Minority Shareholders’ Rights (Part 2 of 2)
( Continued…)
Part 2 of 2 :
4. The General Right To Be Treated Fairly – The Statutory Remedy Under Section 216 Of The Companies Act
* Section 216 of the Companies Act embodies the general right of a shareholder, in particular a minority shareholder, to be treated fairly.
Under the section, a shareholder may apply to court for assistance where:
* the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to 2 or more shareholders or in disregard of his or their interests as shareholders; or
* some act of the company has been done or is threatened or that some resolution of the shareholders, or any class of them has been passed or is otherwise prejudicial to one or more of the shareholders (including the shareholder making the application).
Under the 1st ground, the affairs of the company would be conducted in an oppressive manner where there is a visible departure from the standards of fair dealing and a violation of the conditions of fair play that a shareholder is entitled to expert.
A case of disregarding the interest of a shareholder will be made out where those in control of the company despite being aware of the interests of the minority make a deliberate decision to override or brush it aside.
Under the 2nd ground, a case may be made out where there are discriminatory acts which cannot be justified with reference to the interest of the company and which operate unfairly.
Alternatively, a case may be brought on the ground of unfair prejudice, and in this regard there are a great number on instances where a case of unfair prejudice may be made out.
If the case is made out under section 216, the court has wide powers to remedy or put an end to the matters complained of. For instance, the court may direct or prohibit any act or cancel or vary any transaction or resolution.
The court may also make orders to regulate the conduct of the company in the future. In appropriate cases, the court may authorise civil proceedings to be brought in the name of the company against persons against whom the company has claims.
The wide breadth of the powers of the court go so fast as to allow the court to wind up or liquidate the company if such is necessary to remedy or end the matters complained of.
The consequences of winding up a company are further dealt with in Point # 5 of this article.
5. The Remedy Of Winding Up The Company
The courts may, among other grounds, wind up a company on an application by a shareholder where:
* the directors have acted in the affairs of the company in their own interests rather than in the interests of the shareholders as a whole, or in any other manner whatever which appears to be unfair or unjust to other shareholders.
* It is just and equitable to do so. The courts have made clear that it is wrong to limit the circumstances in which a case for winding up on the just and equitable ground may be made out.
The courts, however, often do require some sufficiently serious wrongdoing, improper conduct or breach of some understanding or legitimate expectation on the part of a shareholder.
Cases have also shown that the remedy is not only available in cases where some breach or infringement of some legal rights is involved, such as a breach of the M&A, but also breaches of some legitimate expectation on the part of a shareholder that may not be founded on the legal right.
For instance, in small and closely run companies, the courts have on occasion granted the remedy where a shareholder’s legitimate expectation to participate in management was infringed.
It should, however, be mentioned that the larger the company and its number of shareholders the more difficult it would be in the circumstances of the case to establish a legitimate expectation.
This is because with a large shareholder base, it is more likely that shareholders would regulate their activities by reference to more formal and legal arrangements such as the M&A rather than informal and unwritten arrangements and expectations.
Winding up is a drastic remedy in that it puts into operation a process which would lead to the end of the company.
Except for a short period after a winding up order is made, the company would no longer be able to do business and steps would be taken to wind down the company.
Investigations into the affairs of the companies including the acts of directors and officers of the company may be undertaken in the process of winding up.
Thus, in appropriate cases, the remedy of winding up is a powerful remedy, although often of last report, available to shareholders.
6. The Right To Sue On Behalf Of A Company
There may be occasions where a wrong is done to a company, but the majority or those in control of the company decide to take no action in respect of the wrongdoing.
Since the wrong is to the company, the claim has to be brought by the company and a minority shareholder will ordinarily have to abide by the decision of the majority or those in control.
This is a usual aspect of majority rule.
However, where the act complained of is beyond the objects of the company as set out in the memorandum of the company, any shareholder may sue to have the transaction restrained.
This is because the majority has no right to require the company to do something beyond its objects.
Further, exceptionally the courts in the interests of justice would, applying general law, allow such a claim to be brought by the minority, especially where there has been an abuse of power.
A common instance where the minority has been allowed to bring or maintain the action is where the majority of those in control have stifled legitimate claims being brought against themselves.
This right at general law is supplemented by section 216A of the Companies Act which sets out a procedure to allow a shareholder to apply to court in appropriate cases to allow an action by the company to proceed.
The procedure under section 216A is, however, not available in respect of companies listed on the Singapore Exchange.
However, there is nothing to preclude a claim being brought under general law in the case.
Hope this sharing helps those who are MINORITY shareholders, who have been aggrieved by the majority in the course of business.
The best prevention is to do up a Shareholders’ Agreement prior to incorporating your company. I will be sharing another article on Shareholders’ Agreement in my next post.
Exceptions will be those who become MINORITY shareholders through Share Grants received from the company free of charge. I shall hope to address this part on proper conduct of ESOP in next article after Shareholders’ Agreement.
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