THE PROTECTION OF MINORITY SHAREHOLDERS POLICY RATIONALE – Why protect the minority? [p.4 of Notes] Rationale for majority rule Rationale for minority protection Choice – minority choose to be minority Not all that much choice too minority in closely-held Co. cannot exit so easily Risk – majority take more risk Some risk is still risk Efficiency – cannot allow Co. to be deadlocked all the time Cannot allow unfettered tyranny of majority may destroy value of Co. THE BALANCE: rule, augmented by selective intervention by intervention by the courts to prevent unfair and inefficient prejudice against the prima facie legitimate and efficient majority rule, minority.
1. THE COMMON LAW DERIVATIVE ACTION (CLDA) – and the rule in
Foss v. Harbottle
1.1 The Rule in Foss v. Harbottle (“the Rule”) [p.5-8 of Notes] Although termed the rule in Foss, it actually comprises of two rules (as rules (as interpreted by Edwards v. Halliwell [1950, [1950, ECA]): ECA]):
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Proper Plaintiff Rule When a wrong is committed against a Co. Co . the proper plaintiff can only be the Co. itself.
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Rationale: a Co. is a separate legal entity Effect for majority rule: Power is vested in majority bec. majority will almost always have control over deciding whether the Co. shd sue.
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Cases Foss v Harbottle (1843): “In law, the corporation, and the aggregate members of the corporation, are not the same thing for purposes like this” .
Majority Rule Principle Where the wrong is committ ed against a member’s individual right , but it can be ratified by a simple majority of the Co’s members, no individual member is allow to maintain an action. The Co’s word is final – cadit quaestio .
Rationale: fruitless to allow individual to sue when wrong can b e cured by majority ratification Effect for majority rule: Minority cannot sue for mere irregularities Cases (1875): Chairman failed to call vote before adjourning a MacDougall v Gardiner (1875): general mtg – minority member complained – failed, bec. Chairman would’ve had enough votes to command a majority and vote in favour of adjournment anyway.
The link btw the two rules: Emphasize the prima facie right of majority shareholders (“ MSH”) to decide the Co’s affairs, by severely limiting the ability of minority S/Hs to sue. Benefits of Foss Costs of Foss
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Reduce wasteful litigation Prevent double recovery
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MSHs can cover up their wrongdoing – harms value of the Co. Robs minority S/Hs of a remedy when there is clearly a wrong
1.2 Exceptions to the Rule – the CLDA [p.8 of Notes] The Rule is a procedural rule – bec. it deals with whether a member has standing to bring the action for the Co. For eg. if a Dir. misappropriates funds, the Co. has a substantive action for breach of fiduciary duty; regardless of whether it is the Co. or the member o
suing on behalf of the Co. Four exceptions to the Rule (discussed in Prudential Assurance v. Newman Industries Ltd [1982, ECA]):
(1) Member has a personal claim -
If A has cause of action A and B, he may be barred from A but that does not destroy (his personal) cause B.
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(2) Transaction requires special majority to ratify Majority rule principle in Foss cannot apply bec. a simple majority cannot ratify such acts
(3) Complaint is for Ultra vires or illegal transactions Majority rule principle in Foss cannot apply bec. an ultra vires is incapable of ratification
(4) Cases where it is a “fraud on the minority”
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Wrongdoers are the very ones in control of the Co. The only true exception to Foss
*N.B. (1) – (3) are not really exceptions per se, because they bec. they are instances when the member has pre-existing personal rights to sue. In a sense, if you have all these existing rights to sue, you ARE the proper plaintiff. Only (4) is a true exception to Foss.
Exception (1): Member has personal claim [p.9 of Notes] (a) Express contracts Eg. I have a contract to supply goods to the Co.; the fact tt I cannot sue the Co. for a fiduciary breach doesn’t bar me suing for breach on that contract.
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(b) Statutory contract (s.39) -
M&A serve as contract btw Co. and individual member of Co. Subject to 2 conditions: (i) He must be enforcing the right qua 2 member ; (ii) In case of procedural irregularity, there must be substantial injustice (s.392)
(c) Statutory rights conferred expressly 1 by CA s.409A allows member to seek injunction for alleged contravention of CA s. 177 – right to compel gen mtg s.181 – right to appoint proxy s 189 – right to inspect books of the Co.
(d) Common law Case law has developed to recognize certain rights as rights inseparable from a member’s ownership of shares. A right to vote (Pender v. Lushington) Right of a member-director not to be wrongfully removed (Pullbrook v. Richmond )
Restriction on Exception (1): No Reflective Loss principle A shareholder cannot make a claim for reflective loss even if the S/H Exceptions to the No Reflective Loss principle
The difference btw (b) and (c) is that the rights in (b) are accorded by way of the Articles (representing a contract) and (c ) are those immutable rights conferred by statute. Unless the “wide-view” of Salmon v. Axtens applies - This assumes that the “in a capacity other than a member” principle applies in Singapore— which may not be the case. For a discussion of the applicability of the “in a capacity of than a member” principle in Singapore, See Woon at para. 4.49. 2
has his own separate cause of action. If the S/H can be entirely compensated by a re-inflation of the Co’s value, he has no action. Justification: prevent double recovery (Authoritative case: Johnson v. Gore Wood (HL); Singapore authority: Townsing Henry George ) -
Exception (2): Transaction requires special majority to ratify [p.13 of Notes] The reasoning is that if the breach consists of Dirs. not adhering to the 75% rule – after breach is uncovered, the Dirs. need only a simple majority to decide not to p roceed with any action – this effectively circumvents the need for supermajority. Edwards v, Halliwell : “[The] effect would be to allow a o company acting in breach of its articles to do de facto by ordinary resolution that which according to its own regulations could only be done by special resolution “
Can Exception (2) and (1) be combined? Such instances are treated as if they are personal rights of members.
1) -
Co. has no cause of action bec. of wrongdoer’s actions eg. Co. rendered insol vent ( Giles v. Rhind ) bec. the jurisdiction tt the Co. is in has no proper remedy (Hengwell )
2)
S/H’s loss is separate and distinct from the Co’s
Exception (3): Ultra vires transactions [p. 14 of Notes]
But this Exception is of limited ap plication bec.s.25 effectively abolishes the doctrine of ultra vires. However, the remaining limited powers of a member to deal with an ultra vires act in s. 25 can still be enforced by a member in their own right (and, therefore, remain an exception to the rule in Foss) Under s. 25(2)(a)a member can restrain the company Section 25(2)(b) allows a company or a member to use ultra vires acts to support a claim against a director. Thus, a minority member may claim “oppression” (s. 216),“just and equitable winding up” (s. 254(1)(i)) or seek a derivative action on behalf of a company for a breach of directors’ duties (s. 216A), all of which may be supported by evidence of ultra vires acts.
Exception (4): “Fraud on the Minority” [p. 14 - 25 of Notes]
This IS the common law derivative action (CLDA). It is a “derivative action” because although it is pursued by a member of the company, the member is not suing to enforce the ir own personal rights, o but rather those of the company (i.e., the rights being enforced are “derived” from the company) A PROCEDURAL right bec. the Co. always had the right to sue but this exception allows a minority S/H to bypass the majority Dirs. and force the Co. o to mount the suit. Purpose: to prevent wrongdoings by corporate controllers from going without redress. Elements of the Test [p.15,16 of Notes] I: Co. is prima facie entitled to the relief claimed II: The wrongdoers must have committed a “ fraud on the minority”. 3 (similar to threshold test in s.216A derivative action) Three elements : (i) Wrongdoer obtains some sort of benefit
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Leading texts suggest that there is a ‘three -part test’. But SGCA in Ting Sing Ning did not expressly state the no. of stages in the test, yet it endorsed a passage in Daniels v. Daniels which states such a test. Nevertheless, in the later SGHC case of Sinwa, Ang J. acknowledges that three- part test may be good but law not settled. He opined an alternative singular test but that wasn’t emphasized. May argue in ex ams tt there is a singular test if client fails three-part test on the facts.
* Prof Puchniak considers this a redundant limb because… But it was considered in detail and deemed important in the dicta of Sinwa SS (HK) Co Ltd v. Morten Innhaug [2010, SGHC].
(ii) (iii)
Benefit obtained at the expense of the Co. Wrongdoer used controlling power to prevent Co. from suing
II: Three-part test for proving fraud on the minority (“FOTM”) (a) Wrongdoer benefit [p.17]
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FOTM does not require prove of actual fraud But must have proof that the wrongdoer actually benefited from the wrongdoing This req. effectively bars claims of ‘pure negligence’ (whr Dir. was merely careless, unlikely to show tt he obtained some benefit). Daniels v. Daniels : sell Co. land at undervalue – Dir benefited – claim allowed. Pavlides v. Jensen : Dir. sold mine at undervalue – but he did not benefit – claim failed.
(b) At the expense of Co.
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This goes to whether the S/Hs could have ratified the wrongdoer’s breach. Where breach benefits the wrongdoer at the expense of the Co., ratification is not allowed (bec. it effectively gives S/Hs license to openly rob the Co.). Cooks v. Deeks – completed negotiation of deal – Dirs diverted it to themselves – no ratification allowed. c.f. Regal Hastings – Lord Russell in obiter considered tt Dirs. could have ratified deal w S/Hs at gen mtg – derivative action barred.
Threshold requirement 1: Pf must come with clean hands [p.21] - In ‘Exceptions’ (1) – (3), the Pf has a pre-existing right at law. But Exception 4 (or the CLDA) resides in equity and so the Pf must come with “clean hands”. Pf can be barred if: - He/ she knows of wrongdoing and adopted it – (Nurcombe v. Nurcombe – wife included husband’s misappropriated assets in matrimonial proceedings (w knowledge of the wrongdoing) and then seeking to sue on behalf of Co. – failed bec. she sort of was in pari delicto.) - Delay in bringing the claim – (Ting Sing Ning – Ct acknowledged there was considerable delay but Pf not responsible for it – claim allowed) - Not in best interest of Co – (Sinwa – Pf only suing
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(c) Wrongdoer control [p.18-20]
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Arguably most crucial element – it must be shown tt wrongdoers have the ability to stifle claim. No need to show tt Pf had requested for action but was actually rejected. a. The clearest case is of course when the wrongdoing Dir. actually commands >50% votes; OR b. Dir. doesn’t actually have 50%, but it can be shown tt sufficient Dirs. would have sided with him to form a majority, then he has de facto control (eg. Ting Sing Ning – sister (10%) + brother = 52% – “Asian family values”) But even if (a) or (b) is satisfied, if the “majority of the minority” would oppose bringing the claim as well, then there is n o wrongdoer control (Smith v. Croft – Wrongdoers (63%), Pf (14%) and remaining independent S/Hs (21%) – the 21% also chose not to mount action – Pf failed) But the “independent” S/Hs must be fully informed (Ting Sing Ning – wrongdoer and solicitors did not fully expln nature of allegations) What happens if both parties have exactly 50-50 shareholding? Then court will look at whether wrongdoer had effective control ( Sinwa) 2: Available vs. better remedy
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In Ting Sing Ning, SGCA held tt the mere availability of an alternative remedy would not defeat claim, unless Df proves tt alternative remedy is a “ better remedy” or “the best solution” . But later in Sinwa, Ang J. at SGHC chose to depart from this on the basis th at the language used by the SGCA was “purely rhetorical”. He considered that so long as the alternative was “ a real option”, the Ct can strike down the o claim. Ang J. contends tt the traditional view of a CLDA was that it must be the last option and if the o SGCA wanted to depart from this position in Ting Sing Ning, it ought to have made its intention clearer. Under Ang J.’s test, the decision in Ting would have been the same bec. the alternative there o was not only not the better option, but not a “viable option” at all. Prof TCH in his commentary (2011) opines that the SGCA’s view should be preferred. While it is true tt the CLDA was an extraordinary remedy, the reason it had to be extraordinary was to prevent abuse by minority S/Hs. But in reality, CLDAs are extremely rare bec. (1) minority S/Hs bear
to vent unhappiness and was not for the best interest of the Co.)
the cost of it and (2) damages recovered only go to Co. Hence, no need to be as strict as Sinwa.
But might it not be argued tt the reason for the strictness is not guard against minority abuse but simply cessante ratione legis, cessat lex ipsa? A Fifth Exception? – the “justice of the case” formulation *p,20+ Accepted? Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993, S C West Aus) – considered that modern companies are more complicated than the time when Foss v. Harbottle was decided, hence shd not limit remedy only to specific - Not formally accepted nor rejected in boundaries – “Equity is concerned with substance and not form… I consider it to be desirable to allow a minority Singapore. - Rejected by ECA in Prudential Assurance. shareholder to bring a derivative claim where the justice of the case clearly demands that such a claim be brought, irrespective of whether the claim falls within the confines of the established exceptions” o
Procedure for bringing the CLDA: (* N.B. This refers to procedure for application for leave to bring a CLDA) No specific procedure in Rules of Court, but: 1. Pf must be a member of the Co. He usually commences action on b ehalf of all shareholders less the alleged wrongdoers; Co. should be named as co-Dfs with the alleged wrongdoers
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to ensure Co. is bound be decision Pf should show that he/ she attempted to persuade the Co. to commence the action prior to mounting the CLDA Issue of standing (whether there is “fraud on th e minority”) should be addressed at the st art of trial (to avoid mistake as in Prudential Assurance ) When proving the alleged wrongdoing of the errant directors, need only prove on a prima facie basis and not on the usual balance of probabilities.
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Although Pf bears his own cost, the Court has the discretion to award costs to Pf or make Co. bear the cost even if action is unsuccessful .
2. 3.
2. STATUTORY DERIVATIVE ACTION (SDA) – s. 216A [p.26 of Notes onwards]
The inadequate procedure and uncertain grounds for bringing a common law derivative action was widely seen as unsatisfactory In November 1993, ss. 216A and 216B were enacted based on theCanadian model Once again, this is a PROCEDURAL right to bypass controlling shareholders and mount suit in the Co’s name (for CLDA, it is on behalf of the Co. but in the case it will be the complainant-shareholders names). Procedural bec. succeeding in the elements of s.216A does not prove wrongdoing on the Dir’s part, it only proves that you have standing to go on and seek to establish the Dir’s wrongdoing (this would be the substantive part). “No Reflective Loss” principle applies equally here.
Who may mount this action? - s.216A(1) 1)
The Co. must be incorporated in Sgp, but not listed on the Sg Stock Exchange (ie. Sgp PRIVATE Co.)
Elements of the Test – s.216(A)(3) 1) Notice – 14 days’ notice must be served
2)
The complainant must be:
- a member of the Co.; or - the Minister of Finance (in the case of a Declared Co. – basically a Co. declared for investigation by the Minister under Part IX of the CA); or - any other person tt the court deems a “ proper person”.
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3) * Note tt a s.216A claim need not be u sed only at the start of a fresh suit, it can b e used to intervene in an ongoing suit of the Co. (s. 216A(2)) (1) Notice of 14 days (2) Good faith A. - Purpose: give Co. chance to sue in its own - Equivalent to the CLDA requirement of “clean hands” and no reasonable delay capacity if it wants to (rmb tt there is no FOTM test in a SDA) - Burden of proof is on the Df to show the absence of No specific form of notice but sufficient info good faith o shd be given for Co. to decide whether to 1. THE TEST: is whether the action is “ frivolous, sue. vexatious or devoid of absolutely any merit ” 1. Req. of notice shd not be interpreted in an unduly (Richardson Greenshields [Ontario CA]) technical manner 2. Also, the fact that there is spite and ill will btw the parties will not, of itself, prove bad faith (dicta of Agus Irawan – wheat rebate case – pleading SGCA in Pang Yong Hock – bec. hostility is very amended AFTER notice was served to incl. common in such situations. Bad faith is only “price rebates” in addition to “volume inferred if vendetta was the “main consideration” rebates”; Ct held tt amendment did not such tt the Pf mounts s.216A to harm the Co. out of change the fundamental claim for b reach of spite.) fiduciary duty – notice was valid. a. Applied to facts in Tam Tak Chuen – passed 2. 14 days is max; no reason for Co. to h ave extra – main motivation financial, not personal time to consider/ investigate allegations Tam Tak Chuen – Eden health case – Co’s The good faith is actually quite easily satisfied. So long objection tt there was insufficient time to B. as there are (1) legitimate issues raised and (2) Pf does obtain legal advice invalid – statute does not not conceal material facts or motivation. allow time extensions. Fong Wai Lyn Carolyn – legitimate issues raised – 3. S. 216A(4) req. of notice can be done away claim allowed. with if it is shown that it is impracticable or “futile”. Agus Irawan – wheat rebate case – Pf did not disclose tt rebates were diverted away from Co. to Impracticable in a case where serving notice companies owned by the Pf – essentially no “clean might destroy the entire case bec. Dirs may 4 hands” - claim failed. destroy docs or drain the Co. Urs Meisterhans v.GIP – Pf did not disclose tt funds Fong Wai Lyn Carolyn – Pf served notice after
to the Dirs. of the Co. before filing of the s.216A claim Complainant is acting in good faith – “clean hands” and no unreasonable delay Prima facie in the interest of the Co. – reasonable basis for complaint (3) In the interest of the Co.
Prima facie basis
Pf does not need to prove on balance of probabilities as this is only application of leave stage Agus Irawan: Only need to show a ‘reasonable semblance of merit’; that the action has a chance of success (not nec. that it is likely to succeed) Need not decide the disputed facts Leave to cross-examine should be sparingly granted Agus Irawan failed bec. Pf actually enjoyed the diverted rebates – no way Ct could have helped him; Teo Gek Luang failed bec. loans had been approved by 75% of members.
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In the interest of the Co. Broad commercial interests (and not o just monetary amt of claim) must be considered (Pang Yong Hock ) – Co. may want to preserve commercial r/s and forbear to sue The mere existence of alternate o remedies does not bar this claim (per Ting Sing Ning – SGCA held tt Pang Yong Hock does not stand for proposition tt
Can’t Pf just get Anton Piller order or Mareva injunction and so no excuse not to give notice? Case-law has not suggested tt Pf has duty to obtain those injunctions. By and large, those injunctions are not easily awarded and a mere application that fails would let the cat out of the bag to the Co. (esp since such injunctions are inter partes applications).
filing s. 216A – Ct held tt claim not barred bec. even after the late notice was given, the Co. did nothing to show effort to investigate the claims (Prakash J. held tt acts of Co. after notice can be used to draw inferences) – hence even if notice had been validly given, it 5 would have been “ futile” .
diverted were actually going to Co. owned by Pf – no “clean hands” - claim failed. * Pang Yong Hock – claim failed partly bec. Ct felt tt parties were using action only for their vendetta + it was in the Co’s interest to allow just and equitable winding up instead.
Statutory provisions of 216A and B
Sections 216(A)(1) 216(A)(2) 216(A)(3) 216(A)(4) 216(A)(5) 216(A)(6)
Content Who may avail themselves of this remedy 216A may be used to intervene in existing action Elements to satisfy for granting of leave Req of leave may be dispensed with if “not expedient” Court may make ANY order If 216A is used to intervene in an existing action at Sub Cts, app shd be made to District Ct
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216B(1)
216B(2)
216B(3)
Ratification can be considered but shd not of itself bar the claim After leave is granted to commence a s.216A action, it cannot be stayed or discontinued without the Ct’s approval Ct may order Co. to bear interim costs (but that cost may revert to be borne by Pf later on, depending on outcome of action)
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mere existence of winding up as a remedy would bar 216A claim) Ratification may be considered when determining if claim is in interest of Co. – but Df has burden of proof to show tt ratification was independent (s216B(1) as read by MARGARET CHEW)
Comparing 216A and CLDA
Advantages of 216A over CLDA 1. Easier for Pf to succeed - No requirement to establish “fraud on the minority” and in particular “wrongdoers control” - No need to show benefit to Dir. (ie. pure negligence claims allowed) - Ratification may bar claim but burden is reversed and placed on Df 2. Easier for Pf to get Co. to bear costs - Under CLDA, Ct may choose to make Co. bear costs but for 216A, Pf can petition Ct to grant an order for costs - Cts have power to make any order to facilitate action – incl. order to compel Dirs to provide certain documents for evidence Disadvantages of 216A *216A only available to non-listed Singapore companies! Foreign-incorporated Co. must go through CLDA 1. Req. to prove in the interest of Co. is no walk in the park – may be equally difficult as wrongdoer control 2. CLDA not done away with – confusion in the law in this area still remains
Prof Puchniak raises the qn of whether “futile” here refers to the rich body of case -law in US (esp in the State of Delaware) relating to futility of notice. Another contention is that could it not be tt the Co. did not investigate bec. late notice meant that Co. could do nothing to prevent the Pf from proceeding with the s.216A action since papers have already been filed? Quite curiously, the requirement of notice has been used to indicate what is akin to wrongdoer control in the Co.
3. OPPRESSION: s.216
This action differs significantly from the two “derivative actions” above because this action is substantive and personal. The S/H is not suing for the Co’s loss but
alleging that he has been oppressed and has suffered a loss unique to himself.
The test for s. 216 – that of commercial unfairness – fully embodies the need to promote majority rule, but not without limits: Lim Swee Khiang v Borden Co (Pte) Ltd [2006, SGCA+: “a minority shareholder participates in a corporate entity knowing that decisions are subject to majority o rule, [s 216 allows the courts] to examine the conduct of majority shareholders to determine whether they have departed from the proper standard of commercial fairness and the standards of fair dealing and conditions of fair play” Who may mount this action? - ss.216 (1) and (7) 1.
2. 3. 4.
Member of the Co. - Only those names tt appear on Co’ s register are allowed to sue. - Can an equitable owner of shares sue for oppression? Technically, NO bec. the equitable owner’s name would not appear on the Co. register. o However, English case law suggest tt the owner can direct his nominee/trustee to sue o or register as a member of the Co. and sue in his own name. - If Pf’s name is not on register but sues, Df cannot object if: (a) Pf’s very complaint is that he was unfairly removed from the Register (ie. that Df was the reason his name is not on Register); or (b) If mistake in Register is due to failure of those responsible for upkeep of the register. Debenture holder of Co. - Creditor of Co. – holder has an interest over the stock/ asset of Co. Minister - In the case of a declared Co. A person to whom shares are transmitted by operation of law - Equitable owner of shares does not fall under this - Usually refers to personal representative (in case of estate) or trustee ( for bankruptcy).
When Four Becomes One: Elements of the action – s.216(1) A read of s.216(1) will reveal four different terminology: i) oppressive iii) unfairly discriminates ii) disregard of interest iv) otherwise prejudicial The historical reason for this is tt when Canada and Aus enacted this section, they did not want to be bound by the baggage in Eng law that attached to the word “oppression”. (N.B. when we analyse Eng cases, only post-UK CA 1985 is relevant bec. tt is when th ey changed terminology to “unfair prejudice”) Regardless of the diff in terminology, there is only ONE TEST in s.216 – that of “ commercial unfairness”. SGCA said tt it is pointless to analyse the d ifferent expressions; courts will simply intervene when “ [the conduct] offends the standards of commercial fairness and is deserving of intervention” (Over & Over )
* s.216 ONLY applies to local companies and not foreign ones bec. “company” and not “corporation” is used in the statute. Discretion vs. Certainty – A two-step approach
O’Neill v. Phillips [1999, HL] –strike balance btw discretion and certainty
Parliamentary intent is to free the court and confer wide discretion to do what is just and equitable. However, it does not meant tt courts can do whatever it pleases. (1) M&As are still relevant bec. business ppl enter into Co. with legal adviceas to their rights; but (2) companies being “developed seamlessly” from the law of partnership, implies that there should be a degree of good faith. Over & Over v. Bonvest Holdings Ltd [2010, SGCA] – look both at legal rights and “legitimate expectations” The willingness of the courts to overlook strict adherence to legal rights stems from the understanding thatbusiness people do not always put everything
down to pen and paper. Thus, the personal relationship must be taken into consideration. The legitimate interest is something that arises out of a fundamental understanding btw the parties which formed the basis of their association but not put into contractual form. (1) Starting point: WRITTEN AGREEMENT (2) Then: “LEGITIMATE EXPECTATIONS” - R Saul D Harrison & sons Plc [1995, ECA] - Hoffman LJ.: Context of commercial - But Ct may find unfair prejudice even without breach of Arts relationship, so starting point is the M&As which govern the contractual relationship. - Acts can be unfair without being unlawful. But an act which breaches the M&As may not be oppression. The law - The personal r/s of the S/Hs must be considered – no one o permits ratification and this v alidates majority rule. test but the following factors are usually relevant: Hence, the UK formulation is “unfair prejudice” bec. majority rule invariably a. Type of Co. o means that there would be some prejudice to the minority. b. Degree to which the venture was purely commercial Taking a closer look at “ LEGITIMATE EXPECTATIONS” Legitimate expectations based on INFORMAL UNDERSTANDINGS Legitimate expectations based on IMPLIED UNDERSTANDING 1) Informal understandings are more likely to be upheld in ‘QUASI PARTNERSHIP‘ settings. Hence the Unlike informal understandings (which is based on 6 preliminary issue is always to decide whether there is a quasi partnership . It will arise: the relationship btw the S/Hs, implied a. Where there is a personal relationship btw the S/Hs tt involve placing mutual confidence understandings are based on the nature of the b. An agreement that all or some of the S/Hs will participate in the business corporate structure. 7 c. A restriction on transfer of shares . These are understandings which are not in the 2) Secondly, the understanding must have been EXPRESSLY COMMUNICATED to the other party. (*Thio M&As and yet never been discussed btw the S/Hs. Keng Poon v. Thio Syn Pyn [2010, SGCA] – Malaysian Dairies case) Unilateral understandings will not be upheld, no matter how genuine or reasonable they o 1. Implied understanding tt Dirs are not to enrich were. themselves at the expense of other members. A legitimate understanding must be one tt i s btw all members. o - Low Peng Boon – pay low dividends to incr. Co’s Profs Puchniak and TCH criticise this decision on the basis that there can be informal shared but profits bec MSD’s salary computed based on unspoken understandings. amt of profits. Conceivable tt based on social and cultural norms, a founding patriarch would be entitled to o - Re Gee Hoe Chan Trading Co Pte Ltd – Refused retain a management position after gifting shares to family, out of respect for the patriarch to declare dividends but MSDs paid themselves 8 even if such respect is not spoken of . generous salaries – HC held it was inequitable 3) If there is professional advice and parties carefully negotiated the terms of the Arts, it is unlikely to to adopt a policy tt benefited only the MSDs
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per Over & Over . Rajah JA. Held tt in the first place, it is more likely that legitimate expectations based on informal understandings will arise in a quasi partnership. Furthermore, the law must apply a “stricter yardstick of scrutiny” bec. minority S/Hs in such Co. are more vulnerable due to illiquidity of shares and how any promised understanding were merely informal. 7 The SGCA in Over & Over suggested tt this criterion is not impt. However, Dan Puchniak and TCH argue tt a restriction on transfer is still an important element in finding a quasi partnership for three reasons: (1) conceptually, what distinguishes a Co. from a partnership is the freedom to transfer economic interest; hence if there is a restriction on transfer, then it will be more “partnership-like” rather than Co.; (2) relationship-wise, a Co. with restriction on transfer will revolve arnd familiar faces, and it is thr that one is more likely to find r/s of mutual confidence; (3) vulnerability-wise, a restriction on transfer is more likely to make a Pf a more vulnerable victim of oppression – which is the basis for protecting the informal understandings of S/Hs there in the first place. *Whatever the academic’s view is, note tt the law is likely to follow Over & Over .] 8 But Profs argue tt even if this understanding is accepted result might still have been the same bec. it is unlikely that such an unspoken understanding would amount to carte blanche for patriarch to do whatever he lik es and Pf’s double claiming would have breached the understanding. *Whatever the academic’s view is, the orthodox view is that the understanding must be a spoken one.]
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base legitimate expectations on informal understandings . - Over & Over : failure of parties to record “essential elements of their agreement” led Ct to view that it could only mean tt parties had based their r/s on mutual trust + good faith. - RE a Company [1986, Chancery Div] – parties had spelt out in detailed agreements all matters which were to govern their R/S. - O’Neill *’99, HL+ – N cannot be given the shares bec. P and N had entered into negations on professional advice and subject to an express condition that neither was bound until a formal document was executed. – To find otherwise “would not be restraining [P’s] legal rights but imposing upon [P] an obligation which he never agreed.” Tan Choon Yong (2009, HCp [p.46 of Notes] – Dfs induced Pf to join Co. as CEO on the promise tt he would always remain on the Board – he was removed – Ct held tt h e did suffer oppression. Prof Puchniak + TCH raise the quare whether in a public Co. there can be a legitimate expectation
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with hardly a benefit for minority S/Hs. 2.
Implied understanding tt in quasi-partnership, a higher std of corporate governance is expected visà-vis the minority - Lim Swee Khiang v. Borden Co (Pte) Ltd – controller owned shares in an overseas Co owned by son tt was competing with this Co. – Ct held that it amounted to a conflict of interest in equity .
to never be removed as a Dir considering that s.152 states tt a public Co. can always remove a 10 Dir by simple majority regardless of M&A or personal agreements. They also qn whether Tan Choon Yong this challenges Thio Keng Poon bec. the Co. in the former was a private-turned-public Co. such tt there was no way the initial agreement was btw ALL members after the Co. floated. “Commercial unfairness” is an objective standard * Can there be ‘legitimate expectations’ in Must MSDs oppressive conduct constitute a a public Co.? single or series of acts? Objective standard, but the context is impt – eg. competing Unlikely, bec. of requirement tt Limb (a) and (b) of s. 216 opens the door businessmen vs. members of family and other circumstances must incorporation is based on personal both to cases of continuing and single acts be considered (O’Neil ) 11 r/s respectively Re Saul D Harrison Not meaningful to use some amorphous “reasonable company” fiction; Cts should state the factors tt the BUT, cases like Tan Choon Yong and But, as noted by the SGCA in Over & Over , law take into acct to determine what amounts to “commercial most cases heard have been those Ebrahimi [p.48 of Notes] did allow unfairness” finding of legitimate expectations pertaining to oppression over a series of based on informal understanding in a acts. An objective std means tt it does not matter that MSD had no public Co. intention to oppress, or in fact he might have done if tor the (Eg. of singular act tt can constitute Nevertheless, the rule of thumb is s. oppression is like a singular dilution of benefit of the Co. – it may still amt to oppression under s. 216. minority’s shares contrary to an informal 216 is more for private/ closely-held BUT, if facts reveal tt MSD did have improper motive, that may Co. understanding) well be a relevant consideration in going towards a finding of oppression (Re a Company ).
* MSDs can forestall/ strike out an action in s.216 by offering to purchase the 9
Evidence of oppression in other Co. can be used as evidence in an action for
This shd not be viewed as an exception or limitation on its own, but rather that in such cases, it is difficult to find tt the Co. was based on a personal relationship grounded in mutual confidence and so there is no quasi partnership in the first place. 10 My view: There is certainly support in like Re a Company tt an expectation to be employed as a director is a legitimate interest, but the dicta there clearly applied to private Co. and its weight is not as clear when it comes to public Co. Perhaps the only way to explain Tan Choon Yong is tt it referred to an expectation to play a significant role in the management of the Co. in a general sense and the Df Dir’s actions cumulatively added to a breach of that expectation. 11 For more reasons, see p. 50 of Notes
minority’s shares. oppression in the Pf’s Co. If after proceedings have commenced, the majority S/Hs offer to buyout the If Pf, as S/H of Co. A is suing for oppression, he may be allowed to adduce minority S/H, the Ct may decide to strike out the minority’s claim (2 reasons: evidence of MSD oppressive behaviour in Co. B, C, D etc. provided the affairs (1) freedom to leave – so minority not vulnerable; (2) if action succeeds, Ct is of those Co. impact the affairs of Co. A likely to order a buyout anw) a) Usually only in those single economic unit scenarios of parent-subsidiary or Co. with very similar shareholders. But offer must be a “fair offer”, ie. b) Or where court has directed the lifting of the corporate veil (eg. fraud, 1. Fair value – w/o minority discount sham) 2. Fair value to be determined by a competent and neutral expert 3. Both parties must have chance to argue why the price shd be higher or But the mere fact tt it is a p arent-subsidiary r/s is not of itself sufficient ; must lower AND both must have equal access to Co. info to make those args show how affairs in those Co. impact/ affect this Co. 4. If offer is made after an un reasonable delay after proceedings have This is actually a slight exception to the doctrine of separate legal personality commenced, majority might would have to include in the offer a sum for BUT the reason is so that the purpose and policy behind 216 is not defeated legal costs (O’Neil ) bec. if u recall, s. 216 is not av ailable to foreign corporations. How to identify fact situations where possible actions for oppression may arise? (1) Dominant members advancing their own (2) Abuse of voting powers (3) Exclusion from management interests Pf must establish a “legitimate expectation” tt he/she is to be included in Majority often hold the Dir positions too. Generally, majority S/Hs need only vote in their own the management of the Co They may do things tt are not in the best interests (unless it is for interest of the Co (such as diverting corporate Quite difficult in a public Co. modification of M&As). assets). These may be a breach of fiduciary Tan Choon Yong v Goh Jon Keat legitimate expectation of duties BUT that is not of itself sufficient to be But it may amount to management in a public Co. oppression, unless they coincide with the oppression if vote was for a Thio Keng Poon v Thio Syn Pyn no legitimate expectation of legitimate expectations of the members. collateral purpose or management bec. it was a mere one-sided expectation against the spirit of the Lim Swee Khiang v. Borden – MSDs with Lim Swee Khiang v Borden Co (Pte) LtdIU S/Hs meeting proposed tt all articles: conflict of interest shd have refrained from Dirs shd not hold executive positions – Pf stripped of their executive role voting – sufficient to find oppression bec. Re SQ Wong Holdings (Pte) - but later, nominees of the majority S/Hs were allowed to take on closely-held Co. held to higher std of Ltd (p 55 of Notes) – Dirs executive directorships – Ct held it was oppressive. corporate governance. deliberately refused to Ng Sing King v PSA International Pte Ltd no legitimate expectation of make dividend payments – Low Peng Boon v Low Janie – MSD used Co. always being in management bec. this was a S/H agreement concluded at motive was to preserve funds to pay for personal travelling expenses. arm’s length their dominance (bec. c.f. Re Kong Thai Sawmill – Used Co funds to Kitnasamy v Nagatheran Pf had secured the main contract for which some strange rule in Arts tt purchase motor yacht for personal use – the Co. was established in first place – expended lots of effort and money if they did not issue extravagant but did not amt to oppression – reasonable to expect tt his investment can only be p rotected if he were dividends, they retained bec. Pf had (1) gotten over 250% of dividends a Dir. and had a say i n mg’ment. power to vote) – held tt over 4 years; (2) other minority S/Hs tt this was not the purpose weren’t related to the MSD also were not on In any Co, even if such a legitimate expectation is estb, Dirs may “fairly” behind granting Dirs the his side and (3) Pf h ad rejected a fair buyout exclude him/her from management if there are good reasons to. discretion whether or not offer. Re a Company – considered in dicta tt it is reasonable tt in the case of a to recommend a dividend. irreconcilable breakdown for the minority to leave, if he is compensated
for the loss of employment. (5) No/ Low dividends (6) Loss of substratum The starting position is that all S/Hs have no right to The fundamental basis/ expect dividends; it is a decision solely for the Dirs. to business objective for which the make. Co. was started is no longer there. But courts generally willing to find tt there is a “legitimate expectation” tt majority and minority get Unlike the others which is roughly equal returns on their investment. essentially a breach of promise (express, informal or implied), Two types of cases generally give ri se to oppression: this is analogous to Frustration (a) Only the MSDs are getting benefits (in the form (O’Neil ) of directors’ fees) but the minority is not getting any dividend (Re Gee Hoe Chan Trading Co Pte ) The basis is just as in frustration – non haec in foedera veni – this Bhd) (b) There is a significant gap in the return-per-share of the majority’s shares vis-à-vis the minority’s is not what I signed up for. Courts must be careful to distinguish btw MSDs who had a shares. This is unfair bec. the minority’s genuine belief in the success of their business bu t failed (Re $$ are locked up in a Co. with Tri-Circle Investment Pte Ltd ) and those where the MSDs It is probably not right to say tt the moment Dirs. deliberately wanted to cause business to fail (Lim Swee refuse a dividend and yet continue to receive commercial objectives he did not emoluments, they are acting unfairly. In Re Gee Hoe consider investing in (Over & Khiang – failure to explain business decisions to minority – MSDs “must be deemed to have intended the consequences Chan, it was done consistently and over a prolonged Over ) period. of their acts and omissions ”) Remedies under s. 216(2) The court may grant “ any order as the court thinks fit”; but a list of what that includes is set out in 216(2)(a) – (f) (1) Buyout and Winding-up - 216(2)(d), (f) (2) Derivative action - 216(2)(c) Court may order the majority to buy out the minority’s shares One of the remedies is tt the Ct can Over & Over : buyout was ordered bec there was “no residual goodwill left” and it would not be right for the Pf’s actually give the Pf a “free pass” to shareholding “to remain tied up with the Co. in a broken and bitter r/s”. commence a derivative action Lim Swee Khiang v Borden Co (Pte) Ltd : buyout was ordered even though winding-up was prayed for. (including a s.216A SDA) without the Valuation of shares can be contentious due to two issues: laborious process of establishing 1. Fair value of shares – it is NOT always the case tt courts order fair value . While clean hands is not req’d, the court standing again. has discretion to reduce the valuation price if the Pf’s own condu ct partially justifies the prejud icial conduct (Over This is particularly advantageous for a & Over – Pf had NO FAULT – therefore fair value could b e ordered) member of a listed Singapore 2. Time of valuation – general rule: at the point when buyout order is made. But this could be departed from when the current value of shares is due to injection of fresh capital (Tullio v Maoro – p64 of Notes) companies (who are precluded from 3. Pre-judgement interest – Court has no power to award pr e-judgement interest (bec. tt is only reserved for mounting a s.216A action). “damages”), but court can adjust the share valuation upwards to compensate the Pf for long and prolonged However, the importance of this proceedings (Yeo Hung Khiang – p64 of Notes) remedy has diminished bec. of the case of Kumagai where corporate damages Buyout is generally preferred over a winding-up bec. it does not destroy the Co were directly awarded to the Co. However, in cases where there is serious mismanagement, the court may wish to order winding-up instead. (4) Serious mismanagement The tricky business is that mere mismanagement shd not suffice to prove oppression bec. every investor takes the risk tt management may not turn out to be top notch. The mismanagement must usually be of such as degree as to amount to breaches of duty of skill and care (Re Macro – held tt there was oppression bec. the same acts of mismanagement were repeated over many yrs despite Pf pointing them out) Note tt the mere fact tt majority always disagrees with the minority S/H is insufficient (Re Kong Thai Sawmill (Miri) Sdn
without the need for Pf to initiate a separate derivative action .
Another reason for preferring winding-up is when the majority has no $ to buyout the Pf’s shares ( Tan Choon Yong: order for buyout, failing which the Co. would be wound-up.)
Can the court order compensation to the COMPANY? The orthodox view is tt s.216 is a personal action and remedies shd only pertain to t he Pf’s own losses. Secondly, to do otherwise would be to allow litigants to circumvent the rule in Foss v. Harbottle and the carefully-carved-out exceptions to it. HOWEVER, cases have held that you can order the Df to compensate the Co. even in a s.216 action. a. *Kumagai (1995, SGCA) – a request to make Df compensate Co. was not granted for lack of causation – but Ct held tt “in principle” such an order was possible bec. 216(2) states tt court can give any order “remedying the matters complained of” – so the wide discretion conferred by Parliament should not be restricted. b. Low Peng Boon v. Low Janie – order to compensate Co. actually gi ven – Df ordered to make restitution to Co. for unauthorised travel expenses c. *Kung v. Kou (’04, HK Ct of Final Appeal) – [best case tt discusses this issue] – while it is not impossible for Cts to gi ve such an order, they would be rare and exceptional – shd only be granted when the order corresponds with the order to which the Co. would have been entitled had it pursued the action itself – this means tt at the pleading stage, it must be clear tt the amount of the Df’s liability can conveniently be dealt with in the s.216 action. The reason for this bending of the rule in Foss is probably expedience and justice – to ensure the Co. does not go unremedied.
4. JUST AND EQUITABLE WINDING-UP: s.254(1)(i) Who may mount this action? – s.253(1)(c) S.253(1) states that: (a) the Co itself; (b) a creditor; or (c) a ‘ contributory’, may apply for winding up. “Contributory” is defined under s.4(1) as: i. Members; or Provided the shares were originally allotted; or held for a min period of six months at the d ate of o action; or person got shares from bankrupt or through an estate. ii. Non-members So long as the person has an interest in the shares of the Co. o Action only applies to Singapore companies and not foreign ones – “company” is used. But technically a foreign incorporated Co. can apply to Sg court for winding-up but unders.351(1)(c)(iii) instead [but no cases have tried this yet]. * Note tt the class of persons allowed to mount this action is probably the WIDEST.
The Test Simply whether it is “ just and equitable ” to wind up.
Relationship btw power to wind-up under 254 and 216(2)(f) A successful oppression action may not result in the court granting a windingup— in fact, winding-up seen as a remedy of last resort. Under 254, there is NO NEED to show oppression or commercial unfairness – particularly useful in a “fault neutral” irretrievable breakdown of a quasipartnership.
Strategic considerations when choosing btw s.254 and s.216 action
Go for 216 Wide discretion of remedies – even if Ct does not want to wind up, it will award something. Once you commence a 254 action, the application for winding-up must be advertised. Go for 216 to avoid bad press.
Go for 254 Facts insufficient to show oppression. Do this if your client is hell-bent on getting the Co. to wind up – if judge is really moved to intervene, his h ands are tied and he will order winding-up.^ Client is not a class of persons entitled to bring a a 216 action.
If Co. is large and doing well as a ‘going concern’, go for 216 instead bec the court will almost certainly never award winding-up. ^ Note tt your client must be warned tt his claim under s. 254(1) may be struck out for being vexatious if: (1) It is an attempt to harass the Co. (to improve one’s bargaining position say, for a private buyout) – Sim Yong Kim v. Evenstar Investments (“Evenstar”) (2) It is viewed as trying to bypass the more appropriate and moderate remedies under s216 – Summit Co (S) Pte Ltd v. Pacific Biosciences Pte Ltd (“Summit”)
*In a nutshell, if the facts show a whiff of oppression, go for 216 instead. How is the “just and equitable” test applied?
A two-step analysis: 1. Whether there is a disease that needs a cure? 2. Whether the cure is worse than the illness (1) – refers to whether there are any grounds to justify intervention – (i) broken promises (here the ‘legitimate expectations’ analysis features again); (ii) disregard for minority S/Hs; (iii) loss of substratum. (2) – refers to whether the damage done by winding up may be greater than the harm it avoids – hence large, (often public) going concerns are unlikely to be wound-up. The reasons for winding-up must also subsist at the time the order is made – ie. if problems have been resolved in the interim, the Ct won’t order winding-up. Mere constant disagreement among members is insufficient, bec. S/Hs are expected to resolve their probs within the framework of the Arts (Chow Kwok Chuen ) Bec. “just and equitable” is so amorphous, must consider cases (below) where 254 actions have succeeded. Irretrievable Breakdown Loss of Substratum Fraudulent Inception and Purpose Qn usually turns on whether the “hiatus” caused by the Usually ordered where there is an irretrievable breakdown Re Thomas Edward Brinsmead & Sons (1897) and fault cannot be pinned on one party in a quasibickering was fatal to the Co. – ie. whether there is a partnership only. chance of the Co. picking itself up and become a viable Co was fraudulently set up biz again. to pass off other pdts but Ng Sing King v. PSA Intl – YES – fiery meetings and no was appeared to be for board meetings can be constructive – rare case where Summit – little interruption even after the Pf’s firm manufacturing pianos – equitable winding-up ordered for a non-quasi-partnership + pulled out of the logistics business – assertion tt failure subscribers all wanted out S/H agreement negotiated at arms length. to transfer lines of pdt to Pf was loss of substratum was bec. they had been unsubstantiated considering how the firm managed to Chow Kwok Chuen – YES – brothers always blocking one defrauded. ECA said continue operating so smoothly. another – Co. has lost its leadership. CLEARLY this is a case Ng Sing King v. PSA Intl – thr was loss of substratum bec. Summit – NO – breakdown was btw Pf and another Dir – btw
Pf and Df, they were still able to communicate. Lawrence v LAwrich Motors (1948, S Africa) – YES - Dir had slept with wife of another Dir.
firm lost many contracts, was not granted patent and does not even have a permanent staff – unlikely to be viable again.
where Co. must be wound up.
------------------------------------------------------------------------------------------------ IMPT SINGAPORE DECISIONS ------------------------------------------------------------------------------------------Ting Sing Ning v. Ting Chek Swee [2008, SGCA] – Common law derivative action Facts TSN (was Dir. and 10% S/H of H Ltd.) sued TCS (also Dir. of H Ltd) for breach of fiduciary duty. H’s BoD refused to adopt the action H’s independent S/Hs voted against the continuation of the action at an EGM. s.216A SDA could not be brought bec. Co. was incorporated in HK. TSN argued at trial tt there was a fraud on the minority bec. TCS had wrongdoer control (by way of TCS + his sister controlling a combined shareholding of 52%) o SGHC rejected this bec. it could not be shown tt the sis would alwa ys vote in TCS’ side by virtue of their family relationship. HELD SGCA reversed judgement – found for TSN – there was fraud on the minority bec. the sister would likely vote in favour of TCS. Reasoning/ On the likelihood that sis would vote for TCS Impt analysis CA disagreed with trial judge tt close family ties were irrelevant; reasoned tt Asian family values tend to still be very clan-like and hence family ties may count for something. o But tt also did not mean tt family ties is conclusive of the direction tt a S/H would vote. In this case, the fact tt sis was majority S/H in another Co. tt stood to benefit from TCS’ fraud fact tt her shares in that other Co. was a gift from TCS mattered in finding tt sis was more likely than not to vote in TCS’ favour.
On the fact tt independent shareholders had voted against the action too “Majority of the minority” had voted against continuation of t he action – prima facie shows tt TCS does not have wrongdoer control However, the allegations being levelled against TCS was never mentioned at the S/H meeting and TCS withheld obtaining copies of affidavits stating the nature of the allegations so as to conceal these from the independent S/Hs (esp since the allegations were quite serious). Hence, independent S/Hs had voted without knowing the nature of the allegations of fraud and this does not defeat the arg of wrongdoer control.
Must a S/H seeking to bring a derivative action seek to make the Board bring the action first? At law, there is no requirement tt the S/H must bring to the Board the proposal that an action be brought against the errant Dirs. Not in issue in this case bec. TSN did mention his complaints to the Board numerous times.
Availability of alternate remedies TCS arg tt availability of alt remedies means tt courts shd not grant the derivative action. – (1) H could be wound up bec. S/Hs had alr agreed to that and (2) TSN could pursue an oppression action in the HK courts. On (1), SGCA said tt Pang Yong Hock does not stand for the principle tt the availability of an alt remedy like winding-up should preclude allowing an action in derivative action as well. In that case, the court was satisfied that the s.216A action was unmeritorious bec. the Pfs had failed to make out a prima facie case against the Dfs in the first place – plus the two sides were countersuing each other – more equitable to just wind up. On (2), TCS had not shown why suing in HK might be a better option. In fact, doing so would mean starting all over again, and resulting in even more delay to resolving this saga. - Family ties
Significance
- Majority of the minority situation – independence not enough; must be fully appraised of the allegations - Availability of alternative remedies not a bar – might have to show it is a “better option”
Sinwa (SS) Co Ltd v. Morten Innhaug [2010, SGHC] – Common law derivative action Facts S and M were 50-50 S/Hs in N Ltd – a ship-owning Co. tt was incorporated overseas. N granted a time charter to Company X and Co X reassigned it to Y Ltd, a Co. which M had control over. M, acting as Dir. of N, accepted this reassignment - vessel then had some trouble and Y Ltd asked for lower price of charter hire – N refused and Y stopped paying. S alleged breach of fiduciary duties on M’s part – (1) procuring the charter for his firm; (2) causing Y to withhold payments to N; and (3) preventing S from commencing legal proceedings on behalf of N. M counter-argued tt S did not bring this action in good faith – instead, it was to force M t o buyout S’s shares at a higher value. HELD Judgment for M – S’s application for derivative action was “premature”. Reasoning/ Elements of CLDA Impt analysis (1) Co. prima facie entitled to the relief and (2) “fraud on the minority” Ct still has discretion whether to grant CLDA
Prima facie entitled to relief Purpose behind this rule is to prevent Pfs from easily circumventing the proper Pf – esp if Pfs do so “at little or no risk” to themselves + saddle Co. with t he costs of such actions Not in judgement: but academics would criticise tt it is not that common for derivative actions to happen bec. the Pf bears great financial risk in initiating such actions. Of course Pf only need prove the possibility of success on a prima facie basis.
Whether prima facie case of being entitled to relief was made out in this case (1) – procuring charter not breach of FD – although it is a situation of possible conflict, M had disclosed it informally and indirectly (note tt this was probably a special case bec there were only 2 S/Hs) (2) – M not collecting debts owed by Y – Ct held tt under the charter agreement, Y did have a basis for asking lower charter hire. (3) – Pf had a legitimate claim against M for failing to support legal proceedings taken by N against a nother Co. On whether M actually had wrongdoer control Shareholding is most obvious way of determining wrongdoer control but it should not be the sole means. Preferred the “substance over form” approach – test is whether the wrongdoer was able to prevent an action being brought against him. On this facts, whether M had control is unresolved bec. it could not be determined who had authority to decide whether Co. can sue.
Discretion of court Even after (1) and (2) are established, the court still has discretion to decide whether to grant the CLDA bec. this is a remedy of equity The discretion will largely be based on (a) whether the Pf has come with clean hands AND (b) whether Pf is starting this action bona fide (conjunctive).
Availability of alternate remedies Foundation of derivative action is that without such remedy, justice will not be done. Hence, it shd only be granted when absolutely necessary bec. it stands as a derogation from the proper plaintiff rule. Re-interpreted Ting Sing Ning by saying tt language making reference to “best solution” or “better remedy” was purely rhetorical. In that case, the suggestion to sue in HK for oppression was not only not a better option, it wasn’t even a viable option – bec. Pf was not even alleging oppression + considerable delay. Andrew Ang J. held tt there’s no r eq tt the alternative remedy is a better remedy, it only need be a real option. this was the orthodox view and if SGCA wanted to
Significance
depart from it, it would have made it clear tt it was departing. On the present facts, there was t he option of arbitration to decide how to interpret one of the clauses of the S/H a greement.
On Pf’s bona fides Ct found tt Pf had not “laid all its cards on the table”. Ct also found the Pf’s main allegations were all very strange and without force. On that basis, Ang J. concluded tt “Pf had not disclosed its real motive for bringing a derivative action”, and appeared to be “throwing everything but the kitchen sink at the Df”. Here, we can see the big difference btw 216A (tt places burden of disproving good faith on the Df) and CLDA where Pf has to ‘ disclose his real motive’. Qns Ting Sing Ning on the availability of alternate remedies.
Pang Yong Hock v PKS [2004, SGCA] – s 216A SDA Facts Co had 4 S/Hs - Two factions of 2 S/Hs each. All 4 were Dirs. No deadlock bec Board had a fifth Dir who was loyal to faction A Faction B suspected Faction A of abusing their Dirs’ powers – wanted to commence a DA against Faction A. Served notice under s. 216A – Co did not take action (naturally, since Faction A commanded 3/5 of Board’s votes) – Faction B commenced s 216A action. HELD s 216A application dismissed – a s254 winding up was more appropriate. Reasoning/ Three elements of SDA Impt analysis 1. Notice Notice served – no issue in this case. 2. Pf comes in good faith Burden: It is on the Df to show absence of good faith on the Pf’s part Insufficient to show lack of good faith o Delay in suing o Less than happy circumstances o Fact tt there were disputes Factors tt show lack of good faith: o Pf shown to have a vendetta o Action commenced for purely personal reasons o Set on destroying the Co’s image this also affects Stage 3 (below) On the facts, Pf deemed to have come in good faith. 3. Action would be in the interest of Co. 2 issues: Does Co stand to “gain substantially”? o Co may have legitimate reasons from forbearing to sue – bad publicity Is there a meritorious claim? o Proven on a prima facie basis On the facts, claim was not in the interest of Co bec: 1) There was no merit – auditors’ report had no uncovered any wrongdoing on Faction A’s part (if at all, all the Dirs were liable) 2) Not in interest – CA felt tt to give Faction B license to sue necessarily means giving Faction A license to sue as well – would only prolong e conflict s 254 winding up awarded instead – Barrett v Duckett followed. Significance Shows how to apply the factors for each element of the test. -
Over & Over Ltd v Bonvest Holdings Ltd [2010, SGCA] – s 216A SDA Sheraton Towers case Facts Two companies – O&O and UFL (both private Cos) came together to form a joint venture (R Ltd) to run hotel – in 30:70 shareholding. Discussions all undocumented After 10 yrs, O&O alleged tt family behind UFL (“the majority”) were diverting the hotel’s service contracts to Cos controlled by their family. The majority wanted its other Co – BHL (a public listed Co) – to buy over UFL’s stake in R Ltd. O&O consented, largely because it didn’t have a choice. Majority then forced O&O to take up rights issue and threatened to dilute their shareholding if they refused. HELD Majority (family behind UFL and BHL) had acted oppressively – ordered buyout of O&O’s stake. Reasoning/ On legitimate expectations Impt analysis It is common for business people to have legitimate expectations btw them that is not documented or couched precisely “In particular, it is trite law that conduct can be unfair without even being unlawful.” On the relationship in the present case Two closely connected families Ct placed a lot of weight on the fact tt a no of impt business discussions were not penned down Started as a close association in the beginning the fact tt it later soured does not change the initial r/s Single act vs course of conduct Oppression due to a sustained course of conduct is more common, but a single act can be construed as oppression But that single act would have to be extremely serious – eg. dilution of minority’s shares or very serious misappropriation. Alleged acts of oppression 1) Diverting contracts away without consulting Board of R Contracts diverted were for the strategic interest of R – but tt does not mean such behaviour was not to be taken into consideration “in assessing holistically” the entire attitude of the majority 2) Leaving O&O with Hobson’s choice wrt BHL taking over UFL’s stake Did amt to oppression Even though O&O grudgingly accepted the change in partner (from UFL to BHL), this did not bar e claim bec they accepted as they had no real choice. Further, although BHL and UFL were controlled by same family, BHL was public listed, which radically changed the nature o the business partnership = loss of substratum 3) Compelling O&O to take up the ri ghts issue Ct found tt this single act alone could have amounted to oppression Majority had issued shares for purposes other than raising capital – breach of fiduciary duties - aq deduced this bec there was lack of urgency for new funds but the Rights Issue was done very hastily. Minority suffered a loss unique to themselves bec they had to get financing to take up the R ights Issue. Significance Breach of fiduciary duties can amt to personal loss as well Loss of substratum can incl change of the nature of business
Sim Yong Kim v Evenstar Investments Pte Ltd [2006, SGCA] – s 254 Winding Up Facts Two brothers incorporated a Co – Evenstar – just to hold their shareholding in other companies.
S claimed tt M promised him he would be allowed to withdraw from the Co. at any time – subj to M having ‘first right of refusal’ over S’s stake S also alleged there was a change in the nature of the business bec. M started using Evenstar to hold shares in other investments as well. When time came for S to leave, M offered him a very unreasonable price for the shares Majority (family behind UFL and BHL) had acted oppressively – ordered buyout of O&O’s stake. No loss of substratum S had acquiesced to M using Evenstar to hold shares in other investments – hence S could not allege loss of substratum
HELD Reasoning/ Impt analysis
Significance
No breakdown in mutual trust S did not play any role in management – so S could not be said to be critical of M’s management methods. Rather S was upset bec M would not buy him out. On the ‘first right of refusal’ Qn before the CA was what exactly was M’s assurance? S said at trial tt M wanted a ‘first right of refusal’. This meant tt M had no obligation to buy S out. However, CA found tt what S meant was tt M promised to buy S out, just tt S was imprecise when he used the term ‘first right of refusal’. Hence, M did breach S’s legitimate expectations when he refused to buy S out at a reasonable price. On the relationship btw s216 and s54 Distinct but greatly overlapping – the two remedies have different bases for application. o In a sense s254 is wider. but the touchstone of s 254 is ‘unfairness’ as well. o BUT, when s254 is triggered bec of alleged oppression, the degree of oppression should be the same as in s216, but not necess ary tt it be higher. In dicta, CA said tt when Co is a going concern, Ct will usually view any petition for winding up as a measure of spite, rather than exit strategy. Should winding up be ordered in this case? Ct felt tt M’s going back on his word did amount to unfairness . But would winding up be justified bec all that S wants is to exit and M may still want to run Evenstar? o Instead of awarding an outright winding up, Ct turned to s257 – “make any interim orders it deems fit”. o Effectively, Ct ordered (1) winding up to be stayed for 30 days; (2) and in the meantime, S and M negotiate a possible buyout. I f negotiations fail, Co will be wound up. o This ability to modify the winding up application made it “no different” from a share buyout. Overlap btw 216 and 254 very great – esp since Ct can use 257 to ‘restructure’ the winding up to make it look like a buyout. Co having no real business, it was not difficult to wind it up. Diff btw a ‘first right of refusal’ and an assurance to buy the minority out when latter wanted to exit.
