The Wellness Group Pte Ltd v Paris Investment Pte Ltd and others

• Judge: Tay Yong Kwang JA
• Judgment Date: 29 August 2018
• Neutral Citation: [2018] SGCA 47
• Hearing Date: 22 May 2018
• Docket Number: Civil Appeal No 142 of 2017
• Court: Court of Three Judges (Singapore)
• Published date: 31 August 2018
• Plaintiff Counsel: Toby Landau QC and Calvin Liang (instructed counsel), Chua Sui Tong and Wong Wan Chee (Rev Law LLC)
• Defendant Counsel: Davinder Singh SC, Lydia Ni Manchuo and Deborah Loh Yu Chin (Drew & Napier LLC),Siraj Omar and Premalatha Silwaraju (Premier Law LLC)
• Subject Matter: Companies,Directors,Appointment

Steven Chong JA (delivering the judgment of the court): Introduction

It is commonplace for shareholders’ agreements and joint venture agreements to contain a provision entitling a shareholder to nominate or appoint a director to the company’s board of directors. This may be so even where the constitution of the company confers the power to appoint directors upon the board. It is therefore somewhat surprising that there is no reported local precedent in which the court has had to decide on the precise contours of the shareholder’s right or the corresponding obligations of the other parties to the agreement in relation to the appointment of directors. The leading foreign authorities in this area of law are also somewhat dated.

In this appeal, the parties dispute the legal effect of an implied contractual term entitling the minority shareholder to appoint a director to the board. The appellant, the minority shareholder, claims it has a right to appoint any person unless such appointment would be injurious to the company, and that its nomination of that person, ipso facto, constitutes him or her a director with immediate effect. The respondents claim that the minority shareholder has a mere right to nominate a person for directorship, and that the board of the company retains the discretion not to appoint that person if it would not be in the company’s interests to do so. Central to the appeal are the questions of whether the contractual term obliges the company to accept the shareholder’s nominee/appointee without question; if not, what principles (if any) constrain its discretion to reject the nominee/appointee; and how such a term interacts with a provision in the company’s constitution which vests the power of appointment in the board. The answers to these questions must balance the competing interests of the shareholders and the board of the company.

Genesis of the shareholder’s right

The facts of the case are fairly straightforward and for the most part undisputed. The shares in the third respondent, TWG Tea Company Pte Ltd (“TWG”), are divided between the appellant, The Wellness Group Pte Ltd (“Wellness”), the first respondent, Paris Investment Pte Ltd (“Paris”), and the second respondent, OSIM International Pte Ltd (“OSIM”). Paris is wholly owned by OSIM.

TWG was incorporated as a wholly-owned subsidiary of Wellness in October 2007. In 2010, Paris acquired 15.8% of the shares in TWG, Wellness owning the remaining 84.2%. On 18 March 2011, a sale and purchase agreement was signed pursuant to which OSIM purchased a 35% stake in TWG from Wellness and Paris. On the same day, all four parties (ie, Wellness, OSIM, Paris and TWG) also signed a shareholders’ agreement (“the Shareholders’ Agreement”), which included the following clause:1Core Bundle Vol II, p 12. 5. Board of Directors 5.1 Number: The Board shall comprise three Directors. 5.2 Composition: The Board shall comprise: 5.2.1 two persons appointed by [Paris] and [Wellness]; and 5.2.2 one person appointed by OSIM, for so long as OSIM’s Shareholding Percentage is not less than 25 per cent. That person shall be Mr Ron Sim.

[emphasis added in italics]

Following the sale and purchase, Wellness, OSIM and Paris held shares in TWG in the respective proportions of 54.7%, 35% and 10.3%. Clause 5 of the Shareholders’ Agreement therefore ensured that OSIM – a minority shareholder – would be represented on TWG’s Board of Directors so long as its shareholding in TWG did not fall below 25%.

Subsequent to the signing of the Shareholders’ Agreement, following a rights issue in 2013 to 2014, these shareholdings were varied to 30.1% (Wellness), 58.6% (OSIM) and 11.3% (Paris) and remain unchanged to date.2Record of Appeal (“ROA”) Vol III, p 4. This led to the counterintuitive situation in which OSIM, despite being the majority shareholder, was entitled to appoint only one director to the Board, whereas Paris and Wellness (which together owned 41.4% of the shares in TWG) were entitled to appoint two directors.

In February 2014, Wellness and its chairman commenced a minority oppression action against OSIM, Paris and the directors of TWG. On 22 April 2016, the High Court dismissed the claim in The Wellness Group Pte Ltd and another v OSIM International Ltd and others and another suit [2016] 3 SLR 729 (“Wellness v OSIM”), and this decision was upheld by this Court. One of the High Court’s findings was that a term should be implied into the Shareholders’ Agreement because it “omitted to address the situation where [Wellness], whether by itself or with Paris, ceased to be the majority shareholder/s in [TWG]” (Wellness v OSIM at [121]). The parties had not contemplated this lacuna, and it was necessary in the commercial sense to imply a term in order to give the contract efficacy because otherwise, Wellness and Paris would continue to control the TWG Board regardless of how small their combined shareholding came to be. The parties could not have intended such a result. The specific term to be implied, in the court’s view, was that “the majority shareholder(s) (whoever they may be) would be entitled to appoint two directors, and the minority shareholder(s) would be entitled to appoint one director so long as they hold at least 25% of the shares in [TWG]” (Wellness v OSIM at [121(c)]). We refer to this hereafter as the Implied Term. Wellness, being the minority shareholder, was entitled to appoint one director pursuant to the Implied Term. The High Court’s findings on the Implied Term were not disturbed on appeal.

The dispute between the parties

Following the dismissal of the appeal, on 26 October 2016, Wellness sought to appoint Mr Manoj Mohan Murjani (“Mr Murjani”) to the Board of TWG. Mr Murjani had previously sat on TWG’s Board before resigning on 28 September 2012, and Wellness had not appointed another director in his place since then. However, TWG, OSIM and Paris refused to appoint Mr Murjani on the basis that his appointment would not be in TWG’s best interests, and instead invited Wellness to appoint either one Ms Kanchan Murjani, who is Mr Murjani’s wife, or Mr Finian Tan, both of whom were also directors of Wellness.

To resolve this impasse, Wellness wrote to TWG on 13 February 2017 proposing that Associate Professor Mak Yuen Teen (“Prof Mak”) from the National University of Singapore be appointed to the Board of TWG instead of Mr Murjani. Wellness also requested (a) that the Board authorise Prof Mak to disclose to Wellness information in relation to TWG which he would have access to in his capacity as director, in accordance with s 158 of the Companies Act (Cap 50, 2006 Rev Ed) (“the Companies Act”); and (b) that TWG arrange for Prof Mak to be covered by director and officer insurance to the same extent as TWG’s other directors; and if no such insurance had been purchased for the directors, that it be purchased. These two matters will hereafter be referred to as “the Ancillary Matters”. Wellness concluded by requesting TWG to “[p]lease arrange for the appointment of Professor Mak as a Director of [TWG] and the [A]ncillary [M]atters … to be formalised as soon as practicable”.3Core Bundle Vol II, pp 26–27.

Having received no reply from TWG, Wellness again wrote to TWG on 17 February 2017 to “request” that it “immediately take all necessary steps to formalise the appointment of Professor Mak, including the [A]ncillary [M]atters”.4ROA Vol III, p 144. TWG did not reply and Wellness wrote again on 21 February 2017 to “demand” the formalisation of Prof Mak’s appointment, this time without mentioning the Ancillary Matters.5ROA Vol III, p 145.

On 23 February 2017, TWG replied to say that it would not appoint Prof Mak because the Board was “unable to accede” to the Ancillary Matters, which were in any event not in TWG’s interests.6Core Bundle Vol II, p 28.

On 27 February 2017, Wellness filed Originating Summons No 206 of 2017 (“the OS”) in the court below, by which it sought:7Appellant’s Case, para 35; Core Bundle Vol II, p 5. a declaration that it was entitled to appoint one director to TWG’s board as long as it held at least 25% of the shares in TWG; an order that Prof Mak be appointed as a director of TWG; and an order that the three defendants (being Paris, OSIM, and TWG) execute the necessary documents to give effect to Prof Mak’s appointment.

The Board of TWG presently comprises Mr Taha Bouqdib (“Mr Bouqdib”) (appointed by OSIM) and Mr Ron Sim Chye Hock (appointed by Paris). Wellness has not been represented on the Board since 28 September 2012.8ROA Vol III, p 198, para 9.

Decision below

The High Court judge (“the Judge”) dismissed the OS. First, he held that though the Implied Term described Wellness’ contractual right as a right to “appoint” a director to TWG’s Board, it was not disputed that this right was “in effect a right to nominate a person to be appointed as a director” (The Wellness Group Pte Ltd v TWG Tea Co Pte Ltd and others [2017] SGHC 298 (“the GD”) at [23]). We note that this finding is disputed by Wellness.

Secondly, the Judge observed that Wellness’ submissions, filed two working days before the hearing, stated that the Ancillary Matters were merely requests rather than conditions which it sought to attach to Prof Mak’s appointment.9ROA Vol III, p 202, para 22. The Judge found that this constituted a change in Wellness’ position with respect to the Ancillary Matters and was “calculated to steal a march on the defendants at the hearing” (the GD at [26]). In his view, the Ancillary Matters had been “clearly intended and conveyed to the defendants” as conditions attaching to Prof Mak’s appointment, and the defendants had refused to appoint Prof Mak on the basis that the Ancillary Matters were unacceptable (at [25]–[27]). The Judge agreed with the defendants that they should be given an opportunity to reconsider Prof Mak’s...