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Shareholders' Agreements and Minority Oppression

8 May 2013

Federal Court rules breach of shareholders' agreement does not amount to minority oppression.


It is a common practice for commercial men to enter into shareholders' agreements to regulate the terms of their respective participation as shareholders in the companies (more often than not special purpose vehicles) which they have incorporated to carry out their joint ventures or projects. Shareholders' agreements tend to be very comprehensive legal documents, containing detailed provisions covering various aspects of the affairs of a company, including but not limited to shareholding structure, management, composition of board of directors, profit-sharing, quota for meetings, rules governing decision-making, deadlock provisions etc, which are worked out after careful negotiation and agreement between the shareholders of the company.

There are various reasons why shareholders' agreements are entered into. For example, commercial men dealing at arm's length wish to have the terms of their cooperation or joint venture clearly and properly recorded to avoid any future disputes, particularly when they are working together for the first time and are not familiar with each other. One important reason is that shareholders' agreements are regarded as necessary to safeguard and protect the interests of minority shareholders of the company - the agreement may for example confer upon the minority shareholders a right to appoint a specific number of directors to participate in the management of the company, or provide that the quorum for all board meetings must consist of at least one director nominated by the minority shareholders. 

A serious breach or disregard of the terms of a shareholders' agreement may result in the interests of the minority shareholders being seriously prejudiced. For example, if the shareholders' agreement between A (majority shareholder) and B (minority shareholder) provides that B shall be entitled to appoint at least one director, and all resolutions of the company must be passed by at least one director appointed by B, but the directors of A then pass a resolution to remove B as a director and then pass another resolution declaring that B shall not be entitled to participate in or question the day-to-day management of the company, such breaches of the shareholders' agreement by A would surely amount to oppression of B as a minority shareholder, as B would have been forced out of the management of the company in breach of its legitimate expectation of management participation. 

It therefore comes as a surprise that the Federal Court, in the recent case of Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors and another appeal [2013] 2 MLJ 297, FC, has decided that breaches of a shareholders' agreement cannot be a basis for bringing what is commonly referred to as a "minority oppression" petition under section 181 of the Companies Act 1965. 

Section 181 of the Companies Act 1965 is a provision which allows the court, on the application of an aggrieved shareholder, to make such orders as it thinks fit to remedy any oppression caused where:-

(a) 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 of the shareholders of the company or in disregard of the applicant's interests as shareholder of the company; or

(b) that some act of the company has been done or is threatened or that some resolution of the shareholders has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the shareholders (including the applicant).

According to the Federal Court in Jet-Tech at para [37], a complaint under section 181 of the Act must be confined to matters relating to the affairs of the company. The Court was of the opinion that shareholders' agreement and breach of the same "clearly are not matters relating to the affairs of the company. They are private matters enforceable by the parties to the shareholders agreement". 

With respect, it is submitted that the very brief reasoning of the Federal Court in Jet-Tech on such an important area of company law leaves a lot to be desired. In particular, it is difficult to accept the proposition that serious breaches of the terms of a shareholders' agreements "clearly are not matters relating to the affairs of the company". 

As stated above, shareholders' agreements almost always contain detailed and substantial provisions governing and regulating the rights and duties of the shareholders' vis-a-vis the affairs of the company (e.g. shareholding structure, management, rules governing decision-making etc). In most if not all situations, shareholders can be said to have legitimate expectations to participate in the management of a company based on the rights expressly conferred upon them by such shareholders' agreements (such as the right to appoint directors and participate in decision-making). In this regard, support can be found in the case of Re Phoneer Ltd [2002] 2 BCLC 241, where the court held that the shareholders' agreement between the parties was an agreement which related to the conduct of the affairs of the company, as well as the manner in which the affairs themselves would be regulated, and the breach thereof was a breach of the petitioner's legitimate expectations which amounted to oppression.

The Federal Court in Jet-Tech did not explain how breaches of a shareholders' agreement can be effectively "enforced" by a minority shareholder. Bearing in mind that serious breaches of a shareholders' agreement may lead to a complete breakdown in the relationship of trust and confidence between the shareholders, how can the shareholders' agreement by itself, which is a contractual agreement between the parties, provide an effective remedy to the minority shareholder? Specific performance of the shareholders' agreement will be meaningless when the parties have fallen out, as the shareholders cannot be forced to work together. If the agreement does not contain buy-out provisions in the event of deadlock, the minority shareholder may find itself trapped in the company, unable to exit the company as the majority shareholder is unlikely to agree to buy out the minority shareholder's shareholding on fair and reasonable terms. Further, if the minority's action is one for breach of contract simpliciter, the court will have no power to grant any of the relief provided under section 181 unless the shareholders' agreement expressly provides for it, which is unlikely in practice. 

It should be noted that the Federal Court in Jet-Tech had referred to the decision of Kang Hwee Gee J in Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors [1999] 3 MLJ 262 in support of its reasoning that breaches of a shareholders' agreement do not amount to oppression. However, in Beh Chun Chuan, the Court at pages 268 and 269 had recognised that the breaches of a shareholders' agreement could amount to oppression if the provisions of such shareholders' agreement were expressly incorporated into the articles of association of the company, referring to the decisions of the English High Court in Re A & BC Chewing Gum Ltd; Topps Chewing Gum Inc v Coakley & Ors [1975] 1 All ER 1017 and the decision of the Singapore Court of Appeal in Teo Choon Mong Frank v Wilh Schulz Gmbh & Anor [1998] 2 SLR 529. However, this point was not addressed by the Federal Court in Jet-Tech, and it is not clear whether this view was endorsed by the Federal Court. 

On the face of it, the Federal Court in Jet-Tech seems to have made a sweeping statement to the effect that breaches of shareholders' agreement will never amount to oppression within the meaning of section 181 of the Companies Act 1965. It remains to be seen whether this decision would apply to cases where the terms of a shareholders' agreement are incorporated into the articles of association of a company. In the meanwhile, it is advisable for parties to shareholders' agreements to ensure that the material provisions of such agreements, especially those relating to management and decision-making, are clearly reflected by the articles of association so as to bring it within the scope of section 181 of the Companies Act 1965.


 
 


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