Case Note - SHARE BUY-OUT IN A DEADLOCK SITUATION
| Author | LEE Suet Lin Joyce LLB (Hons) (National University of Singapore), LLM (University of Virginia); Associate Professor, Nanyang Business School, Nanyang Technological University. |
| Citation | (2020) 32 SAcLJ 1189 |
| Date | 01 December 2020 |
| Published date | 01 December 2020 |
Perennial (Capitol) Pte Ltd v Capitol Investment Holdings Pte Ltd [2018] 1 SLR 763
The case note examines the significance of “unfairness” in a deadlock within a quasi-partnership being seen as stemming from the shareholder's inability to exit rather than a deadlock per se; and the interplay of “unfairness” so understood with a contractual exit option in the company's constitution.
1 An unhappy minority (and in a vast number of cases it is the minority) who desires a clean break from their company sometimes seeks the law's assistance. The Singapore Companies Act1 has two provisions, namely s 216 (oppression action) and s 254(1)(i) (winding up on the just and equitable ground) which, if the grounds for the respective sections are established, provide statutory exit options for the minority either in the form of winding up or buy-out of the minority's shares.2
2 Prior to the Companies Act amendment in 2014,3 s 254 provided for only one remedy, namely, winding up. The amendment introduced a new s 254(2A)4 which provides:
On an application for winding up on the ground specified in subsection (1)(f)[5] or (i), instead of making an order for the winding up, the Court may if it is of the opinion that it is just and equitable to do so, make an order for the interests in shares of one or more members to be purchased by the company or one or more other members on terms to the satisfaction of the Court.
3 To put the two statutory exit options into context, it is observed that a minority shareholder has other means to exit the company, which includes a buy-out provision in the company's constitution or shareholders' agreement. It is also not uncommon in the period leading up to litigation that the majority shareholder makes an offer to buy the minority's shares. In other words, there may be a contractual exit option without the need to resort to the two statutory exit options.
4 While Singapore's Court of Appeal in Ting Shwu Ping v Scanone Pte Ltd6 (“Ting Shwu Ping”) was the first to consider and clarify the ambit of a shareholder's right to apply for a “just and equitable” buy-out under s 254(2A), Perennial (Capitol) Pte Ltd v Capitol Investment Holdings Pte Ltd7 (“Perennial”) followed closely on its heels. The Court of Appeal in Perennial had occasion to decide the extent to which the principles laid down in Ting Shwu Ping applied in a deadlock within a quasi-partnership where there was a contractual exit option in the company's constitution.
5 The case concerned a dispute between joint venture partners, P and C, in three companies (collectively to be referred to as “the companies”). The companies hold and manage a large integrated development project (“the Capitol Project”). P and C each held 50% of the shares in all three companies. Each of the companies' articles of association contained an Art 22, which provided that if any member desired to transfer their shares, they had to offer them to the existing members of the company at a price to be agreed upon by the member and the directors, or if there were a difference in price, at a fair value
6 There were many disputes between P and C. P applied to wind up the companies on the “just and equitable” ground pursuant to s 254(1)(i). According to P, the Capitol Project had been founded on a quasi-partnership based on mutual trust and confidence. As the relationship of mutual trust and confidence had broken down, they were no longer able to work together to manage the Capitol Project. P had submitted that it would be “just and equitable” for the court to order a buy-out under s 254(2A).
7 The High Court found the relationship between the shareholders was akin to a quasi-partnership built on mutual trust and confidence. The breakdown of relations precipitated a deadlock which stalled the Capitol Project. The High Court held that any unfairness was negated by Art 22 since it allowed P an exit mechanism to escape the unfairness. Kannan Ramesh J had also concluded that P's true objective was not to wind up the companies, but made the application to circumvent Art 22 in order to obtain a buy-out on their terms.
8 On appeal, the Court of Appeal held that notwithstanding P and C being deadlocked in a quasi-partnership, the existence of Art 22 precluded P from relying on the just and equitable ground to wind up the companies; and whether the winding-up application was an abuse of process is closely connected with the issue of whether the applicant was entitled to obtain a winding-up remedy.
9 Judith Prakash JA, who delivered the grounds of decision of the Court of Appeal, reiterated that unfairness is the foundation of the court's jurisdiction under s 254(1)(i)8 and that it is a jurisdiction permitting the court to superimpose equitable considerations to the exercise of legal rights.9 The Court of Appeal had accepted the High Court's finding that the parties' relationship was a quasi-partnership and the breakdown in trust and confidence between the shareholders precipitated a deadlock.
10 In its earlier decision Chua Kien How v Goodwealth Trading Pte Ltd,10 the Court of Appeal had held: “If the only two directors of
11 What is meant by “deadlock” is not entirely clear from the cases. In most cases the courts will hold that there is no deadlock if a legal means exists to get decisions made, using some procedure under either the company's constitution or the general law.12 What appears from early jurisprudence is that an impasse in the corporate decision-making process of a quasi-partnership, which cripples the company's business, is in itself sufficient basis to wind up the company.
12 In Chow Kwok Chuen v Chow Kwok Chi13 the Court of Appeal had wound up a group of family companies14 which presented an actual deadlock because the relationship between all three brothers had deteriorated to the point where no two of them could agree on anything regarding the companies' operations. Chao Hick Tin JA had explained the court's decision to wind up the family companies as follows:15
We also recognise that there is no lack of probity among the three brothers, but there is nevertheless a practical deadlock in the management due to the brother directors' conduct, which, because of their acrimonious relationships, tended to be irrational, emotional, unreasonable and non-objective. Their private affairs were inextricable from the conduct of the company's business because they are incapable of interacting civilly and separating their personal hostility from their business obligations … Indeed, the acrimonious situation was equally created by all three brothers, with the result that now the majority of the family members want to have a clean break from each other. Given that the brothers have no desire to co-operate with each other and that all the siblings, other than Chuen, want the Companies wound up so that their assets may be liquidated and each sibling can deal with his or her share as they wish, we see little reason to keep the Companies a going concern and to force the siblings to work together when they really cannot.
13 The Court of Appeal in Perennial had referred to its own decision in Sim Yong Kim v Evenstar Investments Pte Ltd16 (“Sim Yong Kim”) for the principle that “in situations of deadlock between the shareholders of a company, unfairness stems from the shareholders' inability to exit rather than the deadlock per se” [emphasis in original].17
14 Sim Yong Kim concerned a minority shareholder who was treated unfairly by the controlling shareholder, who also managed the company.18 In that case, SYK was a minority shareholder in Evenstar Investments Pte Ltd while his older brother, SYT, held the rest of the issued share capital. SYT had assured SYK that if he wanted to withdraw his investment from Evenstar Investments Pte Ltd, SYT would buy him out. SYT did not honour his promise although he did eventually offer an unreasonable price of SYK's shares. The Court of Appeal granted the winding-up order under s 254(1)(i). The basis of the court's decision was that SYK had “legitimate expectation” that SYT would buy out his shares on reasonable terms19 and SYT's breach of promise had “put an end to the basis upon which the [brothers] entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association”.20 In arriving at its decision, the court in Sim Yong Kim had referred to Lord Hoffmann's carefully worded passage in O'Neill v Phillips21 (“O'Neill”) in which his Lordship had opined: “But I think that one useful cross check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed.”22
15 O'Neill was decided at a time when the UK “unfair prejudice” remedy23 was often seen as dispensing “palm tree justice”24 and Lord Hoffmann thought it was important that in the commercial
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