Introduction

Consider this scenario: a disagreement between directors in a closely-held company escalates into a paralysis in decision-making—one party then tries to use its majority shareholding to convene an Extraordinary General Meeting (“EGM”), hoping to pass the necessary resolutions or to cause the removal of the other director, only to be foiled by the other party intentionally boycotting the meeting. Without the presence of the other party to satisfy the requirement of a proper quorum, no discussion can be had, no decision can be made and the impasse continues indefinitely, adversely affecting the business of the company, staff morale and worst of all, stakeholders and consumer confidence.

Unfortunately, scenarios like this are, contrary to popular belief, more commonplace than people think and SMEs tend to disproportionately fall victim to this issue by the very nature of how they are owned and managed – the same stakeholders are also usually the directors.

In addition, more often than not, the significance of the “quorum” requirement for company meetings is easily overlooked—most small and medium enterprises (“SMEs”) simply adopt wholesale Accounting and Corporate Regulatory Authority’s (ACRA) sample Memorandum & Articles of Association which provides at Article 47, that “no business  shall be transacted at any general meeting unless a quorum of members is present at the time” and that “except as herein otherwise provided, 2 members present in person shall form a quorum.”

As a result, minority shareholders, knowing that if they show up for a meeting they would be out-voted, would instead strategically boycott meetings in order to intentionally deprive the majority shareholder(s) of a proper quorum. This will, in effect, achieve their aim of opposing the proposed resolution.

This was the exact situation that the High Court had to consider in Lim Yew Ming v Aik Chuan Construction Pte Ltd and ors [2015] SGHC 101 (“Lim Yew Ming”).

Brief Facts

The Plaintiff was the majority shareholder (51.5%) of the 1st Defendant, Aik Chuan Construction Pte Ltd. The remaining 48.5% was held by various family members, the 2nd to 7th Defendants (“the Defendants”).

A disagreement broke out between the Plaintiff and the Defendants over the direction of the company and in order to move forward, the Plaintiff tried to convene two EGMs to remove the 2nd and 5th Defendants as directors. Both EGMs were boycotted by the Defendants. As the Defendants refused to attend both EGMs, the Plaintiff was deprived of the quorum required, resulting in an impasse.

The Plaintiff thus sought an order against the Defendants that under section 182 of the Companies Act (“Act”), a quorum of 1 be sufficient for a general meeting of the shareholders. In this case, the High Court had to consider whether the Defendants’ refusal to attend the EGMs amounted to an “impracticability” under section 182 of the Act, thereby allowing the Court to order the meeting to proceed on a quorum of one.

In essence, the main issue was whether Singapore law recognizes the right of shareholders to effectively boycott company meetings and veto proposals by their absence.

Decision of the High Court

After having examined local and foreign authorities, the High Court allowed the Plaintiff to proceed with a meeting of one, and held in very clear terms that a minority shareholder’s refusal to attend meetings amounts to an “impracticability in calling or conducting a meeting”, thereby satisfying section 182 of the Act.

The Court took the firm position that “the refusal of members to attend meetings perverts the point of membership and the meeting process”.

Of significance is the Court’s emphasis on the fundamental concept that in a company, decisions are made by majority vote and not vice versa. In particular, the Court took the position that “a minority shareholder cannot use the quorum provision as a de facto veto mechanism, allowing him to obstruct the desires of the majority shareholder…veto by lack of quorum is nothing more than the imposition of the will of the minority on the majority.”

Prevention is better than cure

With this new ruling from the High Court, “minority holding the majority hostage” scenarios may be a thing of the past as (minority) shareholders can no longer manipulate the quorum requirement to veto decisions.

This ruling may, however, be of little comfort in reality, as in order to obtain this relief, the aggrieved party may have to expend considerable effort and resources to bring his case to Court. In addition, the High Court left open the possibility that in some situations, the right of a majority shareholder to pursue his objectives may yet be constrained by express or implied agreements that would require the consent of all other shareholders, thereby displacing the operation of section 182 of the Act.

This means that the relief offered by section 182 of the Act may not necessarily be granted to all applicants.

So how can stakeholders of private limited companies prevent or limit these types of disputes from occurring?

Introducing Deadlock Clauses

Companies may consider introducing a Deadlock Clause into their articles of incorporation and or shareholders agreements. Deadlock Clauses must be well-drafted to: (i) clearly identify situations amounting to a deadlock; and (ii) provide a clear process by which the deadlock is to be resolved within a certain time-frame.

For instance, it is common for Deadlock Clauses to provide that where two attempts to hold a meeting have been unsuccessful due to the refusal of a party to attend, then the party calling for the meeting shall be at liberty thereafter to proceed without the absent party and any decision made at that meeting shall be deemed valid.

By stipulating the manner and time by which a deadlock must be resolved, Deadlock Clauses at least ensure that any management impasse does not drag on indefinitely and provides an agreed mechanism for the parties to manage their dispute.

If the shareholders of Aik Chuan Construction had such a deadlock clause governing their relationship, it is likely that the above scenario would not even have occurred.

While Deadlock Clauses cannot of course be expected to deal with the root differences between parties in a dispute, they can at least ensure that the operations of a Company do not become paralysed and prevent any internal conflict from compromising the interests of the company.

Concluding words and practical considerations for SMEs

The Judgment in Lim Yew Ming is certainly good news for majority shareholders. Yet, this case has also provided a timely wake-up call, especially to SMEs, to examine the articles of their company and / or shareholder agreements to check if they have the necessary processes to deal with disputes and deadlocks.

SMEs especially can ill-afford the distraction of a management fight when every dollar and every second counts. While no one hopes to ever have to resort to a Deadlock Clause, it would be tempting fate to not have one.