The Wellness Group Pte Ltd v Paris Investment Pte Ltd

• Jurisdiction: Singapore
• Judge: Tay Yong Kwang JA,Steven Chong JA,Quentin Loh J
• Judgment Date: 29 August 2018
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeal No 142 of 2017

The Wellness Group Pte Ltd

and

Paris Investment Pte Ltd and others

[2018] SGCA 47

Tay Yong Kwang JA, Steven Chong JA and Quentin Loh J

Civil Appeal No 142 of 2017

Court of Appeal

Companies — Directors — Appointment — Company constitution giving board of directors power to appoint directors — Implied term in shareholders' agreement giving minority shareholder right to appoint one director to board of company — Board of directors refusing to appoint minority shareholder's nominee — Nature of minority shareholder's right — Whether minority shareholder able to constitute its nominee director with immediate effect — Whether board of directors entitled to refuse to appoint minority shareholder's nominee — Whether implied term breached — Whether specific performance available

Held, allowing the appeal:

(1) The Implied Term gave Wellness a right to nominate one person to be a director of TWG, with a corresponding obligation on the part of the Board of TWG to appoint that nominee as a director, subject to two important caveats. First, the nomination of a person who was statutorily disqualified under the Companies Act (Cap 50, 2006 Rev Ed) from assuming directorship, or who did not consent to act as a director, would be defective. There would clearly be no obligation to appoint such a person. Secondly, the Board of TWG would not be obliged to appoint the nominee if it was able to establish that the nominee would be obviously unfit for office or that his appointment would be obviously injurious to the company: at [33] and [62].

(2) The burden was not on Wellness to prove the suitability of its nominee, but on the Board to prove his unsuitability. It would not suffice for the Board to simply assert that the nominee lacked relevant experience or skills. Rather, the Board had to adduce clear evidence of the shortcomings of the nomination, such as if the nominee would be placed in a position of a conflict of interest or a breach of fiduciary duty. This might be the case if, for example, the nominee operated a business in competition with the company: at [33].

(3) The respondents' construction of the Implied Term was too narrow. It was at odds with the principle that where shareholders were conferred a contractual right to select nominee directors, they might exercise that right in their own interests. Moreover, the purpose of the Implied Term was to ensure that the minority shareholder was represented on the Board and not totally excluded from decision-making by the majority. The Implied Term would not achieve this purpose if the majority could indefinitely delay the appointment of Wellness' nominee by requiring Wellness to prove his suitability to the majority's subjective satisfaction: at [32], [35] and [37].

(4) Wellness' construction of the Implied Term was too broad. The purpose of the Implied Term was not to do away with the formalities of appointment or alter the process of appointment, but to enable the shareholders to decide the composition of the Board. A host of practical problems would arise if a shareholder could constitute its nominee a director with immediate effect simply by nominating him/her. The concept of de facto directorship did not assist Wellness because it was typically invoked to impose directors' duties and liabilities on someone who, although not officially a director, held himself out as one and performed the functions of a director. It did not refer to a transitional category of persons who were legally recognised as directors notwithstanding that they had not yet been formally appointed. In fact, Wellness had by its own conduct acknowledged that Prof Mak was not yet a director: at [32], [40], [41], [43] and [44].

(5) The power to appoint directors remained with the Board pursuant to TWG's constitution, though it had to now be exercised in accordance with the shareholders' wishes pursuant to the Implied Term. This power also had to be exercised bona fide in TWG's interests. The shareholders each had an individual interest in being able to appoint as directors the persons they wished to represent them on the Board, which was inextricably connected to their participation in the joint venture and could not be divorced from TWG's interests as a commercial entity. They also had a unified interest in the appointment of persons suitably qualified to manage and supervise TWG. The Board's limited discretion not to appoint a nominee if he was obviously unfit for office or injurious to the company struck a balance between these two types of interest and enabled it to fulfil its fiduciary duty to TWG without denuding the Implied Term of effect: at [64] to [67].

(6) The Implied Term was not inconsistent with any legal rule against the usurpation of powers. The Board retained its power of appointment, though it did not have absolute discretion to appoint whom it wished. But even if the Implied Term was inconsistent with the constitution, the shareholders' agreement was intended to prevail in the event of inconsistency and obliged the shareholders to amend the constitution to remove such inconsistency. The Implied Term was legally binding and enforceable notwithstanding that it had not been incorporated into TWG's constitution. Furthermore, the authorities cited by the respondents did not stand for any rule prohibiting the shareholders of a company from unanimously agreeing by way of a shareholders' agreement that they should choose the directors, notwithstanding that the articles conferred the power of appointment on the Board: at [68] to [73] and [78].

(7) The respondents had breached the Implied Term by refusing to appoint Prof Mak. This was the same breach which Wellness had alleged against the respondents in the High Court and did not amount to a new cause of action. Besides its rejection of the Ancillary Matters, TWG had not given any legitimate reason to refuse Prof Mak's appointment. Although Wellness had not replied to TWG's requests for more information about Prof Mak, the Implied Term did not entitle the respondents to indefinitely delay Prof Mak's appointment by placing the onus on Wellness to justify his candidature: at [80] to [83].

(8) A provision like the Implied Term could in principle be enforced through an order for specific performance. An award of damages would be an inadequate and illusory remedy for Wellness' loss of representation on the Board. Moreover, the authorities cited by the respondents did not establish that the court would not order specific performance of an obligation to appoint a director on the basis that it was a contract for services: at [85] and [86].

(9) The court therefore ordered that Prof Mak be appointed a director of TWG and that the respondents, their directors and/or officers execute or procure the execution of the documents necessary to give effect to his appointment: at [92].

Case(s) referred to

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 (refd)

Bainbridge v Smith (1889) 41 Ch D 462 (distd)

BNX v BOE [2018] 2 SLR 215 (folld)

British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186 (refd)

Centre for Laser and Aesthetic Medicine Pte Ltd v GPK Clinic (Orchard) Pte Ltd [2018] 1 SLR 180 (folld)

Chan Siew Lee v TYC Investments Pte Ltd [2015] 5 SLR 409 (refd)

Credit Development Pte Ltd v IMO Pte Ltd [1993] 1 SLR(R) 68; [1993] 2 SLR 370 (refd)

Golden Harvest Films Distribution (Pte) Ltd v Golden Village Multiplex Pte Ltd [2007] 1 SLR(R) 940; [2007] 1 SLR 940 (folld)

Harmer Ltd, Re [1959] 1 WLR 62 (distd)

Hydrodam (Corby) Ltd, Re [1994] 2 BCLC 180 (refd)

James v Eve (1873) LR 6 HL 335 HL (refd)

John Shaw & Sons (Salford) Ltd v Peter Shaw and John Shaw [1935] 2 KB 113 (refd)

Malayan Banking Bhd v Raffles Hotel Ltd [1966] 1 MLJ 206 (refd)

Plantations Trust Ltd v Bila (Sumatra) Rubber Lands Ltd (1916) 85 LJ Ch 801 (refd)

Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588 (refd)

Santos Ltd v Pettingell (1979) 4 ACLR 110 (refd)

Wellness Group Pte Ltd, The v OSIM International Ltd [2016] 3 SLR 729 (refd)

Yeo Chong Lin v Tay Ang Choo Nancy [2011] 2 SLR 1157 (folld)

Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029; [2008] 3 SLR 1029 (folld)

Facts

The appellant (“Wellness”) and the first and second respondents were shareholders in the third respondent (“TWG”). All four companies had signed a shareholders' agreement containing an implied term that the majority shareholder(s) of TWG would be entitled to appoint two directors to the board of directors (“the Board”) of TWG, and the minority shareholder(s) would be entitled to appoint one director so long as they held at least 25% of the shares in TWG (“the Implied Term”).

The first and second respondents together held 69.9% of the shares in TWG. Wellness held the remaining 30.1%. Pursuant to the Implied Term, Wellness sought to appoint one Associate Professor Mak Yuen Teen (“Prof Mak”) as a director of TWG. Wellness also requested (a) that the Board of TWG authorise Prof Mak to disclose to Wellness information in relation to TWG which he would have access to in his capacity as director; 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 (together “the Ancillary Matters”).

TWG did not agree to the Ancillary Matters and therefore refused to appoint Prof Mak. Wellness then filed an originating summons (“the OS”) seeking, amongst others, an order that Prof Mak be appointed a director of TWG. In written submissions filed shortly before the OS was heard, Wellness stated that the Ancillary Matters were mere requests rather than conditions which it sought to attach to Prof Mak's appointment. The High Court found that this constituted a change in Wellness' position and dismissed the OS in order to give the respondents an opportunity...