10 March, 2020
What happens when a minority shareholder or a director frustrates the quorum requirements of shareholder or board meetings of a company by deliberately not attending? If the quorum requirements under the constitution of the company are not met, a meeting (and the resolutions therein) may not be deemed to be duly convened and passed. This has an adverse effect on the operations of the company and may even lead to penalties if the company cannot meet its statutory obligations as the result of being unable to hold meetings and pass resolutions.
The recent case of APBA Pte Ltd v Seah Shiang Ping and others [2019] SGHC 229 is but one of many cases where a company has resorted to the courts when a shareholder or director has persistently failed to show up for meetings.
This article sets out the various options that may be available to a company facing such challenges (in particular, through the operation of § 182 and § 392 of the Companies Act (Chapter 50) of Singapore, and reminds us as practitioners to be mindful of the importance of a well-drafted company constitution.
Preliminary Step: Review of the Constitution
As a starting point, it would be helpful to closely review the constitution and any shareholders’ agreements of the company to determine the extent of rights accorded to the shareholders and directors. Important clauses to look out for include (a) the requirements for a resolution in writing, (b) deadlock provisions (covering situations of inquorate meetings), (c) transfer permissions and restrictions, and (d) buy-out mechanisms.
Resolutions in Writing
In the case of either a boycotting shareholder or director, it may be helpful to look at any terms relating to resolutions in writing, which may provide an alternative means to pass resolutions other than through a meeting.
Deadlock Provisions
Some constitutions may provide for an inquorate meeting to be rescheduled and, in the case of persistent inquorate meetings, to have a variety of solutions to resolve the deadlock, such as referring the matter to senior representatives of the shareholders for further negotiations in good faith, or implementing a buy-out mechanism.
Transfer Permissions
Some constitutions may allow shareholders to transfer shares to certain third parties, such as the shareholder’s affiliates, without preemptive rights being triggered. If that is the case, the third party would be considered a new shareholder and would be able to form sufficient quorum with the nonboycotting shareholder.
Buy-Out Mechanisms
Some constitutions may allow for a buy-out mechanism to be exercised in various situations (such as at-will, after a certain date or upon certain occurrences such as a deadlock).
Actions Under the Act
Option 1: Seek Court Approval Under § 182 of the Companies Act to Hold a Meeting
Section 182 of the Companies Act allows the court to order a meeting (including deeming that one member present would constitute a meeting notwithstanding quorum requirements) if it is “impracticable” to call or conduct a meeting otherwise.
When making such an application to the court, it would be necessary to set out the purpose of the meeting. The purpose of the meeting would likely be to (a) vote on the matter at hand or (b) amend the constitution to include one of the mechanisms to prevent future persistently inquorate meetings.
We highlight that in the abovementioned case of APBA, the court, facing an application under § 182, did not grant leave for an inquorate shareholders’ meeting to be held for the purposes of removing directors appointed by minority shareholders. The court did not grant leave on the basis that the minority shareholders in that case had a substantive right to participate in the management of the company through the appointment of directors by virtue of a quasi-partnership. In that case, the court found that the shareholders each had an active role to play in the building of the business, and the shareholders had previously admitted that the understanding was that each of the shareholders had a role in managing the company.
While this option can provide a solution to an impasse, there would be costs involved in an application to the court, and more so if the application is contested.
Option 2: Hold a Meeting and Make an Application Under § 392 of the Companies Act
Section 392 of the Companies Act permits procedural irregularities, including the absence of a quorum, unless such irregularity causes substantial injustice.
The Court of Appeal discusses § 392 in greater detail in the case of Chang Benety and others v Tang Kin Fei and others [2012] 1 SLR 274. In that case, the appellant and respondent were the two shareholders of a company, and each had the right to appoint a number of directors to the company. A directors’ meeting was held by the respondent-appointed directors (who represented more than half the board) without the attendance of at least one director appointed by the appellant, despite the requirement under the company’s constitution that such director was to be present to form a quorum. At the meeting, a resolution was passed to appoint a legal advisor to, among other things, investigate the appellant’s complaints against the respondent, which was beyond the scope of duties of the legal advisor that the parties had agreed upon. The Court of Appeal invalidated the resolution passed at the meeting, holding that:
- A quorum irregularity was, without more, indeed a procedural irregularity (even if a deadlock right was negotiated) (at [43]).
- In the case of procedural irregularities, a question arises of whether the judge should exercise his power under § 392(2) of the Companies Act to validate the resolutions. This turns on whether a party would suffer substantial injustice if the resolutions are validated (at [44]).
- In that case―as the quorum requirement was explicitly related to the issue of representation instead of a minimum number and was made to ensure that parties would have their interests represented at board meetings and could thus prevent the company from making any decision which would prejudice them―a breach of such quorum requirement would be prima facie be substantial injustice (at [48]).
- The nature of the resolutions are to be considered, as well. In that case, the particular resolution, if passed, would cause substantial injustice because it would have widened the scope of the legal advisor’s duties beyond the agreement, which the appellant had previously struck with the respondent and the legal advisor (at [52]).
This option would enable a meeting to be held to pass resolutions, but this option carries greater risk as compared with Option 1, as it involves holding a meeting first (without prior approval from the court). In any event, as an application should be made to the court to validate the meeting, there may be no difference to Option 1 from a costs perspective. If no application is made to the court to validate the meeting, the inquorate meeting would also be a red flag in the corporate secretarial records of the company that may be a cause for concern in due diligence exercises conducted on the company.
Possible Retaliation Under § 216 of the Companies Act
Pursuant to § 216, a shareholder may apply to the courts to seek a remedy on the grounds that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to such shareholder. Section 216 is typically an action brought by minority shareholders, but this does not ipso facto preclude a claim from a majority shareholder (see, e.g. Ng Kek Wee v Sim City Technology Ltd [2014] 4 SLR 723). While the court has a large range of remedies available, such as prohibiting specific acts or cancelling resolutions, the typical remedies adopted by the court are to order a buyout (both majority and a minority buyouts are possible), or to wind up the company.
Conclusion
While inquorate meetings caused by persistently boycotting shareholders or directors may not be a fatal blow to a company’s operations, remedying such issues through the Companies Act is typically a costly process that may invite further litigation or retaliation. Practitioners should be mindful to ensure that company constitutions are drafted to include mechanisms to resolve the issues of repeated inquorate meetings.
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For further information, please contact:
Teoh Ye Oon, Duane Morris & Selvam LLP
yoteoh@selvam.com.sg
