Independent State of Papua New Guinea v PNG Sustainable Development Program Ltd

JudgeVinodh Coomaraswamy J
Judgment Date02 April 2019
Neutral Citation[2019] SGHC 68
CourtHigh Court (Singapore)
Docket NumberSuit No 795 of 2014; Originating Summons No 234 of 2015
Published date13 December 2019
Hearing Date16 April 2018,14 August 2018,27 April 2018,09 April 2018,24 April 2018,30 April 2018,05 April 2018,20 April 2018,17 April 2018,19 April 2018,11 April 2018,15 August 2018,12 April 2018,03 April 2018,18 April 2018,13 April 2018,10 April 2018,04 April 2018
Plaintiff CounselAlvin Yeo SC, Koh Swee Yen, Wendy Lin, Joel Quek and Sean Poh (WongPartnership LLP)
Defendant CounselPhilip Jeyaretnam SC, Mark Seah, Shobna Chandran, Chua Weilin, Andrea Gan, See Kwang Guan and Ashwin Nair (Dentons Rodyk & Davidson LLP)
Subject MatterCharities,Charitable trusts,Essential requirements,Companies,Memorandum and articles of association,Effect,Members,Rights,Contract,Breach,Contractual terms,Implied terms,Formation,Certainty of terms
Citation[2019] SGHC 68
Vinodh Coomaraswamy J:

This is a dispute about the corporate governance of the defendant, PNG Sustainable Development Program Ltd (“PNGSDP”). PNGSDP was incorporated in Singapore in October 2001 with two shareholders: (a) the Independent State of Papua New Guinea (“the State”); and (b) BHP Minerals Holdings Pty Ltd (“BHP”). By this action, the State seeks to establish the existence of and enforce rights of control and oversight which it claims to have over PNGSDP’s operations and assets.

The State and BHP incorporated PNGSDP to be the vehicle to which BHP would divest its shares in a mining company called Ok Tedi Mining Limited (“OTML”). OTML operates a highly profitable mine in the Western Province of Papua New Guinea. The parties intended PNGSDP to hold BHP’s shares in OTML and to apply the income derived from those shares to advance a programme of sustainable development in Papua New Guinea.

The corporate governance of PNGSDP was uneventful from 2001 until 2011. In 2012 and 2013, however, PNGSDP made several material changes to its corporate governance framework. The effect of these changes was to dilute the State’s powers of control and oversight over PNGSDP. The State brings this action to challenge and reverse those changes.

The State’s pleaded case is that, quite apart from the agreement recorded in the suite of written contracts which were executed on the occasion of PNGSDP’s incorporation, there exists an oral agreement that: (a) the State has certain rights of control and oversight with regard to PNGSDP; (b) those rights cannot be altered without the State’s consent; and (c) the State is entitled to enforce those rights directly against PNGSDP.

Underlying the State’s case is the broader argument that it could never have agreed when it established PNGSDP that PNGSDP could be free to cast off unilaterally the State’s rights of control and oversight. The directors of PNGSDP may be the guardians of its corporate interests, but those narrow corporate interests are subsumed in the broader imperative of improving the lives of the people of Papua New Guinea through a programme of sustainable development. And the State, as the democratically elected government of that people, is the ultimate and legitimate guardian of that broader interest. If PNGSDP’s case in this action is to be believed, BHP and the State intended to endow PNGSDP with such untrammelled freedom that it would have the power even to amend its own objects, to abandon the purposes for which it was established and to apply its considerable wealth to its own ends. According to the State, that simply cannot be.

PNGSDP, for its part, points out that BHP divested its shares in OTML as part of an immensely complex transaction which was documented with the assistance of sophisticated legal advisers in an suite of interlocking and interdependent written contracts. That suite of written contracts is exhaustive. The structure of the parties’ agreement simply left no scope for such a critical aspect of PNGSDP’s corporate governance framework to be left entirely undocumented in that suite of contracts and to be the subject instead of an oral agreement.

According to PNGSDP, everything that it did in 2012 and 2013 was done in accordance with that suite of written contracts. Although it is true that those written contracts clearly oblige PNGSDP to apply the income from the OTML shares to advance a programme of sustainable development in Papua New Guinea, the State’s right to hold PNGSDP to that obligation is also set out clearly – and exhaustively – in those written contracts. The common intention when PNGSDP was established was that it should eventually become a self-governing and self-perpetuating organisation modelled on the Ford Foundation. The changes to its corporate governance framework which PNGSDP effected in 2012 and 2013 – and which the State challenges in this action – is not a case of PNGSDP or its directors going rogue. It is just the next step in carrying into effect the common intention when PNGSDP was established.

Facts The Ok Tedi mine

The factual background to this dispute starts in 1976. That is when the State and BHP entered into a contract to develop the Ok Tedi mine. The Ok Tedi is a particularly rich gold and copper mine in the Western Province of Papua New Guinea. In accordance with that contract, OTML was incorporated as a Papua New Guinean company limited by shares. Its shareholding was split as follows:1

BHP 52%
The State 20%
Inmet Mining Corporation 18%
Mineral Resources Ok Tedi No 2 Limited 10%
OTML’s primary assets were and are the physical mine itself and a mining licence which gives it the right to exploit the mine until 2022.

The Ok Tedi mine was immensely profitable from the outset. It has consistently made, by itself, a substantial contribution to the gross domestic product of Papua New Guinea. However, being an open case mine, the mining activities there have caused significant environmental damage in the Western Province. BHP eventually became concerned about the economic and reputational cost of that damage. In late 2000, BHP expressed its intention to shut down the mine early, before its mining licence ended and well before the mine’s economic life ended.2 BHP communicated this intention to the State.

The Prime Minister of the State in late 2000 was Sir Mekere Morauta. Sir Mekere was not keen to close the mine.3 The State recognised that the mine had caused significant environmental damage and that it would cause even more damage as long as it was in operation. But it felt on balance that the mine should continue operating because of the significant economic benefits it brought to Papua New Guinea and to the people of the Western Province.4

In late 2000, OTML appointed NM Rothschild & Sons Ltd (“Rothschild”) to facilitate negotiations between all the relevant stakeholders on arrangements to allow BHP to exit from OTML while allowing the mine to continue operating.5 In June 2001, BHP entered into a merger with Billiton plc. The merged company came to be known as BHP Billiton Ltd (“BHPB”). Nothing material to this dispute turns on the merger. For convenience and except where necessary, therefore, I shall not distinguish between BHP and BHPB in the remainder of this judgment.

Negotiations proceeded apace for BHP’s exit from OTML between BHP, the State, OTML’s shareholders and OTML’s stakeholders. By the middle of 2001, negotiations had advanced to the point where parties had reached a broad, tentative consensus on key issues. That consensus is recorded in a document dated 29 June 2001 and titled “Heads of Agreement”.

The Heads of Agreement envisages: (a) BHP transferring 90% of its shareholding in OTML to a special purpose vehicle; and (b) the State releasing BHP from, and indemnifying BHP against, claims arising from all liability for the environmental damage caused by the mine. Because the parties had not yet arrived at a consensus on a number of other issues, the Heads of Agreement explicitly records that it is not legally binding.6

Negotiations continued. By October 2001, BHP’s exit plan was sufficiently concrete for the parties to take steps which were legally binding. The thrust of the exit plan was for BHP to gift its entire shareholding in OTML to a special purpose vehicle in return for: (a) the State releasing and indemnifying BHP in relation to liability arising from its operation of the mine; (b) the State guaranteeing that it would not prosecute BHP in connection with its operation of the mine; and (c) the State enacting legislation giving statutory effect to these key points.

PNGSDP was duly incorporated on 20 October 2001 in Singapore to be the special purpose vehicle to whom BHP would divest its OTML shares. Singapore was chosen for a number of reasons: (a) because of its robust corporate governance regime; (b) because of its relative tax advantages; and (c) because Singapore law allows a company’s liability to be limited by guarantee.7

On 20 December 2001, the State duly passed the Ok Tedi Mine Continuation (Ninth Supplement) Agreement Act 2001 (PNG) (the “Ninth Supplement Act”). The Ninth Supplement Act gave the force of law in Papua New Guinea to the key elements of BHP’s exit plan.8

PNGSDP’s corporate constitution

It is common ground that PNGSDP’s corporate constitution is set out in three documents: (a) its Memorandum of Association (“the Memorandum”); (b) its Articles of Association (“the Articles”); and (c) a document called the “Program Rules” which is annexed to and forms part of the Articles.

PNGSDP’s Memorandum is typical of the memorandum of association of a company limited by guarantee. It simply sets out in broad terms the objects and powers of PNGSDP.

PNGSDP’s Articles, too, are for the most part typical of the articles of association of a company limited by guarantee. The Articles set out in some detail the internal governance framework of PNGSDP. This includes, amongst other things, the procedures for: (a) appointing members; (b) appointing directors; and (c) holding and conducting meetings of both members and directors. In particular, Article 24 provides that BHP has the right to appoint three of PNGSDP’s six directors (the “A” directors) and that three agencies of the State identified in Article 24 by name have the right to appoint one director each (the “B” directors). The provisions of the Articles, including Article 24, feature heavily in this dispute. I shall discuss them in greater detail as they become relevant.

Unlike the Memorandum and the Articles, the Program Rules are a bespoke document, unique to PNGSDP. The purpose of the Program Rules is to govern how PNGSDP’s income – primarily the dividends declared on its OTML shares, but also its investment income, is to be managed and applied. As a matter of form, the Program Rules are annexed to the...

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