Those who take interests in shares of companies generally have to accept majority rule. However, there are several rights at law that the minority possess to protect their interests and ensure that they are treated fairly. This article sets out some aspects of the rights of minority shareholders in Singapore companies.
A. Rights Under The Memorandum And Articles Of Association.
The Memorandum and Articles of Association (“M&A”) of a company are the constitutional documents of a company. The M&A are important documents as they set out and regulate among other things the objects of the company and the manner in which the company to be managed.
The M&A take effect in law as a contract between not only the shareholders and the company, but between each individual shareholder and every other. Generally, an affected individual shareholder may bring an action in court to prevent any proposed breach of the M&A. In appropriate cases, the court may also set aside acts done in breach of the M&A. However, where a third party is involved, the courts may be less prepared to set aside the transaction unless the third party knows or possibly ought to have known of the breach.
To further entrench rights under the M&A, the law provides that the M&A can only be amended by a special resolution, that is to say a resolution passed by a majority of not less than three-fourths of the shareholders voting either in person or by proxy at the general meeting of the company.
The M&A is therefore an important starting point for a shareholder who may feel aggrieved. A shareholder is entitled at law to a copy of the M&A, and on request, the company is required to send a copy of the M&A to the shareholder. The shareholder is, however required to make payment of $5.00 or such lesser sum as is fixed by the directors.
B. The Right To Information
As the saying goes, knowledge is power. This is no different in the case of the minority shareholder, who often by reason of not being involved in the day to day management of the company, will not possess detailed information on the affairs of the company.
The law strikes a balance from requiring too much disclosure (which may be overly burdensome and affect the ability to maintain a degree of confidence that may be necessary to the running of a business), and the need of shareholders not in management to be informed.
The following are some of the sources of information on a company. The registers referred to in sub-paragraphs i), ii), iii) and iv) below may be inspected by a shareholder without charge, and copies may be obtained by payment of a nominal charge.
- The register of shareholders. This register which is generally kept at the registered office of the company would provide information as to the names and addresses of the shareholders and their shareholdings.
- The register of directors, secretaries, managers and auditors. This register which is kept at the registered office of the company would contain certain prescribed information on the personal particulars of these persons and of their appointments. Separately there is a register of director’s shareholdings kept at the registered office that would among other things show a director’s shareholding in the company or in a related corporation, and whether any director has rights or options to acquire or dispose of shares in the company or a related corporation.
- The register of substantial shareholders. This register which is kept at the registered office of the company would provide information on persons interested in not less than 5% of the voting shares in the company and the extent of their interest.
- i)The register of debenture holders and the register of charges. These registers are usually kept at the registered office. A debenture is generally a document which creates or acknowledges a debt. The register of debenture holders would provide particulars of debenture holders to whom the company has issued debentures (other than debentures transferable by delivery) and the amount of debentures held by them. The register of charges would provide information relating to most forms of security granted by a company to secure obligations of the company.
- The minute book of general meetings. The minute book is kept at the registered office or principal place of business of the company. A shareholder may inspect without charge the minute books which are required to be kept or proceedings of all general meetings of the company.
- The audited profit and loss accounts of the company, the auditors’ report and the directors’ report. These reports are required to be sent to shareholders not less than 14 days before the general meetings of the company at which the accounts are to be presented. These documents provide useful information relating to the financial affairs of the company.
- i)The Registry of Companies. The Registry maintains a record of documents lodged with the registry. Copies of documents containing much of the information described above may be obtained from the Registry.
C. The Right To Attend, Vote And Call General Meetings Of The CompanyA shareholder has a right to attend any general meeting of the company. A shareholder is also entitled to speak at the meeting. General meetings of companies are important occasions for minority shareholders, especially of large companies, as it is an occasion to meet and ask questions of the management. Further, shareholders of a company (other than those holding non-voting preference shares) are entitled to vote on any resolution.
With one exception, such rights may not be excluded by the M&A of the company. The exception is that the law allows a company to provide in its Articles for suspension of such rights where calls or other sums payable by a shareholder in respect of his or her shares have not been paid.
Apart from the Annual General Meeting, Extraordinary General Meeting (“EGM”) of a company may be called. Two or more shareholders holding not less than 10% of the issues share capital of the company, or such lesser number as is provided in the Articles, may call for an EGM. Further, a resolution may be put forward for voting at a general meeting if a requisition is made in writing by (i) shareholders holding not less than 5% of the voting rights, or (ii) not less than 100 shareholders holding shares in the company on which there has been paid up an average sum, per shareholder, of not less than $500.00.
The requirement of a 10% shareholding, 5% voting rights or 100 shareholders may not always be easy to meet in a case of minority shareholders in a company having many shareholders, such as certain large companies. Thus, there may be a need to pull together resources, and organisations such as the SIAS would no doubt be in a position in appropriate cases to help facilitate such efforts.
D. The General Right To Be Treated Fairly – The Statutory Remedy Under Section 216 Of The Companies ActSection 216 of the Companies Act embodies the general right of a shareholder, in particular a minority shareholder, to be treated fairly. Cases in court dealing with the section show that while the courts recognise the rights of the majority, where there has been a visible departure from the standards of fairplay expected on the part of the majority of those in management, the courts may intervene to provide a remedy.
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 one 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 first 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 second 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. Case law indicates that the courts are more willing to make a finding of unfair prejudice where the conduct complained of is not in accordance with the articles or some other requirement of law.
Exceptionally, conduct that is lawful may, in certain limited circumstances, be unfairly prejudicial. This is, however, the exception rather than the rule. The exception arises in situations where the articles do not reflect the understanding upon which the shareholders were associated. In this regard, if there are legitimate expectations on the part of the shareholder which have been breached, the court may intervene and provide a remedy. In general, however, shareholders (particularly of large companies having many shareholders) have no additional legitimate expectation beyond that conferred on them by the constitution of the company.
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 Part E of this article.
E. 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.
F. 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 of listed companies.