FOR BETTER OR FOR WORSE — THE STATUTORY DERIVATIVE ACTION IN SINGAPORE

Date01 December 1995
Published date01 December 1995

Managerial accountability (or the lack of it) to shareholders has been described as “one of the major socio-legal problems of the twentieth century”1. That such a comment has come to be made seems inevitable given the fact that common law courts have consistently upheld, in the absence of fraud, the managerial authority of the Board against the shareholders in general meeting. The Directors have almost absolute authority to decide what is, in their opinion, in the commercial interests of the company. The concerns of shareholders are obvious in public companies where, for the sake of economic efficiency and as a result of the development of the large public company as a capitalist venture, a divorce occurs between the specialist management2 and the owners/investors. But the problem cannot be said to be non-existent in smaller private companies. On the contrary, the position of the private minority shareholder could even be said to be worse. Here, the individual minority shareholder is concerned not only with managerial accountability but also with majority shareholder accountability. Unfortunately, the task of the single concerned shareholder, in his noble quest to ferret out corporate wrongdoing3, whether committed by the elected directors or his fellow shareholders, has never been a bed of roses. He has faced monumental procedural obstacles when the wrong is classified, not as a wrong to him personally, but as a wrong to the corporation. Although technically, a wrong to the company is a wrong that should affect all shareholders alike4, the problem is usually couched as one the minority shareholder has to bear, as some possibility of redress lies with the majority in general meeting5.

The problems confronting the minority or perhaps more accurately, the individual6 shareholder, has, in most countries with legal roots in the English system, largely been attributed to the operation of that infamous7Rule in Foss v Harbottle8.

The Rule in itself is logical — where a wrong has been perpetrated against the company, than the proper person to bring an action against the wrongdoers is the company but where the alleged wrong is a transaction which might be made binding on the company and on all its members by a simple majority of the members, then no single shareholder is permitted to maintain an action in respect of that matter9. The Rule can be said to achieve what is socially and economically desirable. A wrong committed against the company would affect all shareholders alike and confining the action to a corporate (as opposed to a personal) action obliterates the possibility of multiplicity of actions and wasteful litigation. Also, as there is seldom unanimity in business views, and because the company is in reality an embodiment of the collective investments of the shareholders, the majority shareholder opinion ought to hold sway. It cannot be denied that the Rule does give to the Board some peace of mind in going about its business as it eliminates potentially vexatious actions commenced by pesky minority shareholders who do not know any better10. The Rule can therefore be said to preserve entrepreneurship and boldness in business decisions.

The problem however, is that the company, though possessed of legal status, is only able to act through its human agents (namely the Board of Directors and the General Meeting). These human factors could themselves be, or at least the majority in these organs, are, the very ones guilty of the corporate wrongdoing, which would include fraud, unfair and self dealing and mismanagement. “Misconduct in the affairs of a company may be passive conduct, neglect of its interests, concealment from the minority of knowledge that is material”11. By vesting the right to commence a corporate action on the Board of Directors, or in their default, on the General Meeting12, means that it is nigh on impossible for an individual minority shareholder to bring suit, as obviously the wrongdoing directors would never authorise such a suit and if the majority shareholders are also the majority directors, in cohorts with them, under their influence or simply apathetic, the individual shareholder has reached a legal cul-de-sac. No doubt as with most legal rules, exceptions13 exist to allow shareholder litigation, but the consensus seems to be that these exceptions are themselves so fraught with difficulties that they are of little help.

Legislature has attempted to alleviate some of the minority shareholder’s problems by statutorily providing for specific remedies in situations of unfair prejudice or oppression14. These provisions have, as a general common denominator, the aim of redressing broad wrongs amounting to oppression or prejudice committed against the shareholder himself. In some jurisdictions, this oppression/unfair prejudice remedy is augmented by a statutory derivative action15. In Australia, the Companies and Securities Law Review Committee16 proposed the enactment of a statutory derivative action and in Singapore, the statutory derivative action was included as part of the protection-for-the minority package by the 1993 amendments to the Companies Act.

This paper is primarily concerned with the derivative action. It is proposed that the new derivative action provisions in Singapore be examined against the background of existing remedies for the minority shareholder and in view of the expressed justification for the statutory derivative action in Singapore and in various jurisdictions. The relationship between the derivative action and oppression remedy in section 216 will also be considered. The Canadian experience with the derivative remedy will be drawn upon mainly in this analysis and, where appropriate and relevant, a comparison will be made with the New Zealand provisions.

SHAREHOLDERS’ RIGHT OF ACTION PRIOR TO THE 1993 AMENDMENTS

The position of the minority shareholder wishing to commence an action in Singapore pre-1993 was broadly parallel to that currently existing in England and in Australia. There were four17 possibilities of action available to the litigious shareholder: 1) a personal action in respect of the infringement of a personal right; 2) a common law derivative action brought on behalf of the company in respect of a cause of action belonging to the company18; 3) an action to enforce a statutory remedy for unfair/oppressive conduct of the company’s affairs19; and 4) an application for winding up of the company by the court including on the “just and equitable” ground20.

It is not proposed to discuss avenue (4) at all although it must be said that the remedy of winding up is generally thought of as being rather a drastic measure, of corporate governance or otherwise. Although the situations in which the court may order a winding up are many, the fact that the company is successful and prosperous would usually affect the court’s decision. Hence, the order would only be given if there is no other practical remedy, for example where animosity is rife amongst all parties so that carrying on would be futile. Indeed, it has often been said of the provision that the cure is worse than the malady.

Shareholder Litigation under Common Law

The difficulties of distinguishing between what constitutes a personal right, the infringement of which would be the proper subject of a personal action, and what is properly categorised as a corporate right which would then be the subject of a derivative action, are legion21. The orthodox view is that a right can only be personal if the plaintiff shareholder(s) has a peculiar interest, as opposed to the general interest of the shareholders as a whole, in its enforcement. Where all the shareholders are similarly affected, it cannot have been a personal right that had been infringed since the body of shareholders as a whole is generally thought of as being synonymous with the company. Much of the difficulties encountered in the attempt to draw a clear line between corporate and personal rights can perhaps be attributed to an over-emphasis on the concept of the separate legal personality of the company. This has led to a judicial fixation with the idea that all wrongs committed by directors and officers run exclusively to the company22 and all duties are owed by them to the company and the company alone.

The problem seems less acute in Australia where the judges are apparently not encumbered by such a “blind spot”23. Australian judges have consistently brushed aside the common law problems of Foss v Harbottle by enhancing the personal rights of shareholders24, and usually without citation of authority25. The position taken in Australia appears to be that where the wrong affects each of the members as separate individuals and not as a single body of shareholders, it can be classified as a personal right even if all the shareholders are affected alike26.

A similar judicial reluctance to be thwarted by the web woven by Foss v Harbottle can apparently also be found in New Zealand27. Whether Singaporean judges would treat these problems as robustly as the Australians and New Zealanders remains to be seen as cases involving such intricate issues have been thankfully(?) few.

The common law derivative action developed as an exception to the rule in Foss v Harbottle, in the “slippery”28 form of the fraud on the minority exception. For the exception to apply, the shareholder has to establish that the wrongdoers were fraudulent (in the wider equitable sense so as to include a breach of fiduciary duty) and that the wrongdoers were in control of the company29. Where, however, the wrongdoing is ratifiable by a majority of the shareholders in general meeting, it cannot be the subject of a derivative action. Whilst mere or even gross negligence or incompetence on the part of the controlling directors is insufficient to rouse the exception30, a shareholder was allowed to bring a derivative action where the directors or persons...

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