THE ARBITRATION AND LITIGATION OF MINORITY SHAREHOLDER DISPUTES

Date01 December 2016
Published date01 December 2016

Case Note

Tomolugen Holdings Ltd v Silica Investors Ltd

[2016] 1 SLR 373

The Court of Appeal has ruled that minority oppression claims are arbitrable, notwithstanding jurisdictional limits on the remedies that an arbitral tribunal may award, and the possibility of having to resolve such disputes across two fora— in arbitration and in court. However, is arbitration really suitable for resolving such disputes when: (a) there may be a public interest in such disputes; (b) the interests of parties who are not bound by the arbitration agreement may be affected; and (c) the remedy sought might be beyond the power of the tribunal to grant? These issues are explored in this case note.

I. Introduction

1 Parties who sign arbitration agreements may expect to never see the inside of a courtroom. Nonetheless, court proceedings can unfortunately precede, run concurrently with and succeed arbitral proceedings. For instance, parties to an arbitration may turn to the court where they seek to challenge the existence and scope of the arbitration agreement in court, commence parallel court proceedings or apply to court to set aside or to enforce an arbitral award. Arbitration, therefore, requires judicial support; as Paulsson put it, “the great paradox of arbitration is that it seeks the co-operation of the very public authorities

from which it wants to free itself”.1 Hardly anywhere is this co-operation stronger than in Singapore, where the “unequivocal judicial policy of facilitating and promoting arbitration”2 has been instrumental in the rise of Singapore as one of the top five most preferred seats of arbitration worldwide.3

2 This pro-arbitration judicial policy is evident in the recent Court of Appeal decision of Tomolugen Holdings Ltd v Silica Investors Ltd,4 a landmark decision where the Court of Appeal rendered a judgment for the first time on issues such as the standard of review for stay applications under s 6 of the International Arbitration Act5 (“IAA”), the arbitrability of disputes over minority oppression under s 216 of the Companies Act6 (“CA”) and the approach to take when there are potentially overlapping issues to be resolved in court and arbitral proceedings.

3 In essence, the Court of Appeal decided, first, that a prima facie standard of review is appropriate when deciding whether to grant stay applications under s 6 of the IAA, as this would cohere better with the principle of kompetenz-kompetenz. Next, on the issue of arbitrability, the Court of Appeal again adopted an arbitration-friendly position by finding that disputes over minority oppression or unfairly prejudicial conduct are arbitrable, notwithstanding the jurisdictional limits of arbitral tribunals to grant specific kinds of relief such as winding up, as this section was not introduced to protect or further any public interest. The court then adopted a commonsensical approach in characterising the matter and finding that the arbitration agreement covered part of

the dispute. Finally, the court held that when there are potentially overlapping court and arbitral proceedings, an appropriate balance that ultimately serves the ends of justice must be struck.

4 After setting out the facts and holdings of the case in greater detail, this case note will discuss the following issues that may arise as a result of the Court of Appeal's judgment:

(a) whether a prima facie standard of review should apply even when one party has alleged that no arbitration agreement exists between the parties;

(b) whether s 216 claims may affect the public interest due to the varied remedies that may be awarded upon a successful s 216 claim;

(c) how the arbitral tribunal is to decide on the issue of remedies and whether the court would give effect to the tribunal's opinion on remedies;

(d) whether interpreting the parties' agreement to arbitrate as an agreement to arbitrate first and then obtain their remedy from the court later accords with the commercial sensibilities of rational businessmen; and

(e) whether parties who never consented to arbitration may be compelled to arbitrate a matter.

II. Facts

5 The plaintiff was Silica Investors, a minority shareholder holding approximately 4.2% of the issued share capital of Auzminerals Resource Group Ltd (“AMRG”), the eighth defendant.

6 Silica Investors first acquired shares in AMRG from Lionsgate Holdings Pte Ltd (“Lionsgate”), the second defendant, by way of a share sale agreement (“the Share Sale Agreement”). Clause 12.3 of the Share Sale Agreement provided that “any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination” was to be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre for the time being in force.

7 The remaining six defendants were shareholders and current or former directors of Lionsgate, AMRG, or Solar Silicon Resources Group Pte Ltd, a subsidiary wholly owned by AMRG.

8 Silica Investors complained of oppression or unfair prejudice, and supported this with four broad categories of allegations:

(a) The first category, referred to as “the Share Issuance Allegation”, concerned a share issuance on 15 September 2010 that allegedly diluted Silica Investors' shareholding in AMRG.

(b) The second category, referred to as “the Management Participation Allegation”, concerned Silica Investors' alleged denial of its entitlement to participate in AMRG's management.

(c) The third category, referred to as “the Guarantees Allegation”, concerned certain guarantees executed by AMRG on 11 July 2010, which were allegedly not in AMRG's interest to execute.

(d) The fourth category, referred to as “the Asset Exploitation Allegation”, concerned AMRG's expending of resources to identify and develop mining assets allegedly for the benefit of its majority shareholder.

9 Lionsgate applied under s 6 of the IAA for a stay of court proceedings against it in favour of arbitration, while the other seven defendants filed stay applications contingent on the success of Lionsgate's application pursuant to the court's inherent power of case management.

III. Decision of the Court of Appeal
A. Threshold question: The standard of review in stay applications under s 6 of the IAA

10 Before addressing the substantive issues, the Court of Appeal first considered the threshold question as to what standard of review the court should adopt in an application for a stay under s 6 of the IAA.7 This section mandates that the court stay proceedings relating to “any matter” covered by an arbitration agreement upon an application for a stay by a party to that agreement, unless the court is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed.8 The Court of Appeal noted that there was potential for friction to arise between s 6 of the IAA and the kompetenz-kompetenz principle, or the principle that the arbitral tribunal has the jurisdiction

to determine its own jurisdiction,9“because any determination made by the court on the existence and scope of the arbitration agreement may well intrude into the remit of the arbitral tribunal's kompetenz-kompetenz”.10

11 After a detailed consideration of the travaux preparatoires of the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration11 (“the Model Law”), the positions in other jurisdictions and local case law on the subject, the Court of Appeal held that a prima facie standard of review should be adopted by a Singapore court hearing a stay application under s 6 of the IAA.12 Accordingly, a court hearing a s 6 stay application:13

… should grant a stay in favour of arbitration if the applicant is able to establish a prima facie case that:

(a) there is a valid arbitration agreement between the parties to the court proceedings;

(b) the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and

(c) the arbitration agreement is not null and void, inoperative or incapable of being performed.

12 Once the applicant has discharged this burden, then the court should grant a stay and “defer the actual determination of the arbitral tribunal's jurisdiction to the tribunal itself”.14 Nevertheless, the arbitral tribunal's determination of its jurisdiction will remain subject to overriding court supervision, as parties may yet appeal against the arbitral tribunal's jurisdictional ruling, or apply to court to set aside or enforce the award rendered by the arbitral tribunal.15

13 The Court of Appeal gave four reasons for adopting the prima facie approach over the full merits approach preferred in England and some Model Law jurisdictions:16

(a) First, the prima facie approach coheres better with parliamentary intention to empower the tribunal to rule on its own jurisdiction, and to confine the scope of curial intervention.17

(b) Secondly, the full merits approach “could significantly hollow the kompetenz-kompetenz principle of its practical effect” as this approach may subject the arbitral tribunal's kompetenz-kompetenz to the claimant's strategic choices in a putative arbitration: depending on whether the claimant chooses to pursue its claim by arbitration or by court proceedings, the question of the arbitral tribunal's jurisdiction will fall to be determined fully by either the arbitral tribunal, or the court. This:18

… undermines the principles of judicial non-intervention and kompetenz-kompetenz which were at the forefront in the drafting of the Model Law and the enactment of the original IAA.

(c) Thirdly, the fear of resource duplication arising from the prima facie approach is overstated, as a robust recognition and enforcement of the kompetenz-kompetenz principle may deter parties to arbitration agreements from commencing court proceedings...

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