REVERSE OPPRESSION AND THE RESIDUAL NATURE OF THE SHAREHOLDER'S COMMERCIAL UNFAIRNESS REMEDY

Date01 December 2015
Published date01 December 2015
AuthorZhong Xing TAN LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Sheridan Fellow, Faculty of Law, National University of Singapore.
Citation(2015) 27 SAcLJ 122

The question of whether a majority, rather than a minority, shareholder can access the corporate oppression or commercial unfairness remedy under s 216 of the Companies Act (Cap 50, 2006 Rev Ed) is not a mere technical issue. A deeper examination of this issue reveals the principle upon which access to the s 216 remedy is permitted: whether a shareholder is able to cure oppression through the means of self-help remedies. To this end, building on the recent Singapore Court of Appeal decision of Ng Kek Wee v Sim City Technology Ltd[2014] 4 SLR 723, this article suggests that s 216 is a residual remedy, and offers various justifications to support this. Further, various UK and Commonwealth authorities are harnessed to identify important exceptions to the residual nature of the s 216 remedy: where voting power is insufficient, neutralised, entirely circumvented or irrelevant. Ultimately, while a majority shareholder should only be allowed to claim for relief from “reverse oppression” in rare circumstances, it is suggested that a more nuanced and fact-sensitive inquiry into the locus of corporate power is necessitated on the facts of each individual case.

I. Introduction

1 Can a majority shareholder ever be oppressed by a minority? At first blush, the notion seems paradoxical. On the one hand, literally read, the relevant provision of the Singapore Companies Act1 governing corporate oppression (or, as Singapore courts have more recently preferred, “commercial unfairness”2), s 216, does not appear to preclude a claim for relief by a majority shareholder. The section simply states:

Personal remedies in cases of oppression or injustice

(1) Any member or holder of a debenture of a company or, in the case of a declared company under Part IX, the Minister may apply to the Court for an order under this section on the ground —

(a) that 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 members or holders of debentures including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or

(b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).

As noted by the Singapore Court of Appeal in the recent decision of Ng Kek Wee v Sim City Technology Ltd (“Sim City”),3 s 216 “states only that ‘any member … of a company’ may bring an action for relief under that provision; there is no further requirement that only members who are minority shareholders are so entitled”.4

2 Yet on the other hand, it seems to have been assumed that only minority shareholders should possess the relevant locus standi to bring a s 216 action. In referring to the UK equivalent of the s 216 remedy,5 one commentator has noted that it “is now firmly established as the remedy from which the minority shareholder derives his principal form of statutory protection, against a background in which majority rule is regarded as fundamental”.6 Indeed, the leading academic and practitioner texts, both locally and overseas,7 tend to classify the s 216 remedy (or its equivalent legislation in other jurisdictions) as a form of minority shareholder protection.

3 In light of the above, it is worthwhile to explore whether a majority shareholder is in fact precluded from invoking the s 216 remedy and, if not so, to identify the circumstances under which the s 216 remedy is available to majority shareholders. This endeavour is important for a number of additional reasons. Firstly, this issue has significant practical import. An entire decision may hinge on this point. In the High Court decision of Sim City Technology Ltd v Ng Kek Wee,8 it was held that the majority shareholder (with a 53.625% shareholding) had made out a case of commercial unfairness against the minority shareholder (with 15% shareholding).9 On appeal to the Court of Appeal, it is important to note that the minority shareholder (the appellant) did not challenge the High Court's findings of fact10 (which formed the substantive basis for its decision that there was commercial unfairness). The appeal was allowed primarily on the point of locus standi— in that the Court of Appeal found that the majority shareholder was precluded from bringing a s 216 claim11 (for the particular reasons discussed below).12 Hence, it is important to have clarity on this issue, as litigants may incur considerable expense in attempting to establish findings of fact, and in ventilating the substantive legal merits of their position in lower courts, before discovering at a later appeal stage that their choice of legal strategy — a s 216 claim — was never available to them in the first place. This is arguably particularly important in a s 216 claim, which unlike the statutory derivative mechanism under s 216A of the Companies Act, does not have a preliminary proceeding to determine whether a plaintiff would be granted leave to bring a statutory derivative action.13

4 Moreover, from an ex ante litigation strategy perspective, the potential availability of the s 216 remedy to majority shareholders (in certain circumstances) is a significant addition to their arsenal of legal weaponry, given the breadth of the court's remedial powers in such circumstances (including directions on the regulation of the conduct of the company's affairs,14 buy-out orders,15 and winding-up16). One can conceive of situations where a majority shareholder, despite holding a controlling interest, may seek legal advice on whether it can bring a s 216 claim. This is particularly pertinent in the corporate joint-venture context, where, for example, a minority shareholder with certain business expertise collaborates with a majority shareholder who provides funding for the business and leaves the day-to-day running of the company to the minority shareholder (or its representatives on the joint-venture company's board of directors). Sim City is an example of such a situation — where the minority shareholder sought out the majority shareholder to co-invest in his software and consultancy business, as he had plans to expand the business; and a joint-venture vehicle was incorporated pursuant to a joint-venture agreement.17 Despite his minority shareholding, he appeared to have day-to-day control of corporate affairs as group chief executive officer, chief technical officer and managing director of the joint-venture company (Singalab International Pte Ltd), as well as having vital positions in its various subsidiaries (including being managing director of Singalab Pte Ltd and chairman of Beans Factory Hong Kong Co Limited).18 Equally common is the situation where particular areas of management or decision-making are designated to the minority and majority shareholders, respectively (a practice designed to avoid operational deadlock in corporate decision making).19 In the above situations, as the majority shareholder has ceded a measure of operational (if not voting) control to the minority shareholder, there is at least some potential for minority shareholders (through their board representatives) to conduct part of the affairs of the corporate joint venture in a way that is prima facie unfair or prejudicial to the majority shareholders — and hence for majority shareholders to desire access to the s 216 remedy.20

5 Finally, from an academic perspective, it is important to seek clarity on the conceptual basis of extending the s 216 remedy to

majority shareholders. The authors of The Anatomy of Corporate Law: A Comparative and Functional Approach,21 a well-known text on the conceptual structure of corporate governance, locate the s 216 remedy (which they term the “oppression standard”) under the wider umbrella of legal constraints used to address the agency problem between majority controlling shareholders (as agents) and minority non-controlling shareholders (as principals)22— that is, as one of the minority protection strategies given the majority's decision-making power and potentially self-interested behaviour at the expense of the minority, whose welfare may be adversely affected.23 To pre-empt the discussion that follows, any extension of the s 216 remedy therefore must be justified by reference to the existence of a hitherto unrecognised reverse agency problem between minority shareholders (as agents) and majority shareholders (as principals); as well as by reference to the underlying purpose of the s 216 remedy and its place in the overall architecture of shareholder protection in corporate law. In essence, a clear principle must be articulated and fleshed out for situations where majority shareholders are permitted recourse to the s 216 remedy. This is necessary also in light of the fact that to date, there has been little academic comment on this issue (apart from a number of brief, slightly-dated and jurisdiction-specific commentaries24), and none which brings together the various UK and Commonwealth authorities which have considered this issue.

6 The balance of this discussion proceeds as follows. Section II considers various UK, Commonwealth and local authorities on this issue, and identifies a consensus on the basis for generally refusing a majority shareholder access to the s 216 remedy — the fact that s 216 is a residual remedy, available only where a shareholder is unable to cure oppression through the means of self-help remedies (primarily, voting control over the appointment of the board). Section III explores the wider theoretical and policy justifications for the residual nature of the s 216 remedy. Given that the availability of the s 216 remedy rests on the availability of self-help remedies, section IV discusses four...

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