums personally payable by him in respect of shares in the company have been paid.

Two situations where members’ right to vote may be suspended by articles(i) When member has not paid all calls or other sums payable in respect of his

shares – s180(1)(ii) If the shares in question are non-voting preference shares – s180(2)

Note: not all preference shares are non-voting. o Some preference shares may be permitted votes, and they are

considered to be equity shares.o Articles may provide in the terms of issue that the preference shares

carry no right to vote, or only restricted voting rights.o Even non-voting preference shares have voting rights in 3 situations:

s180(2) Notwithstanding subsection (1), the articles may provide that holders of preference shares shall not have the right to vote at a general meeting of the company except that any preference shares issued after 15th August 1984 shall carry the right to attend any general meeting and in a poll thereat to at least one vote in respect of each such share held —

(a) during such period as the preferential dividend or any part thereof remains in arrear and unpaid, such period starting from a date not more than 12 months, or such lesser period as the articles may provide, after the due date of the dividend;

(b) upon any resolution which varies the rights attached to such shares; or

(c) upon any resolution for the winding up of the company.

Power to vote is not fiduciary power (Caruth v Imperial Chemical Indsutries Ltd) – a member owes no duty to the company or to anyone else when he exercises his votes.

o He need not consider only the interest of the company as a whole, but may vote in what he considers to be his own interests. Peter’s American Delicacy Co Ltd v Heath, per Dixon J in HC of Australia, 1939

o Singapore: members not required by law to vote in any person’s interests, including that of the company, other than their own. Peck Constance Emily v Calvary Charismatic Centre Ltd

North-Transportation Co Ltd v Beatty (1887) 12 App Cas 589 (PC on appeal from Canada)

Member may vote on a resolution even when he has a personal interest in its

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outcome.

Facts(i) Beatty, a director of the company, and was also substantial shareholder. He sold a

steamer which he owned to the company. (ii) Another shareholder opposed the purchase. Resolution of members approved the

transaction. This resolution was passed by the votes of Beatty and three of the directors.(iii) The dissentient shareholder sough to set the purchase aside, on the ground that the

resolution approving the transaction was passed by the votes of Beatty, who was interested in the transaction.

Held, PC(i) Declined to grant relief. Held that the fact that Beatty had an interest in the transaction did

not thereby disentitle him to vote.(ii) He was acting within the rights to do so and the transaction was binding on the company.

Woon The decision accords with common sense and principle. Voting rights are rights of property. A person should not be restricted in the way he

exercises his vote by reference to the interests of the other shareholders

Prof If the steamer was at a complete overvalue – then probably it would be a breach of

director’s fiduciary duties.

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3. Exceptions to the rule that a shareholder may vote in any way he pleases

(i) Alteration of articles of association Member must vote bona fide for the benefit of the company as a whole when

altering the articles of association. Honestly what he considers to be for the benefit of the company as a whole.

(ii) When voting as a member of a class for a resolution that will affect that class Held in British America Nickel Corp Ltd v MJ O’Brien Ltd that a member must vote

for the purpose of benefitting the class as a whole.

(iii) A shareholder may agree with another person as to how his votes are to be exercised.

(iv) CLRFC has recommended that on a resolution to ratify or condone wrongs committed against the company, the votes of members with an interest or subject to the substantial influence by a person with an interest are to be discounted.

(v) Equitable considerations? Courts have generally been suspicious of unbridled freedom to vote. Suggested that member’s right to vote may be subject to equitable considerations

which may make it unjust to exercise it in a particular way.

Clemens v Clemens [1976] 2 All ER 268Facts(i) Pf held 45% shares in Df company(ii) Pf’s aunt held 55% shares in Df company(iii) Article 6: gave existing members a pre-emptive right if another member wishes

to transfer shares.(iv) Pf had negative control (as she could block special resolution in aunt’s life time)(v) Expected to gain full control on her aunt’s death(vi) Aunt and four non-shareholders – Directors of company(vii) The directors proposed that the company’s capital should be increased by issuing 200

ordinary shares to each of these four directors, and 850 ordinary shares to an employee’s trust. Claimed that the object of resolutions was in the comp’s interest (i.e. to give directors and employees a stake in company)

(viii) Effect of this transaction was that the Pf’s voting power would be diluted and she could no longer exercise negative control.

Court held: real object was to deprive the Pf of her degree of control, and the resolution was set aside.Woon: Net result was that the aunt, who had 55% of the votes, did not get her way. Woon questions the correctness of this decision as people do not vote in a climate of detached and disinterested altruism. Woon suggests that the better formulation is that minority should have the right to be treated fairly. And the minority can complain under s216.

Foster J:(i) Pf’s submissions : submitted that the proposed resolutions were oppressive, since they

resulted in her losing her right to veto a special or extraordinary resolution and greatly

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watered down her existing right to purchase her aunt’s shares under Art 6

(ii) Dfs’ submissions : submitted that if two shareholders vote honestly and hold differing views, the majority must prevail and that the shareholders in general meeting are entitled to consider their own interests and vote in any way they honestly believe proper in the interest of the company.

(iii) Directors must not only act within his power must also exercise them bona fide in what he believes to be the interest of the company.

“Directors have a fiduciary duty, but is there any similar, restraint on shareholders exercising their powers as members at general meetings?”

“One thing which emerges from the cases (he read a line of cases) … in such a case as the present Miss Clemens is not entitled to exercise her majority vote in whatever way she pleases.”

“The difficulty is in finding a principle, and obviously expressions such as “bona fide for the benefit of the company s a whole”, fraud on a ‘minority’ and ‘oppressive’ do not assist in formulating a principle.”

(iv) He then comes to a conclusion: “that it would be unwise to try to produce a principle, since the circumstances of

each case are infinitely varied. It would not … assist more to say more than that in my judgment Miss Clemens is not entitled as of right to exercise her votes as an ordinary shareholder in whatever way she pleases.”

“To use the phrase of Lord Wilberforce [in Ebrahimi v Westbourne Galleries Ltd], that right is ‘subject … to equitable considerations… which may make it unjust … to exercise [it] in a particular way’.”

(v) Application: Are there any such considerations in this case? Miss Clemens is in favour of resolutions and knows and understands their purport and

effect Foster J does not doubt that she genuinely would like to see the other directors have

shares in the company and set a trust set up for the long service employees. However, he “cannot escape the conclusion that the resolutions have been

framed so as to the put into the hands of Miss Clemens and her fellow directors complete control of the company and to deprive the Pf of her existing rights as a shareholder with more than 25% of the votes and greatly reduce her [pre-emptive] rights”

“they are specifically and carefully designed to ensure not only that the Pf can never get control of the company but to deprive her of what has been called her negative control”

“whether I say that these proposals are oppressive to the Pf or that no one could honestly believe they are for her benefit matters not”

A court of equity will in my judgment regard these considerations as sufficient to prevent the consequences arising from Miss Clemens using her legal right to vote in the way that she has and it would be right for a court of equity to prevent such consequences from taking effect.

Prof: hard to justify the decision. Taking away the negative control – in almost every case involving the share issuance

– how to distinguish a situation to dilute shares or a breach of equitable consideration?

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Case is to be ignored forever and confined strictly to its own facts.

Sealy The case has reached a just result; however, it is difficult to defend the judge’s use of

authorities. He applies the Greenhalgh test – which was concerned with special resolutions for

alterations of articles Problems: there was a long history of non cooperation by the niece. The events in Greenhalgh –took place before there was any statutory provision

allowing the court to grant relief to a minority shareholder on the ground of oppression or unfair prejudice (i.e. s 216)

Who should the court identify as the individual hypothetical member? Both are hypothetical members.

Lujia:In short, a decision carried by the votes of majority members may be set aside if there are equitable considerations, e.g. oppressive of minority.

Allen v Gold Reefs of West Africa Ltd (EWCA 1990)

Prof: Mr Zuccani was the only shareholder who held partly paid shares and fully paid shares

o After his death, the directors envisaged some difficulty in recovering arrears of calls.

The articles gave the company a lien over the partly paid shares but none over the fully paid shares.

By special resolution the company amended the articles to extend its lien to fully paid shares.

Despite the fact that the amendment disadvantaged only Mr Zuccani's estate, the Court of Appeal held the amendment valid.

The power conferred on companies to alter articles is limited only by statute and conditions on the memorandum

But these powers, like all powers allowing the majority to bind the minority, must be exercised “bona fide for the benefit of the company as a whole”, per Lindley MR

The fact that Mr Zuccani was the only shareholder with paid-up shares was not material The resolution would have affected all shareholders with paid-up shares equally. It

just so happened that he was the only one. The directors had therefore not acted in bad faith, as their intention was to escape from

the embarrassment that resulted from the inability of Zuccani’s estate to meet its obligations to the company for his unpaid shares

Facts1. Zuccani, as the nominee of the vendor to the company, had a number of fully paid-up

shares allotted to him by way of purchase-money for the property acquired by the company under their

memorandum of association he held 27,885 of these shares at the time of his*660 death, these shares being his own

property.2. In addition to these fully paid-up shares, Zuccani applied for and had allotted to him

60,000 ordinary 5s. shares, not paid up.

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These were applied for and allotted on the terms of the company's prospectus (on which no question turned) and articles of association.

Calls were from time to time made in Zuccani's lifetime on these unpaid-up shares, but he did not pay the calls when they became due, and as early as May, 1896, and thenceforward during his life letters were sent to him pressing for payment of his arrears.

Although he did not pay his calls, he constantly paid up quantities of shares in full before their amounts had been called up: in other words, he from time to time not only paid all the calls due on some of his shares, but also prepaid the uncalled-up amounts of the same shares. He did this constantly all through 1896, and in that way he was able to sell and transfer the shares so paid up free from all liability to calls and from all lien in favour of the company.

His object in fully paying up batches of these shares in the way described was to obtain shares which he could put on the market free from all claims and demands by the company.

3. Zuccani died on February 4, 1897, leaving a will which was proved by the plaintiffs, his executors. At the time of his death he was the registered holder of the 27,885 fully paid-up

vendor's shares, and also of 36,435 other shares partly paid up, and he owed the company 6072l. 10s. for calls in respect of these, besides interest to a

considerable amount.4. The plaintiffs did not get themselves registered as members of the company in respect

of any of Zuccani's shares, and they*661 had not sufficient assets to answer his liabilities.

Alteration of Articles:5. In the first place, on February 9, 1897, a notice was sent out of an extraordinary general

meeting of the company to be held on February 18, for the purpose of passing a special resolution to alter art. 29 of the articles of association (being the article giving a lien for all debts, &c., upon shares "not being fully paid") by omitting the words "not being fully paid."

Original article: (art. 29) "that the company shall have a first and paramount lien for all debts, obligations, and liabilities of any member to or towards the company upon all shares (not being fully paid) held by such member. ... Provided always that if the company shall register, or agree to register, any transfer of any share upon which it has such lien as aforesaid without giving to the transferee notice of its claim, the said share shall be freed and discharged from the lien of the company";

If amended, the article will be:"that the company shall have a first and paramount lien for all debts, obligations, and liabilities of any member to or towards the company upon all shares (not being fully paid) held by such member. ... Provided always that if the company shall register, or agree to register, any transfer of any share upon which it has such lien as aforesaid without giving to the transferee notice of its claim, the said share shall be freed and discharged from the lien of the company";

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Lujia: I.e. if the article is amended, the company would have a first and paramount lien over his fully paid up shares as well.

6. This notice was posted to Zuccani at his registered address, although the directors were then aware of his death. The meeting was held on February 18, and the special resolution was then passed. Thereupon notice of a confirmatory meeting to be held on March 8 was, as before,

sent to Zuccani's registered address. Both notices, addressed to Zuccani personally, came to the knowledge of the

plaintiffs, his executors.

7. On March 8 the confirmatory meeting was held and the resolution confirmed. Thus the company claimed to extend their lien to all fully paid-up shares. There were in fact no fully paid-up shares except those belonging to Zuccani.

8. The next step the company took was this. On June 4, 1897, the directors, purporting to act under arts. 22, 23, and 24, posted to Zuccani at his registered address a notice requiring payment by June 21 of the 6072l. 10s. due for calls on the 36,435 shares, a sum of 804l. 6s. 11d. for interest on arrears of calls, and further interest from the date of the notice; the notice also stating that in the event of non-payment by the time appointed those shares would be liable to be forfeited.

9. This notice was sent also to the plaintiffs, Zuccani's executors, who had not then lodged the probate of his will with the company for registration. The amounts demanded were not paid, and on June 23 the directors passed a

resolution purporting to forfeit the 36,435 partly paid-up shares.

10. January 29, 1897, the directors had refused to register a transfer of some of Zuccani's fully paid-up shares, but ultimately, finding that the articles gave no power to the company or its*662 directors to refuse to register a transfer of fully paid-up shares, they passed the transfer.

11. The object of the plaintiffs in bringing these consolidated actions was to obtain a declaration that:

the defendant company had no lien upon the fully paid-up shares, and oLujia: this argument hinges on the argument that the alteration was not

passed bona fide.

an injunction to restrain the forfeiture of the partly paid-up shares.

Procedural History1. Kekewich J. held,

(i) that the notice threatening forfeiture was bad upon the grounds (among others) that, as the company or its directors were aware of Zuccani's death at the time they served the notice by registered letter addressed to him at his registered address

(ii) that the notices of the meeting of the company to pass the resolution altering art. 29 were also ineffectual as having been addressed to Zuccani after the directors had become aware of his death. His Lordship therefore considered it unnecessary to decide the further question

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whether the company could alter its articles so as to create a lien upon Zuccani's fully paid-up shares.

His Lordship accordingly gave judgment granting an injunction restraining the defendant company from enforcing the lien.

2. Df Company appealed.

Issue:Whether the company had power to alter its original articles by giving itself a lien upon Zuccani's fully paid-up shares.

Held, Per Lindley M.R.

(i) Key point by Lindley MR: Company has power to alter articles.

The articles of a company prescribe the regulations binding on its members: Companies Act, 1862, s. 14. They have the effect of a contract (see s. 16); but the exact nature of this contract is even now very difficult to define.

Be its nature what it may, the company is empowered by the statute to alter the regulations contained in its articles from time to time by special resolutions (ss. 50 and 51); and any regulation or article purporting to deprive the company of this power is invalid on the ground that it is contrary to the statute

(ii) He then states the limitations on the powers of amendment.i. The power thus conferred on companies to alter the regulations contained in their

articles is limited only by the provisions contained in the statute and the conditions contained in the company's memorandum of association.

ii. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities.

iii. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.

iv. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those*672 contained in it

(iii) Application to the case: whether there is in this case any contract or other circumstance which excludes

the application of the altered article to Zuccani's fully paid-up vendor's shares. I am unable to discover any difference in principle between one fully paid-up

share and another. Whether a share is paid for in cash or is given in payment for property acquired by the company appears to me quite immaterial for the present purpose. In either case the shareholder pays for his share, and in either case he takes it subject to the articles of association and power of altering them, unless this inference is excluded by special circumstances.

Zuccani bargained for fully paid-up shares and he got them. The imposition of a lien on them did not render them less fully paid-up than they were before. They remained what they were.

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i. Zuccani did not*675 bargain that the regulations relating to paid-up shares should never be altered, or that, if altered, his shares should be treated differently from other fully paid-up shares. I cannot see that the company broke its bargain with him in any way by altering its regulations or by enforcing the altered regulations as it did.

ii. Every allottee was told by the memorandum that his rights as a shareholder were subject to alteration, and no allottee acquired any rights except on these terms unless, of course, some special bargain was made with him. The fact that Zuccani's executors were the only persons practically affected at

the time by the alterations made in the articles excites suspicion as to the bona fides of the company. But, although the executors were the only persons who were actually affected at the time, that was because Zuccani was the only holder of paid-up shares who at the time was in arrear of calls.

The altered articles applied to all holders of fully paid shares , and made no distinction between them. The directors cannot be charged with bad faith.

Per VAUGHAN WILLIAMS L.J.(i) a company cannot contract itself out of the statutory power of alteration

conferred by s. 50; and the alteration of the articles in the present case involves no contravention of the memorandum of association

i. A resolution may alter the regulations of a company but cannot retrospectively affect existing rights

ii. the alteration must be made in good faithiii. an alteration in the articles which involved oppression of one shareholder would not

be made in good faith

(ii) Application to the case Zuccani, when he took these shares as the price of the property which he was selling,

knew or must be taken to have known of the statutory power of alteration but it does not seem to me that it follows that the company could make alterations

which would alter the value, according to the articles in force, of the consideration which they were giving for the property purchased.

Greenhalgh v Arderne Cinemas [1951] Ch 286

Facts(i) Articles of Df company provided that existing members should have pre-emptive

rights if a member wishes to sell his shares (ii) Mallard – Managing director of Df company.(iii) Mallard negotiated with an outsider, Sol Sheckman, for the sale of a controlling

interest in the company at 6s (30p) per share.(iv) Mallard then procured the passing of a special resolution to give effect to this

agreement.(v) In effect, this negated the pre-emptive rights of the existing members. (vi) Greenhalgh (one of the members) – claimed a declaration that the resolutions were

invalid as a fraud on the minority, as the right of pre-emption to the benefit of

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Greenhalgh was removed from the articles(vii) CA, affirming the lower court Roxburgh J’s judgment, refused a declaration.

Per Evershed MR:

(i) I think it is now plain that "bona fide for the benefit of the company as a whole" means not two things but one thing. (Sealy: this seems like a subjective test)

i. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole.

ii. The second thing is that the phrase, "the company as a whole", does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body.

(ii) That is to say, the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person's benefit. (Sealy: this seems like an objective test)

(iii) a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground.

(iv) “It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern.”

Application to the facts of the case:(i) There are ground for impeaching the resolution:

First, the resolution goes further than what was necessary to give effect to the particular sale of shares.

Second, it prejudiced the Pf and minority shareholders in that it deprived them of the right which, under the subsisting articles, they would have of buying the shares of the majority if the latter desired to dispose of them.

(ii) Mr Jennings (counsel for Greenhalgh) objects to in the resolution is that if a resolution is passed altering the articles merely for the purpose of giving effect to a particular transaction then it is quite sufficient (and it is usually done) to limit it to that transaction.

But this resolution provides that anybody who wants at any time to sell his shares can now go direct to an outsider provided that there is an ordinary resolution of the company approving the proposed transferee. i. if the one selling is the majority – he would easily get an ordinary resolution.ii. For the minority – “makes it more difficult for a minority shareholder, because

the majority will probably look with disfavor upon his choice”

(v) However, Evershed MR qualifies the second point ii above that he made

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“when a man comes into a company, he is not entitled to assume that the articles will always remain in a particular form; and that, so long as the proposed alteration does not unfairly discriminate in the way which I have indicated, it is not an objection, provided that the resolution is passed bona fide … “

Sealy(i) First test by Evershed – seems like a subjective test (Bona fide)(ii) Discrimination – seems like objective test

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3. Remedies for maladministration of the company

Some issues:(i) Who may seek remedies if the company is poorly run?(ii) Issues regarding majority rule(iii) Double recovery

3.1. Oppression and disregard A person who joins a company does so on the understanding that he may be outvoted. A member who dislikes being a minority should sell out, he cannot normally look to

the court to change the decision of the majority. Courts do not sit ot hear appeals from management decisions honestly arrived at.

Qualifier: However, majority cannot abuse their power to bind the minority. o Fraud on minorityo Alteration of articles – majority must vote bona fide for the benefit of the

companyo Class rights - majority must vote bona fide for the benefit of the classo Just and equitable winding up of company (courts’ discretion)o Oppression s216.

Note that the genesis of oppression action in s216 of Singapore’s CA is in the UK Companies Act.

o UK: require the actions of the majority to be ‘unfairly prejudicial’, need not be ‘oppresive’.

o Singapore: 4 different tests, but usually do not separate them distinctly Oppression Disregard of interests Unfair discrimination Prejudice

o S216 invoked when there is oppression of a member or when a member’s interests are disregarded.

Personal remedies in cases of oppression or injustice216.—(1) Any member or holder of a debenture of a company or, in the case of a declared company under Part IX, the Minister may apply to the Court for an order under this section on the ground — (a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or

Re Kong Thai Sawmill (Miri) Sdn Bhd, & Ors v Ling Beng Sung

Issue: Whether powers of directors are being exercised in a manner oppressive to one of the members or in disregard of his interests

Facts

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1. Rp applied by originating summons in his capacity as a member of the first appellant company for a number of orders: In a nutshell, he wanted

2nd and 3rd Apps be removed from office as managing director and director respectively and

a receiver and a manager be appointed to conduct the company`s affairs and for repayment of various sums alleged to have been disposed of wrongfully or without proper authorization

alternative relief asked for that the company be wound up

2. The company was a family one in which the elder brothers (2nd and 3rd Apps) were the majority shareholders.

The Rp and two younger brothers were minority shareholders.

3. Allegations by RpRp alleged that the 2nd and 3rd Apps had committed breaches of their powers as directors of the company and in particular complaint was made relating to

(a) the purchase and outfitting of a motor yacht, Berjaya Malaysia; (b) loan to Encik Harun Arifffin; (c) donations to political parties; (d) advances to and investments in joint ventures; (e) drawing by the second and third appellants from the company`s funds and (f) remuneration paid to the second appellant as managing director. It appeared that

after inquiries instituted by the respondent many of the acts of the second and third appellants were validated by resolutions of the Company.

Procedural HistoryFederal Court held (a) that the purchase by the second appellant of the yacht, Berjaya Malaysia was misuse of

the company`s funds and the moneys which he had paid out or for which he had himself reimbursed from the company`s funds in respect of the donations to political parties were improperly paid. The second appellant should therefore take over the Berjaya Malaysia and pay to the company all the money spent on it and also pay the company the amount of donations paid to the polit ical parties;

(b) that in order to protect the minority shareholders in this case the court would order (i) that one of the younger brothers be appointed a director to safeguard their

interests;(ii) donations be made in future only with the prior approval of the board of

directors; (iii) no bank account be operated without the signatures of two directors, one of

whom shall be other than the elder brothers, the majority shareholders; (iv) no moneys be drawn by any of the directors without the prior approval of the

Board; (v) power delegated to the first respondent to make investments on behalf of the

company be cancelled; (vi) 3 clear days` notice be given in writing of any directors` meetings and (vii) that the bonus for the directors in future be 2% of the nett profits and that no

bonus be paid until after the passing of the company`s accounts at the Annual General Meeting.

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The Apps appealed.

Held(1) the courts in applying s 181 of the Companies Act, 1965, should do so according to its

terms and its purpose and should not regard themselves as necessarily bound by United Kingdom decisions which were based upon a different section and in some cases restrictive. The same would apply, though with less force, to reliance upon Australian decisions

based upon s 186 of the Australian Companies Act, 1951;

(2) Relief could not be sought under s 181 of the Companies Act, 1965 merely because facts were established which would found a minority shareholders` action; the section required "oppression" or "disregard" to be shown and these were not necessary elements in a minority shareholders` action. But if a case of "oppression" or in "disregard" were made out the section would apply and it was no answer to say that the relief might also have been obtained in a minority shareholders` action;

(3) BURDEN OF PROOF: for the case to be brought within s 181(1)(a) of the Companies Act, 1965 at all, the

complaint must identify and prove "oppression" or "disregard".

OPPRESSION: o The mere fact that one or more of those managing the company possessed a

majority of the voting power and, in reliance upon that power, made policy or executive decisions, with which the complainant did not agree, was not enough.

o There must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder was entitled to expect before a case of oppression could be made out.

DISREGARD: o Similarly "disregard" involved something more than a failure to take account

of the minority`s interest; o there must be awareness of that interest and an evident decision to

override it or brush it aside or to set at naught the proper company procedure;

(4) what was attacked by s 18(1)(a) of the Companies Act was not particular acts but the manner in which the affairs of the company was being conducted or the powers of the directors exercised. These might be held to be "oppressive" or "disregard" even though a particular

objectionable act might have been remedied.

(5) In this case none of the nine particular complaints listed by the Federal Court were substantiated and such relief as the Federal Court decided to give in respect of four of them could not be justified. There was no occasion to grant the ancillary relief under the remaining heads;

(6) The grant of winding up was in the discretion of the court.

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In exercising this discretion the court would have in mind:(i) the character of the remedy, (ii) if sought to be applied to a company which was a going concern; it would take

into account inter alia a. the gravity of the case made out under s 181(1) of the Companies Act,

1965; b. the possibility of remedying the complaints proved in other ways than

by winding the company up; c. the interest of the applicant in the company; and d. the interests of other members of the company not involved in the

proceedings.

Application to the case: In this case the respondent had failed completely to make out a case for winding up the company;

(7) The remuneration of the directors and of the managing director which had been regularly voted and approved by the shareholders was a matter for them and no case could be made for interfering with that decision.

Impt: On oppression and disregard: Note the elements to apply in cases.

(i) for the case to be brought within s 181(1)(a) at all, the complaint must identify and prove "oppression" or "disregard". o The mere fact that one or more of those managing the company possess a

majority of the voting power and, in reliance upon that power, make policy or executive decisions, with which the complainant does not agree, is not enough.

o Those who take interests in companies limited by shares have to accept majority rule.

o It is only when majority rule passes over into rule oppressive of the minority, or in disregard of their interests, that the section can be invoked.

o As was said in a decision upon the United Kingdom section there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made

(ii) Lujia: note – that it is not merely “disregard”, but “visible disregard” their Lordships would place the emphasis on "visible". And similarly

"disregard" involves something more than a failure to take account of the minority`s interest: there must be awareness of that interest and an evident decision to override it or brush it aside or to set at naught the proper company procedure (per Lord Clyde in Thompson Drysdale 1925 SC 311, 315).

(iii) Neither "oppression" nor "disregard" need be shown by a use of the majority`s voting power to vote down the minority: either may be demonstrated by a course of conduct which in some identifiable respect, or at an identifiable point in time, can be held to have crossed the line.

The submissions by the Rp and the Privy Council’s decision

(a) the purchase and outfitting of a motor yacht, Berjaya Malaysia;

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(i) the originally intended use of the yacht - for visiting Niah, a place inaccessible by ordinary means - did not materialise: the use of it by Directors` particularly by Beng Siew and Beng Siong personally might not appeal to shareholders.

(ii) But these were all matters for decision by the members of the Company, and if they chose to approve expenditure of doubtful value and even a degree of extravagance that was their choice.

(iii) Neither Beng Sung nor other Directors or shareholders complained at the time. (iv) The trial judge took the view that this expenditure was authorised by the

Directors and, impliedly that it was a matter for their discretion. (v) The Federal Court took the opposite view. They ordered Beng Siew to repay

all money spent on the yacht with interest, upon which being done the Company should transfer it to him.

(vi) Their Lordships consider that on this matter the decision of the trial judge was correct and that the order of the Federal Court ought not to have been made.

(b) loan to Encik Harun Arifffin; insufficient evidence to substantiate any allegation of wrongdoing

(c) donations to political parties; It was found that

i. that donations were in fact made by Kong Thai (i.e. the Company), not by Beng Siew, in the amounts and to the recipients disclosed in his evidence;

ii. that the Company had power in its memorandum to make donations;iii. that all the donations were reported at board meetings and approved by the

Directors and that the accounts were audited;iv. that the accounts containing reference to the donations were presented at the

annual general meetings of the shareholders of the Company and approved by the members without dissent

The trial judge had found that there was no appropriation of the funds by Beng Siew and the Privy Council accepted it (Although the Federal court did not accept it)

(d) advances to and investments in joint ventures; the allegation was that Siew was making profits from investments by Kong Thai

Companies in which he had interests. The evidence however, did not bear this out, and in the event, except in the matter of

drawings and loans to Siew and Siong, Sung(Rp) had failed make out a case of oppression and disregard of his interests.

(e) drawing by the second and third appellants from the company`s funds and this could have amounted to “oppression” or “disregard”, however, becayse they

were repaid at the time of action, no relief was granted in respect of this complaint.

Lujia: because oppression had ceased once the money had been repaid.(f) remuneration paid to the second appellant as managing director. It appeared that

after inquiries instituted by the respondent many of the acts of the second and third appellants were validated by resolutions of the Company.

Some notes: The law

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Section 181(1) and (2) of the Malaysian Companies Act, 1965, are as follows:-(1) Any member or holder of a debenture of a company or, in the case of a declared company under Pt IX, the Minister, may apply to the court for an order under this section on the ground -(a) ) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or(b) ) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).(2) If on such application the court is of the opinion that either of such grounds is established the court may, with the view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and without prejudice to the generality of the foregoing the Order may-(a) ) direct or prohibit any act or cancel or vary any transaction or resolution;(b) ) regulate the conduct of the affairs of the company in future;(c) ) provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself;(d) ) in the case of a purchase of shares by the company provide for a reduction accordingly of the company`s capital; or(e) ) provide that the company be wound up."

3.2. Discrimination

Discrimination exists where one group of members is given a benefit to which other members do not have, or where one group of members is subject to some detriment or liability to which others are not subject.

The term is ‘unfairly discriminates”.o Thus, discrimination can be fair. o E.g. where a class of members is conferred a benefit because of their

membership of that class. The test is whether as between the haves and have nots, the discrimination can be

justified in terms of benefit to the company as a whole.

s216(b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).

Re A Company (No 005134 of 1986) ex p Harris:

(1) The test of unfair prejudice is objective. (2) it is not necessary for the petitioner to show bad faith

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(3) It is not necessary for the petitioner to show a conscious intention to prejudice the petitioner

(4) the test is one of unfairness, not unlawfulness.

Counsel for Rp submitted that because the test is objective, it was irrelevant that the Rp may have acted for an improper purpose or with an improper motive.

I do not doubt that if the objective bystander observes unfairly prejudicial conduct by a Rp, the fact that the Rp had a proper purpose and a proper motive will not prevent that conduct from falling within the section.

But if the objective bystander observes that the conduct of the Rp was for an improper purpose or with an improper motive, that may well be a relevant consideration in determining whether the conduct is unfairly prejudicial.

O’Neill v Phillips

Facts(i) P. Ltd. a private company, employed O. as a manual worker.

P. who owned the entire issued share capital of the company of 100 £1 shares, in 1985 gave O. 25 shares and appointed him a director.

He expressed the hope that O. would take over the running of the company, in which case he would be allowed to draw 50 per cent, of the profits.

O. took over the running of the company and was credited with half the profits.

(ii) In 1989 and 1990 there were negotiations in which P. indicated that he was in principle willing to increase O.'s shareholding and voting rights to 50 per cent, when certain targets were reached.

In 1991, however, he became concerned about O.'s management of the company and decided to resume personal command.

P told O. that he would no longer receive 50 per cent, of the profits but only his salary and any dividends payable on his 25 per cent. shareholding.

O. issued a petition under section 459 of the Companies Act 1985' complaining, inter alia, of P.'s termination of equal profit-sharing and repudiation of an alleged agreement for the allotment to him of more shares.

Procedural History(i) The judge dismissed the petition, holding that P. had not committed himself

permanently and unconditionally to equal profit-sharing or the allotment to O. of more shares and that accordingly it had not been unfair of him to redraw O.'s responsibilities and remuneration and to retain his own majority shareholding. He further held that any prejudice to O.'s interests had not been suffered by him in his capacity as a shareholder.

(ii) Court of Appeal allowed an appeal by O. and ordered P. to purchase O.'s shares, holding that O. had had a legitimate expectation that he would receive more shares and 50 per cent, of the profits when the targets were reached and had suffered unfair prejudice as a shareholder.

P appealed

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Held, allowing the appeal, (iii) although it might in certain circumstances be unfair for those conducting the affairs of

a company to rely on their strict legal powers, ordinarily unfairness to a member required some breach of the terms on which he had agreed that the company's affairs should be conducted;

(iv) However, since P had not agreed unconditionally to give O. more shares or to share equally in the profits, he could not be said to have acted unfairly in withdrawing from the negotiations to that end; and

(v) that a member of a company who had not been dismissed or excluded from participation in its management was not entitled to demand the purchase of his shares simply because of a breakdown in trust and confidence between the parties

Per Lord Hoffman

1. Unfair Prejudice(i) Parliament has chosen fairness as the criterion by which the court must decide

whether it has jurisdiction to grant relief it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared to be just and equitable.

But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles

In the case of section 459, the background has the following two features.i. First, a company is an association of persons for an economic purpose, usually

entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed.

ii. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

o The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted.

o the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

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(ii) It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise

nonetheless he goes on to describe an example: where the literal construction of articles cannot be enforced.

E.g. Page Wood V.-C. in Blisset v. Danie held that upon the D true construction of the articles, two-thirds of the partners could expel a partner by serving a notice upon him without holding any meeting or giving any reason. But he held that the power must be exercised in good faith.

o "It must be plain, that you can neither exercise a power of this description by dissolving the partnership … this power is inserted, not for the benefit of any particular parties holding two-thirds of the shares, but for the benefit of the whole society and partnership.

Equity takes a less literal view of "legal" construction and interpret the articles themselves in accordance with what Page Wood V.-C. called "the plain general meaning of the deed."

o Lujia: i.e. what is the true intention of the parties.

(iii) However, in order to give rise to an equitable constraint based on 'legitimate expectation' what is required is:

i. a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.1. E.g. In a quasi-partnership company,

o they will usually be found in the understandings between the members at the time they entered into association.

o But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore.

o Nor is it necessary that such promises should be independently enforceable as a matter of contract.

o A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.

ii. Lujia: Loss of substratum 1. there may be some event which puts an end to the basis upon which the parties

entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground.

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2. Legitimate expectations(i) a relationship between company members may give rise in a case when, on equitable

principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the C articles to the prejudice of another member.

E.g. shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company. In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the p management without giving him the opportunity to remove his capital upon reasonable terms. The aggrieved member could be said to have had a "legitimate expectation" that he would be able to participate in the management or withdraw from the company.

i. an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;

ii. an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business;

iii. restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

(ii) Application to case: Did O’Neill had legitimate expectations.

i. O’Neill received shares as a gift and an incentive and I do not think that in making that gift Mr. Phillips could be taken to have surrendered his right to dismiss Mr. O'Neill from the management without making him an offer for the shares. Mr. O'Neill was simply an employee who happened to have been given some shares.

However, a. Mr. O'Neill invested his own profits in the company by leaving some on loan

account and agreeing to part being capitalised as snares. b. worked to build up the company's business. c. guaranteed its bank account and mortgaged his house in supportd. Case law: re H. R. Harmer Ltd. [1959] 1 W.L.R. 62 shows that shareholders who

receive their shares as a gift but afterwards work in the business may become entitled to enforce their equitable restraints upon the conduct of the majority shareholder.

ii. To take the shareholdings first, the Court of Appeal said that Mr. O'Neill had a legitimate expectation of being allotted more shares when the targets were met. However , Mr. Phillips never agreed to give them . He made no promise on the point . From which it seems to me to follow that there is no basis, consistent with

established principles of equity, for a court to hold that Mr. Phillips was behaving unfairly in withdrawing from the negotiation. This would not be

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restraining the exercise of legal rights. It would be imposing upon Mr. Phillips an obligation to which he never agreed.

Where, as here, parties enter into negotiations with a view to a transfer of shares on professional advice and subject to a condition that they are not to be bound until a formal document has been executed, I do not think it is possible to say that an obligation has arisen in fairness or equity at an earlier stage.

iii. On sharing of profits:

Mr. Phillips made no unconditional promise about the sharing of profits. He had said informally that he would share the profits equally while Mr. O'Neill managed the company and he himself did not have to be involved in day-to-day business.

He deliberately retained control of the company and with it, as the judge said, the right to redraw Mr. O'Neill's responsibilities.

3. Minority cannot exit at will just because there is a breakdown of relations.

It was submitted by O’Neill that trust and confidence between the parties had broken down and it would be unfair to leave Mr. O'Neill locked into the company as a minority shareholder.

I do not think that there is any support in the authorities for such a stark right of unilateral withdrawal.

o There are cases, such as In re F A Company (No. 006834 of 1988), Ex parte Kremer [1989] B.C.L.C. 365, in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to try to investigate who caused the breakdown.

o Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair. It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company.

But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others.

o Lord Wilberforce observed in In re Westbourne Galleries Ltd. [1973] A.C. 360, 380, one should not press the quasi-partnership analogy too far: "A company, however small, however domestic, is a company not a partnership or even a quasi-partnership”

Law Commission report on shareholder remedieso strong economic arguments against allowing shareholders to exit at will. Also,

as a matter of principle, such a right would fundamentally contravene the sanctity of the contract binding the members and the company which we considered should guide our approach to shareholder remedies."

Application to case

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o initial gift of 25 shares in 1985 did not in my view change the essential relationship between the parties. Mr. Phillips remained controlling shareholder and Mr. O'Neill remained an employee who had some shares.

o A promise to give Mr. O'Neill more shares or a larger share in the profits may well have been based not merely upon his position as an employee but on the fact that he already had a stake in the company. no promise was made by Phillips so this issue did not arise

4. Offer to buy

(i) Law Commission Report on Shareholder Remedies recommended that in a private company limited by shares in which substantially all the members are directors, there should be a statutory presumption that the removal of a shareholder as a director, or from substantially all his functions as a director, is unfairly prejudicial conduct.

(ii) However, Lord Hoffman felt that But the unfairness does not lie in the exclusion alone but in exclusion without a

reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. It is therefore very important that participants in such companies should be able to know what counts as a reasonable offer.

(iii) What counts as a reasonable offer:

i. In the first place, the offer must be to purchase the shares at a fair value.ii. Secondly, the value, if not agreed, should be determined by a competent expert.

The offer in this case to appoint an accountant agreed by the parties or in default nominated by the President of the Institute of Chartered Accountants satisfied this requirement.

iii. Thirdly, the offer should be to have the value determined by the expert as an expert. I do not think that the offer should provide for the full machinery of arbitration or the half-way house of an expert who gives reasons.

iv. Fourthly, the offer should, as in this case, provide for equality of arms between the parties. Both should have the same right of access to information about the company which bears upon the value of the shares and both should have the right to make submissions to the expert, though the form (written or oral) which these submissions may take should be left to the discretion of the expert himself.

v. Fiftly, … if there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer. And the majority shareholder should have a reasonable time to make the offer ° before his conduct is treated as unfair. The mere fact that the petitioner has presented his petition before the offer does not mean that the respondent must offer to pay the costs if he was not given a reasonable time.

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Pursuing claims for maladministration

Main issue: the people causing harm to company (whether directors or shareholders) are usually the people in control of the company, and therefore unlikely to pursue litigation against themselves.

1.1. Actionable wrongs against the company

(i) The company’s directors, acting within their normal powers of management of the company.

Assumption: majority of directors not aligned with wrongdoers; or new board has taken over the old board.

(ii) Company’s administrator or liquidator (winding up)(iii) General meeting(iv) Individual members

Using statutory procedures that allows them to take a derivative action Derivative action: taken in the name of the member, in pursuit of a claim that belongs

to the company, and the remedy accrues to the company, not the member as an individual.

1.2. Actionable wrongs against individual members if wrong done to the member personally (rather than to company), then the member

may pursue his or her claim against the company/against the other members (majority) by way of:(i) Personal action (or representative action) – based on contract between

company and member(ii) Personal action (or representative action) – based on contract between

members inter se(iii) Statutory action(iv) s 216

look at some issues in respect of historical practices, as the genesis behind the enactment of a particular section.

2. Majority Rule: Principles and Problems

Issue: How the majority decision to take that action was reached? The general rule is majority rule – applies to decisions to pursue business activities, as

well as decisions not to pursue corporate wrongdoers. Right to vote

o Is a property right and members may prima facie exercise the right to vote for their own advantage (Peter’s American Delicacy)

o Courts usually unwilling to inquire about matters of internal administration.

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o Rationale: power is lawfully enjoyed by the majority, and this is a fact of business life.

The law has to strike a delicate balance:o If courts too readily support the majority, and are prepared to condone unfair

and wrongful acts and decisions, the minority will be prejudiced and in a small company, “locked in” with unrealizable investment which majority can exploit to their advantage.

o Counter argument: floodgates of litigation, minority will be able to obstruct the company’s legitimate business with tiresome requisitions and objections.

Statutory provisions that give rights to minority by formalities:o Requiring special resolution in certain important matters e.g. alteration of

articleso Requiring courts’ sanction, in matters like reduction of capital or scheme of

arrangemento Giving dissentients a right to apply to court to have a resolution cancelled –

e.g. varation of class rights.o S 216 for oppression, disregarding of minority interest, unfair discrimination,

prejudice

Rules developed by courtso Directors must vote bona fide for the company’s benefit in the alteration of

articleso Directors bound by fiduciary dutieso Rule in Foss v Harbottle: minority members that complain of a wrong or

irregularity. Since a company is separate from its members, only a company can sue to enforce its rights. Thus a member of the company is not allowed to sue in respect of a cause of action that belongs to the company. This is known as the “proper plaintiff” rule. Similarly, if the company sued, a member cannot defend the action on behalf of the company.

3. Unfairness to minorities: A suggested approach

3.1. What should the courts take into account? Needs to strike a balance between rights of majority and rights of minorities. Court should ask: has the petitioner been treated unfairly in the sense that there has

been a departure from the standards of fair dealing that a member is entitled to expect?

o There has to be some standard by which to judge whether particular behaviour is or is not unfair to a minority shareholder.

o Courts should take into account not only members’ legal rights but also their legitimate expectations.

3.2. Members’ Legitimate expectations O’Neill v Phillips [1999] 1 WLR 1092: Lord Hoffman introduced a change in the

approach to the English equivalent of our s 216.

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o Held that the test of whether a minority member has been treated unfairly is whether, applying established equitable principles, the majority had acted, or was proposing to act, in a manner which equity would regard as contrary to good faith.

o The use of the term members’ ‘legitimate expectations’ was deprecated by Lord Hoffman.

o Woon: the phrase is nothing more than a convenient description of the circumstances under which courts have exercised their jurisdiction under s 216, and should not be taken as having an independent explanatory force of its own.

Woon submits: what the legitimate expectations of minority members are, is a question of law to be determined objectively considering the nature of the company involved.

o Not every company is the same.o legitimate expectations of members of public company different from member

of private company.o it is for petitioner to satisfy the court that his expectations were legitimate. (the

one who alleges must prove).

Some circumstances of what the legitimate expectations of minority members are:

(i) It is a legitimate expectation on the part of members of a company that the company should be run in the interests of all the members and not only of the majority. If directors use position to make profits and without dividends from

members – oppression. Majority shareholder misuses company’s finds for personal benefit

(ii) It is a legitimate expectation of members of a company that they should receive a fair share of profits of the business Unfair if majority receive large sums of money from the company whie

they got nothing (Re A Company) Failure to declare dividends may amount to unfairness to minority

members, especially when contrasted to the benefits the majority obtained from the company: Re Sam Weller & Sons Ltd.

(iii) It is a legitimate expectation of a member of a company that the directors will act honestly and diligently. Where transactions entered into with no apparent benefit to company and

there is a conflict of interest on the part of controllers – the evidentiary burden shifts to them to justify what they have done; in the absence of commercial justification, the court may infer that the minority have been treated unfairly: Jenkins v Enterprise Gold Mines NL.

If there are grounds to suspect breach of fiduciary duty or negligence, it is unfair to minority members if the directors consistently refuse to provide them with evidence that the company is indeed being properly run, or if the directors use their majority voting power to prevent an action being brought against them.

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(iv) In the case of an incorporated partnership or family business, it may be a legitimate expectation of minority shareholders that they (or their faction) should have board representation to safeguard their interests

(v) It is a legitimate expectation of a member that directors will account to members for their stewardship of company. Hold AGMs, prepare audited accounts

(vi) It is a legitimate expectation of a member of a joint venture company that the majority shareholder will not run the company as if it was his own business, disregarding the interest of his partner JV – like an incorporated partnership, relationship based on trust and

mutual respect.

(vii) In the case of a guarantee company, it is a legitimate expectation that natural justice will be observed where expulsion of a member is concerned. Guarantee companies with share capital – usually not money-making

ventures. Tend to be non-profit organisations.

4. Section 216 and the Rule in Foss v Harbottle

s 216 embodies a member’s personal right to be treated fairly. Rule in Foss v Harbottle does not restrict a member’s ability to petition for relief. s 216: belongs in class of members’ personal rights and therefore falls outside the

scope of the proper pf rule. o Note: member must be seeking relief to injury done to himself.o If the injury is done to the company, the proper pf is the company.o Injury to company is not ipso facto an injury to the members.

s 216(2)(c): where any of the grounds set out in s216(1) are established, court may authorise civil proceedings to be brought in the name of or on behalf of the company by such person or persons and on such terms as the Court may direct.

o It may be equitable in some cases to allow minority to bring a corporate action against the offending majority.

S216 – should not be used as primary weapon for commencement of derivative actions.

S216A is the proper section for the purpose. Woon: If the primary relief sought is for the benefit of the company and not the

petitioner, s216 is inappropriate. In such a case, the petitioner should seek leave under s216A to commence an action

on behalf of company, or institute derivative action instead. If oppression made out under s216 – and evidence shows the oppressor has caused

damage to company, an order that the oppressor should compensate the company would be within the scope of s216 (refer to pg 184 – complicated case)

s 216 (2) If on such application the Court is of the opinion that either of such grounds is established the Court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and, without prejudice to the generality of the foregoing, the order may —…

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(c) authorise civil proceedings to be brought in the name of or on behalf of the company by such person or persons and on such terms as the Court may direct; …

4.1. Scope of remedy

s 216(2) gives court the power to make such order as it “thinks fit” – wide jurisdictiono Wide discretion to tailor the order to remedy the mischief complained of.o Order must be made with a view to bringing an end of remedying matters

rightly complained of.o Most case – the practical option is that the majority buy out the minority (or

vice versa, but rarely). Reason: if they cannot get along – litigation will not improve matters, and other measures will only be temporary relief.

4.1.1. Purchase of shares

s 216 (2) If on such application the Court is of the opinion that either of such grounds is established the Court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and, without prejudice to the generality of the foregoing, the order may — …

(d) provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself;

Some authority (principles) to apply when valuing shares(i) Valuation to be put on shares is courts’ decision, although assisted by

professional valuers.(ii) Aim of order is to give money compensation to the oppressed shareholders for

the injury done to them: Scottish Co-operative Wholesale Society v Meyer. Judge not bound by strict accounting or business rules, the key is whether the share values is just and proper.

(iii) The alternative is the date the order was made – the date of the order or actual valuation would be more appropriate then the date of the petition, because a going concern should be valued at the date on which it is ordered to be purchased.

(iv) Court has power to order valuation as of some other date if that is appropriate(v) Where shares are ordered to be valued as of the date of the petition, some

judges have indicated that it is not a straightforward valuation that is to be done.

(vi) Value of shares (most cases) is determined by attributing to them the proportion of the total asset value of the company (net tangible assets) that they represent, with no discount for a minority stake.

(vii) However, other authorities suggest that there should be a discount to NTA in the case of a minority stake.

4.2. Winding Up S216(2)(f):

s 216 (2) If on such application the Court is of the opinion that either of such grounds is established the Court may, with a view to bringing to an end or remedying the matters complained of, make such order as it thinks fit and, without prejudice to the

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generality of the foregoing, the order may — …(f) provide that the company be wound up.

Court has inherent jurisdiction to restrain a person from presenting a petition under this section seeking the winding up of a company if there is an abuse of process.

Is it necessary to ground a petition under s 216 on the basis of a violation of a member’s legal rights? Or is it sufficient to argue that the member’s legitimate expectations are not fulfilled?

What are the remedies that the court may order? This is the most important question to ask if you wish to file for a petition under s 216. o Purchase of shares – what is the basis of valuation of the shares?

Would the following constitute grounds of the petition under s 216? Shareholder is excluded from management. Directors, who are nominees of the controlling shareholders, are paid excessively. Company fails to declare dividends, even though it is in a position to do so. Controlling shareholders divert company’s assets or opportunities for themselves Company has a loss of substratum

There is a huge myriad of instances which may raise issues under s 216 or s 254(1)(i). If you are involved in the litigation, research to discover similar cases is essential.

4. Section 216 and the Rule in Foss v Harbottle

Consider the following: What is the principal difference between a petition under s 216 and a derivative action

brought by the shareholders? Can the two overlap?

5. Just and Equitable Winding Up – s 254(1)(i)

Circumstances in which company may be wound up by Court254.—(1) The Court may order the winding up if —

(i) the Court is of opinion that it is just and equitable that the company be wound up;

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Sim Yong Kim v Evenstar Investments Pte Ltd [2006] SGCA 23

Facts

(i) App and brother (mike) pooled their shares in a company called Sinwa, into a company (Evenstar). The App was sole minority shareholder (13.5%) in Evenstar while Mike was the sole

majority shareholder (86.5%), and only directors. Evenstar subsequently transferred a parcel of Sinwa shares to KS Energy in

exchange for KS Energy shares. After the share swap and Sinwa’s listing on the Singpaore Exchange limited, Evenstar

held 54.9% of Sinway’s shares, with 47.5% and 7.4% representing Mike and petitioner’s contributions respectively.

Both brothers remained the only directors of Evanstar, until Feb 2005, when Mike’s son and daughter appt as directors. Brothers also held management positiosn in Sinwa.

Mike was CEO, petitioner was executive officer.

(ii) Appellant petitioned to have Evenstar wound up under s 254(1)(i) of the Companies Act (Cap 50, 1994 Rev Ed), on the grounds that it was just and equitable to do so. The appellant claimed, inter alia, that: Mike had assured him that if he ever wanted to

pull his shares out from Evenstar, Mike would buy him out, i.e. that the appellant would give Mike “the first right of refusal”.

TrialThe trial judge dismissed the appellant’s petition, as a result of which the appellant filed the present appeal.

Appellant’s submissions at trial(a) Prior to the listing of Sinwa, Mike told the petitioner that “it would be in their interest to

pool their shares in [Sinwa] together to be held by a separate holding company”. Mike further assured the petitioner that should he “want to pull out [his] shares

from the Company”, Mike would buy him out, ie, that the petitioner would “give Mike the first right of refusal”.

(b) Evenstar was in substance a partnership between the two brothers, formed for the sole purpose of holding their Sinwa shares as a nominee for them. It was only some time after their shares were pooled that the petitioner found out that Mike had been using Evenstar to invest in other assets contrary to their original plan.

(c) Mike now wanted to “control Evenstar and the Sinwa shares ... with [the petitioner] having no say and no benefit”. In 2005, Mike had added his son and daughter as directors of Evenstar. Furthermore, Mike had also attempted to transfer some of his shares in the company to his

two children to enable him to hold shareholders’ meetings without the petitioner being present, thereby rendering the petitioner “powerless” in Evenstar.

The petitioner had opposed this attempt successfully.

(d) Through the years, various problems made it increasingly difficult for the petitioner to

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work in Sinwa, and thus impossible for him to continue his partnership with Mike. These problems were as follows:

i. Sinwa had become a “Tan family company”, in which one Bettina Tan and her siblings were “running the show”, rather than a “Sim family company”. One example of this concerned how Bettina’s sister had accepted the resignation of one of the petitioner’s employees without his consent.

ii. After the petitioner informed Mike of his desire to exit Evenstar, Mike had intentionally harassed the petitioner by requiring that he be stationed in the office at all times during office hours and by making him deliver a Powerpoint presentation at extremely short notice. The petitioner felt that it was absurd to require that he be in the office from nine to five since the nature of his job involved him leaving the office to meet customers and going to the shipyards.

On appeal, the appellant argued that his application for the winding-up of Evenstar should be allowed as:

(a) the trial judge had erred in dismissing his application for cross-examination of all the deponents of affidavits submitted at the hearing of the petition;

(b) Mike was using Evenstar’s assets to make other investments in breach of the brothers’ original plan for Evenstar to function solely as a means of holding their shares in Sinwa;

(c) Mike had breached his assurance to the appellant that the appellant would be able to exit from Evenstar by pulling out his Sinwa shares whenever he wanted;

(d) loss of mutual trust and the appellant’s loss of confidence in Mike made it impossible for him to continue his partnership with Mike;

(e) there was no practical alternative that would allow the appellant to take his stake out of Evenstar at a fair and reasonable price.

Rp’s submission at trial(a) Evenstar was not formed with the sole objective of holding the brothers’ shares in

Sinwa. Evenstar was intended to serve as an investment holding company, not only for Sinwa

shares, but additionally for other shares and business ventures. The retention of Evenstar’s profits for reinvestment was consistent with its objective as

an investment holding company. The petitioner, as a director and shareholder of Evenstar, had himself agreed to

the retention of profits for further investments. In addition, he had approved payments for these investments out of Evenstar’s funds.

(b) Mike needed to get his son and daughter involved in the running of Evenstar as the petitioner had lost interest in the company and Mike, who already had substantial responsibilities as chief executive officer of Sinwa, needed help. The petitioner had blocked the purported transfer of shares to Mike’s children even though he obviously had little interest in Evenstar by then.

(c) It was untrue that Sinwa was no longer a “Sim family company” as Mike was still its managing director. The petitioner’s role as an executive director in Sinwa was insignificant as he had no executive functions. The petitioner’s appointment was a mistake as he was unable to manage or command the respect of the staff working under him.

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Held, allowing the appeal:

(1) Held at (2): Whilst a company’s memorandum of association would be conclusive evidence of its business vis-à-vis third parties, it was not necessarily so as between shareholders such as the brothers who had entered into what was substantially a quasi- partnership using a company merely as a vehicle for an agreed object. The inconclusiveness of Evenstar’s memorandum of association was a fortiori given that Evenstar was initially incorporated as a shelf company: at [14].

14 Tay J found that the original scope of Evenstar’s business was broader in that the objects clause in its memorandum of association empowered it to invest in practically any lawful business in Singapore and abroad.

Whilst we agree that a company’s memorandum of association is conclusive evidence of its objects vis-à-vis third parties, it is not necessarily so as between shareholders, such as the brothers here, who have entered into what is substantially a quasi-partnership using the company merely as a vehicle for an agreed object.

As between the brothers, what they had agreed on as the object or objects of Evenstar would be determinative. The inconclusiveness of Evenstar’s memorandum of association is a fortiori given that Evenstar was initially incorporated as a dormant or shelf company: see Goodwealth ([9] supra) at [38]–[39].

(2) The initial object of Evenstar was to hold the brothers’ Sinwa shares as an investment block that would allow Mike to retain majority control of Sinwa. However, the appellant, by his actions, had acquiesced, if not agreed, to Evenstar holding

investments other than Sinwa shares. Accordingly, in so far as the appellant’s case was based on a change in the original

objective of Evenstar, it had to fail: at [15].

15 However, the petitioner, by his actions, had acquiesced, if not agreed, to Evenstar holding investments other than Sinwa shares. Indeed, this began at the time of the pooling, when Evenstar transferred a parcel of Sinwa shares to KS Tech (now called KS Energy) in exchange for KS Tech shares.

This could only have been done with the knowledge and consent of the petitioner… Although the petitioner has claimed that he did not know about these investments, he was a signatory of the cheques that paid for these investments. We therefore agree with Tay J that in so far as the petitioner’s case is based on a change in the original objective of Evenstar, it must fail.

(3) The mutual trust and confidence between the brothers that was necessary to carry on the business of Evenstar had not broken down. Any distrust and loss of confidence by the appellant in Mike did not stem from the way

Mike was managing the affairs of Evenstar. The appellant was unhappy because of Mike’s refusal to buy him out when his declining

health made it difficult for him to cope with his work in Sinwa and its related companies: at [16].

16 The petitioner had played no role in the investment activities of Evenstar,

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other than to sign cheques. Any distrust and loss of confidence by the petitioner in Mike did not stem from the way Mike was managing the affairs of Evenstar .

The petitioner was unhappy because of Mike’s refusal to buy him out when his declining health made it difficult for him to cope with his work, such as it was, in the Sinwa companies. He wanted to exit Evenstar for this reason and retrieve his Sinwa shares held in Evenstar. Hence, he called upon Mike to buy him out of Evenstar.

(4) The effect of Mike’s assurance was that the appellant would be able to exit from Evenstar by pulling out his Sinwa shares whenever he wanted, provided that Mike was given a “first right of refusal” on these shares. The “first right of refusal” was not meant to negate or override Mike’s fundamental

promise to pull the appellant’s Sinwa shares out of Evenstar, but was intended to explain what would happen after those shares had been taken out of Evenstar. It was the appellant’s infelicitous explanation of the meaning of Mike’s promise that led to his grief before the trial judge: at [18], [21] and [23].

It is important to have in regard to this factual matrix in determining the substance of Mike’s assurance.

Under the arrangement, Mike would remain free to liquidate his sinwa shares at any time, as he had control of Evenstar, but the App would not be able to do so without Mike’s agreement.

The App’s apparent benefit was his retention of his executive directorship without executive functions. But that could not have been adequate compensation for exchanging his marketable Sinwa shares for unmarketable Evenstar shares. It was therefore not surprising that Mike held out a carrot to the petitioner to get him to agree to pool the Sinwa shares. This came in the form of Mike’s promise to buy the petitioner out should he wish to “pull out [his] shares from the Company”.

Mike’s assurance was neither made in writing, nor were the terms of the buyout discussed, but it is reasonable to infer that the petitioner, being the younger brother, trusted Mike to live up to his promise to buy him out in due course. After all, Mike was his elder brother and the Sinwa shares had their origins in their family company.

21 The factual matrix also explains the meaning of the petitioner’s statement that Mike had been given “the first right of refusal” to buy his shares in Evenstar. This statement has enabled Mike to contend that he was not obliged to buy the petitioner’s shares at all, and that if he refused to do so, the petitioner was free to sell his Evenstar shares to any other person.

However, this argument is based on the literal and technical meaning of the words “the first right of refusal” outside the context of the factual matrix. It is clearly wrong. The fundamental question is whether Mike did promise to “buy out” the petitioner, ie, to allow the petitioner to exit Evenstar, as a condition for the petitioner’s agreement as to the pooling. If Mike did promise to “buy out” the petitioner from Evenstar, which is clearly what the evidence shows, he cannot now be heard to say that he was only given a right of first refusal. This would make no sense, as a promise to buy is a direct contradiction of a right not to buy, which is what the right of first refusal means. What is important here is the

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substance of the promise made by Mike and not what the petitioner thought he heard or understood by his recollection of the words “first right of refusal”.

This misunderstanding is not difficult to explain. The petitioner, being a layman, might have thought that the two statements meant the same thing. More likely, he might have understood the words “first right of refusal”

(5) The affidavit evidence showed that Mike took undue advantage of the appellant’s imperfect recollection of his words of assurance. Mike not only refused the appellant’s request to pull out his Sinwa shares and made the unreasonable suggestion that the appellant sell his shares in Evenstar to a third party, he also offered an unfair and unreasonable price for the appellant’s shares in Evenstar and on unfair terms: at [25].

The law – section 254(1)(i) and its relationship to section 216 of the Companies Act

Counsel for Mike’s submissions Counsel referred to O’Neill where Lord Hoffmann rejected such a submission (that

the petitioner has suffered no inequity from Mike’s refusal to buy him out as Mike had no obligation to do to do so, and that the App made no attempt to sell his Evenstar shares to any other person)

o I do not think that there is any support in the authorities for such a stark right of unilateral withdrawal …

o It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company.

o But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others. I rather doubt whether even in partnership law a dissolution would be granted on this ground in a case in which it was still possible under the articles for the business of the partnership to be continued. [emphasis added]

Counsel for Evenstar submitted that the same principle applies to petitions for just and equitable winding up.

o Counsel also referred to Parker J’s decision in Re Guidezone Ltd in the absence of unfair conduct, the court will not wind up a company just because the aggrieved shareholder is not offered the price he would like for his shares.

Court’s observation(iv) Examination of English Cases:

O’Neill and Guidezone were both “unfair prejudice” cases under s 459 of the Companies Act 1985 (c 6) (UK) (“the UK Companies Act 1985”) (corresponding to our s 216, except for the absence of the remedy of winding up). Lord Hoffmann has in O’Neill provided a clear analysis of the concept of unfairness as the underlying basis of the s 459 jurisdiction

(v) Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared to be just and equitable.

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But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles

In the case of section 459, the background has the following two features.i. First, a company is an association of persons for an economic purpose, usually

entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed.

ii. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

o The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted.

o the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

(vi) House of Lords in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360] adopted in giving content to the concept of “just and equitable” as a ground for winding up

It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise

nonetheless he goes on to describe a few circumstances:

i. an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;

ii. an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business;

iii. restriction upon the transfer of the members’ interest in the company – so that

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if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

(vii) What does s254(1) NOT allow a member to do:

the notion of unfairness lies at the heart of the “just and equitable” jurisdiction in s 254(1)(i) of the CA and that that section does not allow a member to “exit at will”, as is plain from its express terms.

Nor does it apply to a case where the loss of trust and confidence in the other members is self-induced.

It cannot be just and equitable to wind up a company just because a minority shareholder feels aggrieved or wishes to exit at will. However, unfairness can arise in different situations and from different kinds of conduct in different circumstances. Cases involving management deadlock or loss of mutual trust and confidence where the “just and equitable” jurisdiction under s 254(1)(i) has been successfully invoked can be re-characterised as cases of unfairness, whether arising from broken promises or disregard for the interests of the minority shareholder.

Relationship between 216 and 254(1)(i) First, in contrast to the UK statutory regime, where winding up is available as a remedy

only under the court’s “just and equitable” jurisdiction, both s 254(1)(i) and s 216 of our CA empower a court to wind up the company. These two provisions should therefore be treated as prescribing different grounds to warrant winding up , rather than raising the threshold of the “just and equitable” jurisdiction to allow winding up as a higher order remedy for the more severe “oppression” cases.

(ii) Secondly, equating the scope of s 254(1)(i) with that of s 216 would be inconsistent with the express language used in the two sections; a plain reading of ss 254(1)(i) and 216 necessitates the conclusion that relief under the two sections is founded on different bases. Under s 216, the categories of conduct that fall within the court’s purview are limited to:

(a) the conduct of the company’s affairs or the exercise of the directors’ powers under sub-s (1)(a); and

(b) acts of the company or resolutions by members or debenture holders under sub-s (1)(b).

In contrast, s 254(1)(i) is phrased more generally as requiring the existence of “just and equitable” grounds, and is not limited to any particular category of conduct. As a result, the jurisdiction under s 254(1)(i) may in some cases be broader than that under s 216.

The most obvious example of this would be cases involving a deadlock between equal shareholders; whilst it may be difficult to attribute oppressive or unfairly discriminatory conduct on either party in such cases, the courts have, nevertheless, been ready to grant winding-up orders pursuant to their “just and equitable” jurisdiction

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37 Hence, it is our view that the “just and equitable” and “oppression” regimes under our CA each have their own respective spheres of application.

However, at the same time, we also recognise that these two jurisdictions, though distinct, do in fact overlap in many situations since they are both predicated on the court’s jurisdiction to remedy any form of unfair conduct against a minority shareholder.

In this regard, although s 216 does not expressly adopt the “just and equitable” principle, the concept of unfairness is common to both sections.

In such overlapping situations, we agree with Parker J’s dictum in Guidezone ([27] supra) that in order to reconcile the concurrent jurisdictions under the two provisions in a principled manner, the degree of unfairness required to invoke the “just and equitable” jurisdiction should be as onerous as that required to invoke the “oppression” jurisdiction.

Legitimate expectation

we note at the outset that the petitioner has not expressly pleaded that he had a legitimate expectation that Mike would exercise his “first right of refusal” on a reasonable basis

[In] order to give rise to an equitable constraint based on ‘legitimate expectation’ what is equired is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.

This is putting the matter in very traditional language, reflecting in the word “conscience” the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? … In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore.

Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because of a third party) it would not be enforceable in law.

Prof: Remedies – if the application under s216 succeeds one possibility is that Sim will get his

shares work out If 256 succeeds – then company wound up, and the capital will go to Sim Speculation on Prof’s Part Besides, Evenstar is not a trading company, it is just an investment company Unlikely to have a lot of creditors, when there is a winding up, it will be extremely

detrimental to the business. The court considered 254 and found that the petition succeeded, but it was an order of

30days (stayed) – chances that there were compromise between them. Go back to the grounds

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S216 – takes into account companies affairs of directors’ power. Look at how the members dissolve

S254 is based on just and equitable grounds o would succeed under s254 but not under s216o both may overlap

Agreement that Mike will buy out Sim when Sim wants to get out of the transaction Mike offered to buy Sim out of Evenstar How to value the Sinwa shares – he looked at the Sinwa share values

Consider the following: When will the courts consider a remedy under s 254(1)(i) is appropriate?

6. Peculiar situations – M&A Transactions (not required to know in detail)

Merger and acquisition transactions usually require the approval of shareholders, either at the shareholders meeting or by the tendering of their shares. The regulatory regime has developed the following ways to control the voting by majority shareholders in M&A transactions:

(1) Require “super-majority” voting in certain instances (e.g. scheme of arrangement requires majority in number, 75% in value for approval).

(2) Ensuring that shareholders receive procedural protections in terms of informational requirements or access to independent expert opinions to be obtained and disclosed to shareholders. For example, where the Singapore Code of Takeovers and Mergers (“Code”) applies, the Code ensures that target shareholders are given adequate information and advice and all shareholders of the same class must be treated equally.

(3) Requiring certain shareholders to abstain from voting at the shareholders’ meetings or requiring separate meetings of affected shareholders. For example, in the case of the scheme of arrangement, the offeror which holds shares in the target company form a separate class from the rest of the shareholders and the consent of the class of independent shareholders is required.

(4) Giving the minority shareholders the right to exit at a fair price if certain decisions they disagree are taken by the majority. Such exit rights are referred to as “appraisal rights”, though this is not often used under the Companies Act.

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Corporate_wk2_Minority Protection

Documents

company articles

management of company

members rights

register of members

members informational

articles of association

members ipso facto

purported act