Corporate Shareholder Disputes in Singapore: Minority Oppression, Breach of Director’s Duties, Winding Up
By Ronald JJ Wong
Introduction
We have handled many shareholder dispute matters in the course of our dispute resolution practice. Here, we break down the common scenarios where shareholders fight and end up in court, and the legal issues regarding the same.
Types of Shareholder Structures in Shareholder Disputes
Broadly, one way to understand the taxonomy of corporate shareholder disputes would be in terms of the shareholder structure:
Where a minority shareholder (one who is outvoted, outnumbered, or outpowered) is oppressed by the majority shareholder(s). While the term ‘minority’ is used, it is not strictly a matter of whether a shareholder has shares of less than 50% of the total shareholding. The court would consider the actual voting power based on the facts, including the terms of the company’s constitutional documents.
Where blocs of shareholders are at a deadlock or have had their relationship broken down.
Types of Wrongs or Scenarios Which Warrant a Legal Remedy
Another way to understand the taxonomy of corporate shareholder disputes would be in terms of the type of wrongs or scenarios recognised in Singapore law to warrant a legal remedy.
Minority oppression amounting to commercial unfairness.
This gives rise to a minority oppression claim under section 216 of the Companies Act.
The possible typical remedies would be a buy-out of the minority’s shares or winding up.
Breach of director’s duty under the Companies Act (e.g. section 157) or equitable fiduciary duties. E.g. misappropriation of company assets, customers or opportunities.
Typically, this gives rise to a claim by the company against the directors (including shadow directors) or fiduciaries.
Alternatively, shareholders may commence a statutory derivative action under section 216A of the Companies Act. This is often used to get the shareholder-director to negotiate a buyout settlement.
Scenarios which give rise to ‘just and equitable grounds’ for winding up the company (Grimmett, Andrew and others v HTL International Holdings Pte Ltd (under judicial management) (Phua Yong Tat and others, non-parties) [2022] SGHC 137 at [58]):
loss of substratum of the company: main objects for which the company was set up can no longer be achieved;
deadlock in the management of a company;
where the company is in truth a quasi-partnership, and there has been a breakdown of trust and confidence between blocs of shareholders;
where the company’s business had been carried on in a fraudulent manner;
where there is a loss of confidence in the directors on account of their lack of probity in the conduct and management of the company affairs;
a shareholder has been excluded from management in breach of an understanding by the other shareholders.
Breach of shareholders’ agreement e.g. failure to provide capital in accordance with the agreement, breach of share restriction terms, breach of exit mechanism terms, or breach of a restrictive non-compete covenant.
In an international arbitration we handled, the seller of a significant stake in the company allegedly went on to run competing businesses in breach of the share sale agreement.
In another matter, we advised a client who was a 50-50 shareholder and director in deadlock with his other shareholder-director. We advised the client to navigate a process to end the deadlock by utilising certain terms of the shareholders’ agreement to force an exit and/or mount a claim in breach of agreement with the aim towards negotiating an exit.
Disputes arising from mergers and acquisitions transactions. E.g. breach of an agreement to transfer shares or breach of representations and warranties in relation to a share sale.
Our lawyers have handled matters where the purchaser of a business alleged significant breaches of representations and warranties concerning the financial and other conditions of the business and its assets.
We have also handled cases where payment tranches failed to be paid in respect of a sale of shares or business.
Scenarios Which May Constitute Minority Oppression: Commercial Unfairness
The Singapore Courts have held that actionable minority oppression is where there is commercial unfairness, that is, a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect.
The Courts have held the following scenarios as possibly constituting minority oppression, although the specific circumstances in each case always have to be considered holistically:
Exclusion from management of the company;
Amendment of constitutional documents to deprive the minority of certain rights;
Dilution of shareholding contrary to implied understanding;
Clear and egregious misappropriation of moneys contrary to an implied understanding;
Serious mismanagement although usually coupled with circumstances which favour the majority’s personal interests;
Failure to distribute adequate dividends either in breach of legitimate expectations or agreement, or in circumstances where the majority is able to extract benefits for themselves in other ways;
Majority advance their personal interests.
In certain circumstances, a strategic and tactical setup play would be required in order to obtain sufficient information and evidence to successfully mount a claim or pursue the relevant objectives. Often, this involves obtaining access to financial and other information of the company. Depending on the position that the shareholder may have in the company, the constitutional documents, and the terms of any shareholders’ agreements, a minority shareholder may be entitled to certain information, books and records of the company.
Legal Remedies
The legal remedies available vary depending on the type of scenario and nature of the claim or cause of action pursued.
In breach of duty and statutory derivative action cases, the remedies sought typically would be equitable compensation, account of profits, or an account and return or repayment of assets wrongfully taken.
In minority oppression cases, the remedies sought typically would be an order for a buy-out of the minority’s shares by another shareholder or by the company, variation or cancellation of impugned transactions, reduction of share capital of the company, or winding up of the company.
Issues Regarding Asset / Share Buy-Out Orders
Technical and complex issues regarding valuation of the shares arise if a buy-out is ordered. What would be the date of the valuation? What methodology would the valuation be done by?
The parties may by consent agree on the date of the valuation. However, where the parties dispute the appropriate date of the valuation, an interest in a going concern should be valued at the date on which it was ordered to be purchased.
This is however subject to the overriding requirement that the valuation should be fair on the facts of the particular case.
The acquisition date of the shares may be used where:
The company is not a going concern and the initial price is not based on an asset-backed value.
The oppressive acts commenced “from the very outset” when the shareholder acquired the shares.
The actual value paid by the minority shareholder at the acquisition date of the shares provides the best available objective valuation of the company.
The accounts of the company are in an unsatisfactory state, such that any eventual valuation will be disputed.
The date from which the oppressive acts started may be used where:
This enables the shares to be valued without the erosion of value to the oppressive acts. However, where the accounts are in an unsatisfactory state, such that a valuation exercise may generate further disputes as to the parameters of the valuation, the Court may decline to use this date.
It would ensure that the wrongdoing director-shareholders do not achieve the oppressive purpose.
The appropriate method of valuation for the shares depends on whether the company is a going concern.
If the company is a going concern, the appropriate valuation of the shares would be as a rateable proportion of the total value of the company as a going concern without any discount for the fact that the holding in question is a minority holding.
Alternatively, the appropriate valuation for a loss-making company or a company whose assets have a readily realisable value independent of its business is as a rateable proportion of the net assets of the company at their break-up or liquidation value.
Where appropriate, the Court may also make a restitutionary order if it is needed to remedy the commercial unfairness to the claimant minority shareholder. The restitution will be made to the company so that upon winding up, all its shareholders will receive the appropriate and due realization of their investment in the company.
Method of Valuation of Shares in Buy-Out Order
As to the valuation approach, this is usually in the domain of financial accounting experts. Typically, 3 different approaches are considered:
Market valuation approach: involves comparing the business / shares with comparable business / shares for which market price information is available;
Income approach, under which there is the Discounted Cash Flow (DCF) approach: involves projecting future cash flows on certain assumptions, applying a discount to future cash flows, and then converting it into present value; and
Cost approach: in the corporate context, it would be the net asset value, which would usually apply only if the company is not a going concern.
Shareholders’ Agreements May Mitigate Lengthy and Complicated Shareholder Disputes
It is especially important for minority shareholders and investors to have a comprehensive and properly negotiated shareholders’ agreement. Absent that, the rights of minority shareholders are otherwise usually scant compared to what would go into a shareholders’ agreement. Under general law, the majority shareholder would by default have majority voting power and thus other rights.
1. Protection of Minority Rights
A shareholders' agreement can outline specific rights and protections for minority shareholders. This may include provisions related to voting rights, information access, and other safeguards to ensure that minority shareholders are treated fairly.
2. Exit Mechanisms
The agreement can include provisions for exit strategies, such as buy-sell agreements or drag-along/tag-along rights, put-and-call options with various conditions and scenarios envisaged. This helps protect minority shareholders when a majority shareholder wants to sell their stake or when the minority shareholder wishes to exit.
3. Dispute Resolution
In the event of disagreements or disputes among shareholders, the agreement can establish a framework for resolution. This might involve mechanisms like mediation, arbitration, or other dispute-resolution processes to avoid costly legal battles. Alternatively, mandatory use of the exit mechanisms or a winding up.
4. Decision-Making Processes
Clearly defining decision-making processes and the scope of authority for the board of directors can help ensure that minority shareholders have a say in important company matters. This can include specifying certain decisions (typically known as ‘reserved matters’) that require the approval of a certain percentage of shareholders.
5. Preventing Unfair Treatment
The agreement can include provisions to prevent unfair treatment of minority shareholders, such as restrictions on dilution of their ownership stakes without their consent.
6. Information Rights
Minority shareholders may negotiate for specific rights to access company information, financial records, and other relevant data to ensure transparency and accountability.
7. Dividend Policies
The agreement can address how dividends are distributed, ensuring that minority shareholders receive their fair share of profits. Absent that, there is no default rule that mandates dividend distribution.
8. Transfer of Shares
Restrictions on the transfer of shares can be outlined in the agreement to prevent unwanted changes in ownership or to ensure that any transfer adheres to specific conditions.
9. Appointment of Directors
Minority shareholders may negotiate an entitlement to representation on the board of directors, or even observer rights, to ensure their interests are considered in the board decision-making processes.
10. Non-Compete and Confidentiality
The agreement can include clauses preventing shareholders, including minority ones, from engaging in activities that could be detrimental to the company or disclosing sensitive information.
Having a well-drafted and well-negotiated shareholders' agreement can help create a more stable and predictable environment for all shareholders, reducing the risk of disputes and especially protecting the rights and interests of investors and minority shareholders within the company.
Conclusion
We have successfully advised and acted for various clients in corporate shareholder disputes.
In some cases, we have assisted clients in obtaining a share buy-out order and worked with financial accounting experts to navigate the appropriate valuation.
In some cases, we have assisted clients in winding up the company so as to allow the shareholders to finally part ways and unlock the value in the company.
We have also assisted clients in pursuing claims, and also defending claims, in breach of director’s and fiduciary duties. In other cases, we have advised and acted for claimants on breaches of share sale agreements, breach of representations and warranties, and breach of restrictive covenants.
Should you require assistance in any corporate shareholder disputes, please feel free to contact our team.
Ronald JJ Wong, Deputy Managing Director: ronald.wong@covenantchambers.com
Stuart Peter, Senior Associate: stuart.peter@covenantchambers.com