BTY v BUA and other matters

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 15 October 2018
• Neutral Citation: [2018] SGHC 213
• Plaintiff Counsel: Kelvin Koh, Niklas Wong, Nanthini Vijayakumar and Thara Gopalan (TSMP Law Corporation)
• Docket Number: Originating Summons No 829 of 2017 (Registrar’s Appeal No 298 of 2017), Summons Nos 3664 of 2017 and 4911 of 2017
• Date: 15 October 2018
• Hearing Date: 21 November 2017,27 October 2017
• Subject Matter: Scope,Stay of litigation,Arbitration,Mandatory stay under International Arbitration Act,Agreement
• Year: 2018
• Defendant Counsel: Suresh Nair and Bryan Tan (Nair & Co LLC)
• Court: High Court (Singapore)
• Citation: [2018] SGHC 213
• Published date: 29 December 2018

Vinodh Coomaraswamy J:

A joint venture company and its shareholders enter into a shareholders’ agreement. As stipulated in the agreement, the shareholders cause the company formally to adopt new articles of association in agreed form. The new articles restate several provisions found in the shareholders’ agreement. After several years pass, the relationship between the shareholders deteriorates. One of the shareholders alleges that the company has breached the articles and commences litigation against the company. The alleged breach of the articles would, if established, also constitute a breach of the shareholders’ agreement. The shareholders’ agreement contains an arbitration clause. The articles do not. Should the litigation be stayed in favour of arbitration?

The assistant registrar stayed the shareholder’s litigation. The shareholder’s appeal against that decision has come before me. I have allowed the appeal and permitted the shareholder’s litigation to continue. The company has, with my leave, appealed to the Court of Appeal against my decision. I now give the grounds for my decision.

The background The parties

The plaintiff in this litigation, ie the aggrieved shareholder, is an investment fund. It is a wholly-owned subsidiary of a private-equity firm.¹ I shall refer to the private equity firm as “the plaintiff’s parent”.

The defendant in this litigation, ie the joint venture company, has only two shareholders: (a) the plaintiff holding under 50% of its shares; and (b) a company which I shall call “the majority shareholder” holding over 50% of its shares.²

The majority shareholder is a listed company.³ Its business is to provide products and services to a particular industry worldwide.⁴ The defendant is the holding company under which the majority shareholder consolidated and holds an entire arm of its worldwide business.⁵ The plaintiff’s parent used the plaintiff as its vehicle to make an investment in that arm.⁶

The plaintiff’s investment in the defendant

The plaintiff’s parent and the majority shareholder entered into negotiations over the investment in 2008.⁷ The two companies eventually signed heads of agreement in October 2009.⁸ The heads of agreement envisaged both companies establishing a joint venture company into which the majority shareholder would inject part of its business and in which the plaintiff’s parent would take a minority stake.⁹

The two companies duly incorporated the defendant as their joint venture company in December 2009.¹⁰ There was a third shareholder¹¹ of the defendant from a time soon after incorporation until several years ago.¹² But the third shareholder is not material to any of the issues which I have to decide on this appeal. I shall therefore treat the majority shareholder and the plaintiff as having been the only two shareholders of the defendant at all material times.

Five days after the defendant was incorporated,¹³ it entered into a shareholders’ agreement with its shareholders.¹⁴ As one would expect, the agreement governs the shareholders’ relationship inter se as joint venturers and also their relationship with the defendant as their joint venture vehicle. In addition, however, it governs the terms on which the plaintiff was to make its investment in the defendant. It is for this reason that the shareholders’ agreement bears the title “Investment Agreement”.

The Investment Agreement envisaged a period of time elapsing between its execution as a contract and completion of the plaintiff’s investment. It therefore obliged the parties to agree and enter into a number of “agreed form documents”¹⁵ between contract and completion. One of the agreed form documents was a fresh set of articles of association for the defendant. The Investment Agreement thus obliged the parties, as a completion requirement, to procure a shareholders’ resolution to be passed causing the defendant to adopt new articles in agreed form.¹⁶

Within five months of signing the Investment Agreement, the majority shareholder and the plaintiff duly passed a special resolution causing the defendant to adopt new articles (“the Articles”).¹⁷ In all material respects, the defendant remains governed by the Articles to the present day.

The key provisions

The Investment Agreement contains three key provisions which I shall describe before I turn to summarise the factual background. These key provisions: (a) regulate the composition of the defendant’s board; (b) stipulate that certain corporate matters require both shareholders’ consent; and (c) oblige the parties to arbitrate their disputes.

Composition of the board

Clause 12 of the Investment Agreement stipulates that the defendant’s board shall consist of no more than six directors. The majority shareholder is entitled to nominate three directors (who may be executive or non-executive). The plaintiff, as the defendant’s minority shareholder, is entitled to nominate two non-executive directors.¹⁸

At all material times, the defendant’s board has consisted of five directors: three directors nominated by the majority shareholder and two by the plaintiff. The Articles refer to the directors nominated by the majority shareholder as “the A directors” and to the directors nominated by the plaintiff as “the B directors”. I shall use the same terminology to refer to them in this judgment.

Clause 12 of the Investment Agreement is restated in Art 6 of the Articles.

Matters requiring both shareholders’ consent

Clause 11 of the Investment Agreement provides that the defendant may not carry out certain acts without the consent of both shareholders.¹⁹ The Investment Agreement calls these acts “Matters Requiring Consent”. A detailed list of the matters requiring consent is set out in Schedule 7 of the Investment Agreement.²⁰ Under para 8.1 of the schedule, “Adopting or approving the annual accounts” of the defendant is a matter requiring consent.²¹

The obligation in cl 11 of the Investment Agreement binds the shareholders as well as the defendant itself. Thus, cl 11.1 obliges each shareholder to procure that the defendant does not perform any matter requiring consent without the consent of the other shareholder. Further, cl 11.2 obliges the defendant itself not to carry out any matter requiring consent without the consent of both shareholders.²² The consent required by cl 11 must be in writing and can be given either by the shareholder itself or by one of its nominated directors.²³

Clause 11 of the Investment Agreement is restated in Art 61²⁴ of the Articles. That article prohibits the defendant from carrying out what it calls “Reserved Matters” without the consent of both shareholders:²⁵ 61. RESERVED MATTERS

None of the acts specified in Schedule 1 shall be carried out by [the defendant] without both [the majority shareholder’s] Consent and [the plaintiff’s] Consent … provided that to the extent that this would constitute an unlawful fetter on its statutory powers (for which purpose each paragraph of Schedule 1 shall be a separate and severable undertaking by it).

Schedule 1 of the Articles²⁶ sets out the list of reserved matters. It replicates²⁷ Schedule 7 of the Investment Agreement.²⁸ Thus, paragraph 8.1²⁹ of Schedule 1 classifies “adopting or approving the annual accounts” of the defendant as a reserved matter.

As in the Investment Agreement, the Articles provide that the shareholders’ consent required by Art 61 must be given in writing and can be given either by a shareholder itself or by one of its nominated directors.³⁰

The arbitration agreement

Clause 29.2 of the Investment Agreement is a paradigm arbitration agreement. It obliges the parties to arbitrate “[a]ny dispute … arising out of or in connection with this Agreement”:³¹

Any dispute, controversy or conflict arising out of or in connection with this Agreement including any question regarding its existence, validity or termination (a “Dispute”), shall be referred to and finally resolved by arbitration in Singapore and administered by the Singapore International Arbitration Centre (the “SIAC”) in accordance with the Arbitration Rules of the SIAC for the time being in force which rules are deemed to be incorporated by reference into this clause 29.

Clause 29.2 is not restated in the Articles.

The factual background to this litigation

In February 2016, the defendant tabled its accounts for the year ended 31 December 2015 (“the 2015 Accounts”) for approval at a meeting of its board of directors.³² It appears that the A directors were prepared to approve the 2015 Accounts. But the B directors expressed strong objections to substantial aspects of the accounts.³³

In April 2016 and September 2016, the defendant circulated revised versions of the 2015 Accounts to its directors.³⁴ The B directors expressed strong objections to substantial aspects of all of these versions too.³⁵

In December 2016, the defendant circulated yet another version of the 2015 Accounts and tabled that version for approval at a board meeting to be held later that month. The B directors took objection to this version of the 2015 Accounts too. Although the December 2016 board meeting went ahead as scheduled, it appears that this version of the 2015 Accounts was not put to a vote at that meeting.³⁶

On 29 March 2017, the defendant circulated to its directors a resolution in writing resolving to approve the 2015 Accounts.³⁷ It appears that the three A directors, comprising a majority of the board, duly signed the resolution in writing.³⁸ The two B directors refused to do so, repeating their objections.³⁹

Article 44 of the Articles requires any directors’ resolution in writing to be “signed by the majority of Directors being not less than are sufficient to form a quorum” for a physical board meeting.⁴⁰ Article 43.3 provides that the quorum for a physical board meeting is at least two directors comprising at least one A director and one...