6. minority protection

8/11/2019 6. Minority Protection

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THE PROTECTION OF MINORITY SHAREHOLDERS

POLICY RATIONALE Why protect the minority?[p.4 of Notes]

Rationale for majority rule Rationale for minority protection

- Choiceminority choose to be minority

-

Riskmajority take more risk

- Efficiencycannot allow Co. to be deadlocked all the time

- Not all that much choice toominority in closely-held Co. cannot exit so easily

-

Some risk is still risk

- Cannot allow unfettered tyranny of majority may destroy value of Co.

THE BALANCE:

prima facielegitimate and efficient majority rule, augmented by selective interventionby the courts to prevent unfair and inefficient prejudice against the

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 rulein Foss, it actually comprises of two rules(as interpreted by Edwards v. Halliwell[1950, ECA]):

Proper Plaintiff Rule Majority Rule Principle

- When a wrong is committed against a Co. the proper plaintiff can

only be the Co. itself.

- 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.

- Where the wrong is committed against a members individual right, but it can

be ratified by a simple majority of the Cos members, no individual member is

allow to maintain an action. The Cos word is final cadit quaestio.

- Rationale: fruitless to allow individual to sue when wrong can be cured by

majority ratification

- Effect for majority rule: Minority cannot sue for mere irregularities

Cases 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.

MacDougall v Gardiner(1875): Chairman failed to call vote before adjourning a

general mtgminority member complainedfailed, bec. Chairman wouldve had

enough votes to command a majority and vote in favour of adjournment anyway.

The link btw the two rules:

- Emphasize theprima facieright of majority shareholders (MSH) to decide the Cos 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

-

MSHs can cover up their wrongdoingharms value of the Co.

- Robs minority S/Hs of a remedy when there is clearly a wrong

1.2Exceptions to the Rule the CLDA[p.8 of Notes]

The Rule is aprocedural rulebec. it deals with whether a member has standing to bring the action for the Co.o 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

suing on behalf of the Co.

Fourexceptions to the Rule (discussed in Prudential Assurance v. Newman Industries Ltd[1982, ECA]):

(1) Member has a personal claim

(2) Transaction requires special

majority to ratify

(3) Complaint is for Ultra viresor

illegal transactions

(4) Cases where it is a fraud on the

minority

- If A has cause of action A and B, he

may be barred from A but that does

not destroy (his personal) cause B.

- Majority rule principle in Foss

cannot apply bec. a simple

majority cannot ratify such acts

- Majority rule principle in Foss

cannot apply bec. an ultra vires

is incapable of ratification

- Wrongdoers are the very ones in

control of the Co.

- The only trueexception 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, youAREthe proper plaintiff. Only (4) is a true exception to Foss.

Exception (1): Member has personal claim[p.9 of Notes]

(a) Express contracts (b) Statutory contract (s.39) (c) Statutory rights conferred expressly

by CA1

(d) Common law

Eg. I have a contract to

supply goods to the Co.; the

fact tt I cannot sue the Co.

for a fiduciary breach

doesnt bar me suing for

breach on that contract.

- M&A serve as contract btw Co. and

individual member of Co.

Subject to 2 conditions:

(i) He must be enforcing the right qua

member2;

(ii) In case of procedural irregularity, there

must be substantial injustice(s.392)

- s.409Aallows member to seek

injunction for alleged contravention

of CA

-

s. 177right to compel gen mtg

-

s.181right to appoint proxy

- s 189right to inspect books of the

Co.

Case law has developed to recognize

certain rights as rights inseparable

from a members 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

1The 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.

2Unless the wide-view of Salmon v. Axtensapplies- This assumes that the in a capacity other than a member principle applies in Singaporewhich 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.


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has his own separate cause of action.

- If the S/H can be entirely compensated by a re-inflation of the Cos

value, he has no action.

- Justification: prevent double recovery

(Authoritative case:Johnson v. Gore Wood(HL); Singapore authority:

Townsing Henry George)

1)

Co. has no cause of action

- bec. of wrongdoers actions eg. Co. rendered insolvent (Giles v. Rhind)

- bec. the jurisdiction tt the Co. is in has no proper remedy (Hengwell)

2)

S/Hs loss is separate and distinct from the Cos

Exception (2): Transaction requires special majority to ratify [p.13 ofNotes]

Exception (3): Ultra virestransactions [p. 14 of Notes]

The reasoning is that if the breach consists of Dirs. not adhering to the

75% ruleafter breach is uncovered, the Dirs. need only a simple

majority to decide not to proceed with any actionthis effectively

circumvents the need for supermajority.

o Edwards v, Halliwell: [The] effect would be to allow a

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.

But this Exception is of limited application bec. s.25effectively 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 restrainthe 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 ofultra vires acts.

Exception (4): Fraud on the Minority[p. 14 - 25 of Notes]

This IS the common law derivative action (CLDA).

o It is a derivative action because although it is pursued by a member of the company, the member is not suing to enforce their own personal rights,

but rather those of the company (i.e., the rights being enforced are derived from the company)

o A PROCEDURALright 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.

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. isprima facieentitled to the relief claimed

(similar to threshold test in s.216A derivative action)

II: The wrongdoers must have committed a fraud on the minority.

Three elements3:

(i) Wrongdoer obtains some sort of benefit

3Leading texts suggest that there is a three-part test. But SGCA in Ting Sing Ningdid not expressly state the no. of stages in the test, yet it endorsed a passage in Daniels v. Danielswhich 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 wasnt emphasized. May argue in exams tt

there is a singular test if client fails three-part test on the facts.


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* Prof Puchniak considers this a redundant limb

becauseBut it was considered in detail and deemed

important in the dictaof Sinwa SS (HK) Co Ltd v. Morten

Innhaug[2010, SGHC].

(ii)

Benefit obtained at the expenseof the Co.

(iii) Wrongdoer used controlling powerto prevent Co. from suing

II: Three-part test for proving fraud on the minority (FOTM)

(a)

Wrongdoer benefit [p.17] (b)

At the expense of Co. (c)

Wrongdoer control [p.18-20]

- 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 undervalueDir benefited

claim allowed.

-

Pavlides v. Jensen: Dir. sold

mine at undervaluebut he did

not benefitclaim failed.

- This goes to whether the S/Hs could

have ratified the wrongdoers

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. Deekscompleted

negotiation of dealDirs diverted it

to themselvesno ratification

allowed.

- c.f. Regal HastingsLord Russell in

obiter considered tt Dirs. could have

ratified deal w S/Hs at gen mtg

derivative action barred.

- Arguably most crucial elementit must be shown tt wrongdoers have the

abilityto stifle claim.

- No need to show tt Pf had requested for action but was actually rejected.

a.

The clearestcase is of course when the wrongdoing Dir. actually

commands >50% votes; OR

b. Dir. doesnt actually have 50%, butit can be shown tt sufficient

Dirs. would have sided with him to form a majority, then he has

de factocontrol (eg. Ting Sing Ningsister (10%) + brother = 52%

Asian family values)

- But even if (a) or (b) is satisfied, if the majority of the minoritywould

oppose bringing the claim as well, then there is no wrongdoer control

(Smith v. CroftWrongdoers (63%), Pf (14%) and remaining independent

S/Hs (21%)the 21% also chose not to mount actionPf 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)

Threshold requirement 1: Pf must come with clean

hands [p.21]

2: Available vs. better remedy

- 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. Nurcombewife included husbands

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.)

- Delayin bringing the claim(Ting Sing NingCt

acknowledged there was considerable delay but Pf

not responsible for itclaim allowed)

- Not in best interest of Co(SinwaPf only suing

- 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 that the language used by

the SGCA was purely rhetorical.

o He considered that so long as the alternative was a real option, the Ct can strike down the

claim.

o Ang J. contends tt the traditional view of a CLDA was that it must be the last optionand if the

SGCA wanted to depart from this position in Ting Sing Ning, it ought to have made its

intention clearer.

o Under Ang J.s test, the decision in Tingwould have been the same bec. the alternative there

was not only not the better option, but not a viable option at all.

- Prof TCH in his commentary (2011) opines that the SGCAs 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


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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.

o 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+

Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993, SC 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

boundariesEquity is concerned with substance and not form I consider it to be desirable to allow a minority

shareholder to bring a derivative claim where the justice of the case clearly demands that such a claim bebrought, irrespective of whether the claim falls within the confines of the established exceptions

Accepted?

- Not formally accepted nor rejected in

Singapore.

-Rejected by ECA in Prudential Assurance.

Procedure for bringing the CLDA:

(* N.B. This refers to procedure for application for leaveto 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 behalf of all shareholdersless the alleged wrongdoers; Co. should be named as co-Dfs with the alleged wrongdoers

to ensure Co. is bound be decision

2. Pf should show that he/ she attempted to persuade the Co. to commence the action prior to mounting the CLDA

3. Issue of standing(whether there is fraud on the minority) should be addressed at the st art of trial

(to avoid mistake as in Prudential Assurance)

4.

When proving the alleged wrongdoing of the errant directors, need only prove on a prima faciebasis and not on the usual balance of probabilities.

5. Although Pf bears his own cost, the Court has the discretionto award costs to Pf or make Co. bear the cost even if action is unsuccessful.

2. STATUTORY DERIVATIVE ACTION (SDA) s. 216A[p.26 of Notes onwards]

The inadequate procedure and uncertain groundsfor bringing a common law derivative action was widely seen as unsatisfactory

In November 1993, ss. 216A and 216B were enacted based on the Canadian model

Once again, this is a PROCEDURALright to bypass controlling shareholders and mount suitin the Cos name

(for CLDA, it is on behalf of the Co. but in the case itwill be the complainant-shareholders names).

Procedural bec. succeeding in the elements of s.216A does not prove wrongdoing on the Dirs part, it only proves that you have standing to go on and

seek to establish the Dirs wrongdoing (this would be the substantive part).

No Reflective Loss principle applies equally here.

Who may mount this action? - s.216A(1) Elements of the Tests.216(A)(3)

1) The Co.must be incorporated in Sgp, but not listed on the Sg Stock Exchange (ie. Sgp PRIVATE Co.) 1) Notice14 days notice must be served


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2)

The complainantmust be:

- a member of the Co.; or

- the Ministerof 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.

* Note tt a s.216A claim need not be used only at the start of a fresh suit, it can be used to intervene in an ongoing suit

of the Co. (s. 216A(2))

to the Dirs. of the Co. beforefiling of the

s.216A claim

2) Complainant is acting in good faith

clean hands and no unreasonable

delay

3) Prima faciein the interest of the Co.

reasonable basis for complaint

(1)

Notice of 14 days (2)

Good faith (3)

In the interest of the Co.

- Purpose: give Co. chance to sue in its own

capacity if it wants to (rmb tt there is no FOTM

test in a SDA)

o No specific form of notice but sufficient info

shd be given for Co. to decide whether to

sue.

1. Req. of notice shd not be interpreted in an unduly

technical manner

Agus Irawanwheat rebate casepleading

amended AFTER notice was served to incl.

price rebates in addition to volumerebates; Ct held tt amendment did not

change the fundamental claim for breach of

fiduciary dutynotice was valid.

2.

14 days is max; no reason for Co. to have extra

time to consider/ investigate allegations

Tam Tak ChuenEden health caseCos

objection tt there was insufficient time to

obtain legal advice invalidstatute does not

allow time extensions.

3. S. 216A(4)req. of notice can be done away

with if it is shown that it is impracticableor

futile. Impracticable in a case where serving notice

might destroy the entire case bec. Dirs may

destroy docs or drain the Co.4

Fong Wai Lyn CarolynPf served notice after

- Equivalent to the CLDA requirement of clean

hands and no reasonable delay

- Burden of proof is on the Dfto show the absence of

good faith

1.

THE TEST: is whether the action is frivolous,

vexatious or devoid of absolutely any merit

(Richardson Greenshields[Ontario CA])

2.

Also, the fact that there is spite and ill will btw the

parties will not, of itself, prove bad faith(dicta of

SGCA in Pang Yong Hockbec. hostility is very

common in such situations. Bad faith is onlyinferred if vendetta was the main consideration

such tt the Pf mounts s.216A to harm the Co. out of

spite.)

a. Applied to facts in Tam Tak Chuenpassed

main motivation financial, not personal

The good faith is actually quite easily satisfied. So long

as there are (1) legitimate issues raised and (2) Pf does

not conceal material facts or motivation.

Fong Wai Lyn Carolynlegitimate issues raised

claim allowed.

Agus Irawanwheat rebate casePf did notdisclose tt rebates were diverted away from Co. to

companies owned by the Pf essentially no clean

hands - claim failed.

Urs Meisterhans v.GIPPf did not disclose tt funds

A.

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 chanceof success (not nec. that it is

likely to succeed)

Need not decide the disputed facts

Leave to cross-examine should besparingly granted

Agus Irawanfailed bec. Pf actually enjoyed

the diverted rebatesno way Ct could have

helped him; Teo Gek Luangfailed bec. loans

had been approved by 75% of members.

B. In the interest of the Co.

o Broad commercial interests (and not

just monetary amt of claim) must be

considered (

Pang Yong Hock)Co. may

want to preserve commercial r/s and

forbear to sueo The mere existence of alternate

remedies does not bar this claim (per

Ting Sing NingSGCA held tt Pang Yong

Hockdoes not stand for proposition tt

4Cant Pf just get AntonPiller 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 partesapplications).


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filing s. 216ACt 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

would have been futile5.

diverted were actually going to Co. owned by Pf

no clean hands - claim failed.

* Pang Yong Hockclaim failed partly bec. Ct felt tt

parties were using action only for their vendetta + it was

in the Cos interest to allow just and equitable winding

up instead.

mere existence of winding up as a

remedy would bar 216A claim)

o Ratification may be considered when

determining if claim is in interest of Co.

but Df has burden of proofto show tt

ratification was independent(s216B(1)

as read by MARGARET CHEW)

Statutory provisions of 216A and B Comparing 216A and CLDA

Sections Content

216(A)(1) Who may avail themselves of this remedy

216(A)(2) 216A may be used to intervene in existing action

216(A)(3) Elements to satisfy for granting of leave

216(A)(4) Req of leave may be dispensed with if not expedient

216(A)(5) Court may make ANY order

216(A)(6) If 216A is used to intervene in an existing action at Sub Cts,

app shd be made to District Ct

216B(1) Ratification can be considered but shd not of itself bar the

claim

216B(2) After leave is granted to commence a s.216A action, it cannot

be stayed or discontinued without the Cts approval

216B(3) 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)

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 benefitto Dir. (ie. pure negligence claims allowed)

- Ratification may bar claim but burden is reversedand placed on Df

2. Easier for Pf to get Co. to bear costs

- Under CLDA, Ct may chooseto make Co. bear costs but for 216A, Pf can

petition Ct to grant an order for costs

- Cts have power to make anyorder to facilitate actionincl. 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 withconfusion in the law in this area still remains

5Prof 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.


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3.

OPPRESSION: s.216 This action differs significantly from the two derivative actionsabove because this action is substantiveand personal. The S/H is not suing for the Cos loss but

alleging that he has been oppressed and has suffered a loss unique to himself.

The test for s. 216that of commercial unfairness fully embodies the need to promote majority rule, but not without limits:

o 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

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) When Four Becomes One:

Elements of the actions.216(1)

1.

Member of the Co.

- Only those names tt appear on Cos register are allowed to sue.

- Can an equitable owner of shares sue for oppression?

o Technically, NO bec. the equitable owners name would not appear on the Co. register.

o However, English case law suggest tt the owner can direct his nominee/trustee to sue

or register as a memberof the Co. and sue in his own name.

- If Pfs name is not on register but sues, Df cannot object if:

(a) Pfsvery complaintisthat 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.2. Debenture holder of Co.

- Creditor of Co.holder has an interest over the stock/ asset of Co.

3.

Minister

- In the case of a declared Co.

4. A person to whom shares are transmitted by operation of law

- Equitable owner of shares does notfall under this

- Usually refers to personal representative (in case of estate) or trustee ( for bankruptcy).

* s.216 ONLY applies to local companies and not foreign onesbec. company and not corporation is

used in the statute.

A read of s.216(1) will reveal fourdifferent

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 they changed

terminology to unfair prejudice)

Regardless of the diff in terminology, there is only

ONE TESTin s.216that 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)

Discretion vs. CertaintyA two-step approach

ONeill v. Phillips[1999, HL]strike balance btw discretion and certainty

Parliamentary intent is to free the courtand confer wide discretionto 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 advice as 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 that business people do not always put everything


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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 understandingbtw the parties which formed the basis of their associationbut not put

into contractual form.

(1)

Starting point: WRITTEN AGREEMENT

- R Saul D Harrison & sons Plc [1995, ECA] - Hoffman LJ.: Context of commercial

relationship, so starting point is the M&Aswhich govern the contractual relationship.

o But an act which breaches the M&As may not be oppression. The law

permits ratification and this validates majority rule.o Hence, the UK formulation is unfair prejudice bec. majority rule invariably

means that there would be someprejudice to the minority.

(2)

Then: LEGITIMATE EXPECTATIONS

- But Ct may find unfair prejudice even without breach of Arts

- Acts can be unfair without being unlawful.

- The personal r/s of the S/Hs must be consideredno one

test but the following factors are usually relevant:a. Type of Co.

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 PARTNERSHIPsettings. Hence the

preliminary issue is always to decide whether there is a quasi partnership6. It will arise:

a. Where there is a personal relationshipbtw the S/Hs tt involve placing mutual confidence

b.

An agreementthat all or some of the S/Hs will participate in the business

c. A restriction on transferof shares7.

2) Secondly, the understanding must have been EXPRESSLY COMMUNICATEDto the other party. (*Thio

Keng Poon v. Thio Syn Pyn[2010, SGCA]Malaysian Dairies case)o Unilateral understandings will not be upheld, no matter how genuine or reasonable they

were.

o A legitimate understanding must be one tt i s btw all members.

Profs Puchniak and TCH criticise this decision on the basis that there canbe informal shared but

unspoken understandings.

o Conceivable tt based on social and cultural norms, a founding patriarch would be entitled to

retain a management position after gifting shares to family, out of respect for the patriarch

even if such respect is not spoken of8.

3)

If there is professional adviceand parties carefully negotiated the terms of the Arts , it is unlikely to

Unlike informal understandings (which is based on

the relationshipbtw the S/Hs, implied

understandings are based on the nature of the

corporate structure.

These are understandings which are not in the

M&As and yet never been discussed btw the S/Hs.

1. Implied understanding tt Dirs are not to enrich

themselves at the expenseof other members.

- Low Peng Boonpay low dividends to incr. Cos

profits bec MSDs salary computed based on

amt of profits.

- Re Gee Hoe Chan Trading Co Pte LtdRefused

to declare dividends but MSDs paid themselves

generous salariesHC held it was inequitable

to adopt a policy tt benefited only the MSDs

6per Over & Over. Rajah JA. Held tt in the first place, it is more likelythat 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 vulnerabledue to illiquidity of shares and how any promised understanding were merely informal.7The SGCA in Over & Oversuggested 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 oppressionwhich is the basis for protecting the informal understandings of S/Hs there

in the first place. *Whatever the academics view is, note tt the law is likely to follow Over & Over.]8But 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 blanchefor

patriarch to do whatever he lik es and Pfs double claiming would have breached the understanding. *Whatever the academics view is, the orthodox view is that the understanding must be a

spokenone.]


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base legitimate expectations on informal understandings9.

- 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 agreementsall matters

which were to govern their R/S.

- ONeill*99, HL+ N cannot be given the shares bec. P and N had entered into negations on

professional adviceand subject to an express condition that neither was bound until a formal

documentwas executed.To find otherwise would not be restraining [Ps] legal rights butimposing 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 Boardhe was removedCt held tt he did suffer oppression.

Prof Puchniak + TCH raise the quare whether in a public Co.there can be a legitimate expectation

to never be removed as a Dir considering that s.152 states tt a public Co. can always remove a

Dir by simple majority regardlessof M&A or personal agreements.10

They also qn whether Tan Choon Yongthis 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.

with hardly a benefit for minority S/Hs.

2. Implied understanding tt in quasi-partnership, a

higher std of corporate governanceis expected vis-

-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.

* Can there be legitimate expectations in

a public Co.?

Unlikely,bec. of requirement ttincorporation is based on personal

r/s11

BUT, cases like Tan Choon Yongand

Ebrahimi[p.48 of Notes] did allow

finding of legitimate expectations

based on informal understanding in a

public Co.

Nevertheless, the rule of thumb is s.

216 is more for private/ closely-held

Co.

Must MSDs oppressive conduct constitute a

single or series of acts?

Limb (a) and (b) of s. 216 opens the doorboth to cases of continuing and single acts

respectively

But, as noted by the SGCA in Over & Over,

most cases heard have been those

pertaining to oppression over a series of

acts.

(Eg. of singular act tt can constitute

oppression is like a singular dilution of

minoritys shares contrary to an informal

understanding)

Commercial unfairness is an objective standard

Objective standard, but the context is impteg. competing

businessmen vs. members of family and other circumstances mustbe considered (ONeil)

Re Saul D HarrisonNot meaningful to use some amorphous

reasonable company fiction; Cts should state the factors tt the

law take into acct to determine what amounts to commercial

unfairness

An objective std means tt it does not matter that MSD had no

intentionto oppress, or in fact he might have done if tor the

benefit of the Co.it may still amt to oppression under s. 216.

BUT, if facts reveal tt MSD did have improper motive, that may

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 Evidence of oppression in other Co. can be used as evidence in an action for

9This 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 Companytt 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 Yongis tt it referred to an expectation to play a significant role in the management of the Co. in

a general senseand the Df Dirs actions cumulativelyadded to a breach of that expectation.11

For more reasons, see p. 50 of Notes


11/19

minoritys shares.

If after proceedings have commenced, the majority S/Hs offer to buyout the

minority S/H, the Ct may decide to strike out the minoritys claim (2 reasons:

(1) freedom to leaveso minority not vulnerable; (2) if action succeeds, Ct is

likely to order a buyout anw)

But offer must be a fair offer, ie.

1.

Fair valuew/o minority discount

2.

Fair value to be determined by a competent and neutral expert3. Both parties must have chance to argue why the price shd be higher or

lower AND both must have equal access to Co. infoto make those args

4. If offer is made after an unreasonable delay after proceedings have

commenced, majority might would have to include in the offer a sum for

legal costs(ONeil)

oppression in the Pfs Co.

If Pf, as S/H of Co. A is suing for oppression, he may be allowed to adduce

evidence of MSD oppressive behaviour in Co. B, C, D etc. provided the affairs

of those Co. impact the affairs of Co. A

a)

Usually only in those single economic unitscenarios of parent-subsidiary

or Co. with very similar shareholders.

b) Or where court has directed the lifting of the corporate veil(eg. fraud,

sham) But the mere fact tt it is a parent-subsidiary r/s is not of itself sufficient; must

show how affairs in those Co. impact/ affectthis Co.

This is actually a slight exception to the doctrine of separate legal personality

BUT the reason is so that the purpose and policy behind 216 is not defeated

bec. if u recall, s. 216 is not available to foreign corporations.

How to identify fact situationswhere possible actions for oppression may arise?

(1)

Dominant members advancing their own

interests

(2)

Abuse of voting powers (3)

Exclusion from management

Majority often hold the Dir positions too.

They may do things tt are not in the best

interest of the Co (such as diverting corporate

assets). These may be a breach of fiduciaryduties BUT that is not of itself sufficient to be

oppression, unless they coincide with the

legitimate expectations of the members.

Lim Swee Khiang v. BordenMSDs with

conflict of interest shd have refrained from

votingsufficient to find oppression bec.

closely-held Co. held to higher std of

corporate governance.

Low Peng Boon v Low Janie MSD used Co.

funds to pay for personal travelling expenses.

c.f. Re Kong Thai SawmillUsed Co funds to

purchase motor yacht for personal useextravagant but did not amt to oppression

bec. Pf had (1) gotten over 250% of dividends

over 4 years; (2) other minority S/Hs tt

werent related to the MSD also were not on

his side and (3) Pf had rejected a fair buyout

offer.

Generally, majority S/Hs

need only vote in their own

interests (unless it is for

modification of M&As). But it may amount to

oppression if vote was for a

collateral purposeor

against the spirit of the

articles:

Re SQ Wong Holdings (Pte)

Ltd(p 55 of Notes)Dirs

deliberately refused to

make dividend payments

motive was to preserve

their dominance(bec.

some strange rule in Arts ttif they did not issue

dividends, they retained

power to vote)held tt

this was not the purpose

behind granting Dirs the

discretionwhether or not

to recommend a dividend.

Pf must establish a legitimate expectation tt he/she is to be included in

the management of the Co

Quite difficult in a public Co.

Tan Choon Yong v Goh Jon Keatlegitimate expectation ofmanagement in a public Co.

Thio Keng Poon v Thio Syn Pynno legitimate expectation of

management bec. it was a mere one-sided expectation

Lim Swee Khiang v Borden Co (Pte) LtdIUS/Hs meeting proposed tt all

Dirs shd not hold executive positionsPf stripped of their executive role

- but later, nominees of the majority S/Hs were allowed to take on

executive directorshipsCt held it was oppressive.

Ng Sing King v PSA International Pte Ltdno legitimate expectation of

always being in management bec. this was a S/H agreement concluded at

arms length

Kitnasamy v NagatheranPf had secured the main contract for which

the Co. was established in first placeexpended lots of effort and moneyreasonable to expect tt his investment can only be protected if he were

a Dir. and had a say in mgment.

In any Co, even if such a legitimate expectation is estb, Dirs may fairly

exclude him/her from management if there are good reasons to.

Re a Companyconsidered in dicta tt it is reasonable tt in the case of a

irreconcilable breakdownfor the minority to leave, if he is compensated


12/19

for the loss of employment.

(4) Serious mismanagement (5) No/ Low dividends (6) Loss of substratum

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 ofmismanagement were repeated over many yrsdespite 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

Bhd)

Courts must be careful to distinguish btw MSDs who had a

genuine belief in the success of their business but failed (Re

Tri-Circle Investment Pte Ltd) and those where the MSDs

deliberately wanted to cause business to fail (Lim Swee

Khiangfailure to explain business decisionsto minority

MSDs must be deemed to have intended the consequences

of their acts and omissions)

The starting position is that all S/Hs have no right to

expect dividends; it is a decision solely for the Dirs. to

make.

But courts generally willing to find tt there is a

legitimate expectation tt majority and minority get

roughly equal returnson their investment. Two types of cases generally give ri se to oppression:

(a) Only the MSDs are getting benefits (in the form

of directors fees) but the minority is not getting

any dividend (Re Gee Hoe Chan Trading Co Pte )

(b) There is a significant gap in the return-per-share

of the majoritys shares vis--vis the minoritys

shares.

It is probably not right to say tt the moment Dirs.

refuse a dividend and yet continue to receive

emoluments, they are acting unfairly. In Re Gee Hoe

Chan, it was done consistentlyand over a prolonged

period.

The fundamental basis/

business objectivefor which the

Co. was started is no longer

there.

Unlike the others which is

essentially a breach of promise(express, informal or implied),

this is analogous to Frustration

(ONeil)

The basis is just as in frustration

non haec in foedera venithis

is not what I signed up for.

This is unfair bec. the minoritys

$$ are locked up in a Co. with

commercial objectives he did not

consider investing in (Over &

Over)

Remedies under s. 216(2)

The court may grant any orderas the court thinks fit; but a list of what that includesis 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 minoritys shares

Over & Over: buyout was ordered bec there was noresidual goodwill left and it would not be right for the Pfs

shareholding to remain tied up with the Co. in a broken and bitter r/s.

Lim Swee Khiang v Borden Co (Pte) Ltd: buyout was ordered even though winding-up was prayed for.

Valuation of shares can be contentious due to two issues:

1.

Fair value of sharesit is NOT always the case tt courts order fair value. While clean hands is not reqd, the court

has discretion to reduce the valuation price if the Pfs own conduct partially justifies the prejud icial conduct (Over

& OverPf had NO FAULTtherefore fair value could be ordered)

2.

Time of valuationgeneral rule: at the point when buyout order is made. But this could be departed from whenthe current value of shares is due to injection of fresh capital (Tullio v Maorop64 of Notes)

3. Pre-judgement interestCourt has no power to award pre-judgement interest(bec. tt is only reserved for

damages), but court can adjust the share valuation upwardsto compensate the Pf for long and prolonged

proceedings (Yeo Hung Khiang p64 of Notes)

Buyout is generally preferred over a winding-up bec. it does not destroy the Co

However, in cases where there is serious mismanagement, the court may wish to order winding-up instead.

One of the remedies is tt the Ct can

actually give the Pf a free pass to

commence a derivative action

(including a s.216A SDA) without the

laborious process of establishing

standing again.

This is particularly advantageous for a

member of a listed Singaporecompanies(who are precluded from

mounting a s.216A action).

However, the importance of this

remedy has diminished bec. of the case

of Kumagaiwhere corporate damages

were directly awarded to the Co.


13/19

Another reason for preferring winding-up is when the majority has no $to buyout the Pfs shares (Tan Choon

Yong: order for buyout, failing which the Co. would be wound-up.)

without the need for Pf to initiate a

separate derivative action.

Can the court order compensation to the COMPANY?

The orthodox view is tt s.216 is apersonalactionand remedies shd only pertain to t he Pfs own losses.

Secondly, to do otherwise would be to allow litigants to circumvent the rule in Foss v. Harbottleand the carefully-carved-out exceptions to it.

HOWEVER, cases have held that you canorder 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 causationbut Ct held tt in principle such an order waspossible 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 Janieorder to compensate Co. actually givenDf 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 give such an order, they would be rare and

exceptionalshd 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 Dfs liability can conveniently be dealt within the s.216 action.

The reason for this bending of the rule in Fossis 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) The Test

S.253(1) states that: (a) the Co itself; (b) a creditor; or (c) a contributory, may apply for winding up.

Contributoryis defined under s.4(1) as:

i. Members; or

o Provided the shares were originally allotted; or held for a min period of six months at the date of

action; or person got shares from bankrupt or through an estate.

ii.

Non-members

o So long as the person has an interest in the shares of the Co.

Action only applies to Singapore companiesand not foreign onescompany is used.

But technically a foreign incorporated Co. can apply to Sg court for winding-up but under s.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.

Simply whether it is just and equitableto 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 winding-upin 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 quasi-

partnership.


14/19

Strategic considerations when choosing btw s.254 and s.216 action

Go for 216 Go for 254

Wide discretion of remedieseven if Ct does not want to wind up, it will award

something.

Facts insufficient to show oppression.

Once you commence a 254 action, the application for winding-up must be advertised.

Go for 216 to avoid bad press.

Do this if your client is hell-bent on getting the Co. to wind up

if judge is really moved to intervene, his hands are tied and he

will order winding-up.^ If Co. is large and doing well as a going concern, go for 216 instead bec the court will

almost certainly neveraward winding-up.

Client is not a class of persons entitled to bring a a 216 action.

^ 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 ones 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 remediesunder s216Summit 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 avoidshence 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 madeie. if problems have been resolved in the interim, the Ct wont 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

Usually ordered where there is an irretrievable breakdown

and fault cannot be pinned on one party in a quasi-

partnership only.

Ng Sing King v. PSA Intl YES fiery meetings and no was

board meetings can be constructive rare case where

equitable winding-up ordered for a non-quasi-partnership +

S/H agreement negotiated at arms length.

Chow Kwok Chuen YES brothers always blocking one

anotherCo. has lost its leadership.

SummitNO breakdown was btw Pf and another Dir btw

Qn usually turns on whether the hiatus caused by the

bickering was fatal to the Co.ie. whether there is a

chance of the Co. picking itself up and become a viable

biz again.

Summitlittle interruption even after the Pfs firm

pulled out of the logistics business assertion tt failure

to transfer lines of pdt to Pf was loss of substratum was

unsubstantiated considering how the firm managed to

continue operating so smoothly.

Ng Sing King v. PSA Intlthr was loss of substratum bec.

Re Thomas Edward

Brinsmead & Sons (1897) -

Co was fraudulently set up

to pass off other pdts but

appeared to be for

manufacturing pianos

subscribers all wanted out

bec. they had been

defrauded. ECA said

CLEARLY this is a case


15/19

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 staffunlikely 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.

Hs BoD refused to adopt the action Hs 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 always vote in TCS side by virtue of their family relationship.

HELD SGCA reversed judgementfound for TSNthere was fraud on the minority bec. the sister would likely vote in favour of TCS.

Reasoning/

Impt analysis

On the likelihood that sis would vote for TCS

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 conclusiveof 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 tha t other Co. was a gift from TCS mattered in findingtt 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 facieshows 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 allegationsof 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 Hockdoes 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 aprima faciecase against the Dfs in the

first placeplus the two sides were countersuing each othermore 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.

Significance - Family ties


16/19

- Majority of the minority situationindependence not enough; must be fully appraised of the allegations

- Availability of alternative remedies not a barmight 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/Hsin N Ltda 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 hireN refused and Y stopped paying.

S alleged breach of fiduciary duties on Ms part (1) procuring the charter for his firm; (2) causing Y to withhold payments to N; and (3) preventing S from commencinglegal proceedings on behalf of N.

M counter-argued tt S did not bring this action in good faithinstead, it was to force M t o buyout Ss shares at a higher value.

HELD Judgment for MSs application for derivative action was premature.

Reasoning/

Impt analysis

Elements of CLDA

(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 Pfesp 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 aprima facie basis.

Whether prima facie case of being entitled to relief was made out in this case

(1) procuring charter not breach of FDalthough 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 approachtest 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 handsAND (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 necessarybec. it stands as a

derogation from the proper plaintiff rule.

Re-interpreted Ting Sing Ningby 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 wasnt even a viable optionbec. Pf was not even alleging oppression + considerable delay.

Andrew Ang J. held tt theres 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


17/19

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 Pfs bona fides

Ct found tt Pf had not laid all its cards on the table. Ct also found the Pfs 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.

Significance-

Qns Ting Sing Ningon 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. 216ACo did not take action (naturally, since Faction A commanded 3/5 of Boards votes) Faction B commenced s 216A action.

HELD s 216A application dismisseda s254 winding up was more appropriate.

Reasoning/

Impt analysis

Three elements of SDA

1. Notice

Notice servedno issue in this case.

2.

Pf comes in good faith

Burden: It is on the Dfto show absence of good faith on the Pfs part

Insufficient to show lack of good faith

o

Delay in suingo

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 Cos imagethis 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 suebad publicity

Is there a meritorious claim?

o

Proven on aprima faciebasis

On the facts, claim was not in the interest of Co bec:

1)

There was no meritauditors report had no uncovered any wrongdoing on Faction As part (if atall, all the Dirs were liable)

2)

Not in interestCA 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 insteadBarrett v Duckettfollowed.

Significance - Shows how to apply the factors for each element of the test.


18/19

Over & Over Ltd v Bonvest Holdings Ltd [2010, SGCA]s 216A SDA

Facts Two companiesO&O and UFL (both private Cos) came together to form a joint venture (R Ltd) to run hotelin 30:70 shareholding.

Discussions all undocumented

After 10 yrs, O&O alleged tt family behind UFL (the majority)were diverting the hotels service contracts to Cos controlled by their family.

The majority wanted its other CoBHL (a public listed Co)to buy over UFLs stake in R Ltd. O&O consented, largely because it didnt 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 oppressivelyordered buyout of O&Os stake.

Reasoning/

Impt analysis

On legitimate expectations

-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 familiesCt 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 beginningthe 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 canbe construed as oppression

- But that single act would have to be extremely seriouseg. dilution of minoritys shares or very serious misappropriation.

Alleged acts of oppression

1) Diverting contracts away without consulting Board of R

- Contracts diverted werefor the strategic interest of Rbut 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 Hobsons choice wrt BHL taking over UFLs 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 capitalbreach 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 natureof business

Sim Yong Kim v Evenstar Investments Pte Ltd [2006, SGCA]s 254 Winding Up

Facts

Two brothers incorporated a CoEvenstarjust to hold their shareholdingin other companies.

S claimed tt M promised him he would be allowed to withdraw from the Co. at any timesubj to M having first right of refusal over Ss 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

HELD Majority (family behind UFL and BHL) had acted oppressivelyordered buyout of O&Os stake.

Reasoning/

Impt analysis

No loss of substratum

- S had acquiesced to M using Evenstar to hold shares in other investmentshence S could not allege loss of substratum

Sheraton Towers case


19/19

No breakdown in mutual trust

- S did not play any role in managementso S could not be said to be critical of Ms 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 Ms assurance?S said at trial tt M wanted a first right of refusal. This meant tt M had no obligationto 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 Ss legitimate expectations when he refused to buy S out at a reasonable price.

On the relationship btw s216 and s54

- Distinct but greatly overlappingthe 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 Ms 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 s257make 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 sharebuyout.

Significance - 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 anassurance to buy the minority out when latter wanted to exit.

6. minority protection

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