One could reasonably argue that shareholders in the same company pull the same rope, in the same direction, as it is in their sole interest to ensure that the company operates efficiently, effectively and in harmony with the objectives of those who drive it financially - hence the concept of majority rule. As Mark Mobius has stated:
"Shareholder activism is not a privilege - it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal."
Majority rule is an established general principle of company law which ensures that decisions taken by the company conform to the will of the majority of the shareholders, the same shareholders who share a common incentive to see that the company thrives. Although a seemingly obvious and well-adjusted rule - and one that most democratic countries operate in very much the same way - it has its flaws and is not immune to abuse. Consequently, it has had to be kept in check first by the principle of 'fraud on the minority' and more recently by the 'unfair prejudicial' remedy.
Article 402 of the Companies Act provides all shareholders, particularly but not exclusively minority shareholders, with the so-called unfair prejudicial remedy. This allows them to seek redress before the courts in the event that the conduct of the company's affairs, whether by act or omission, is oppressive, unfairly discriminatory or unfairly prejudicial to its members. The unfair prejudice action is effective and far reaching but, in some respects, also limited, as it lists exhaustively the orders that the court may make when asked to provide a remedy in terms of this action. This means that although any well-founded complaint may be brought to its attention, the court may grant only such measures as are strictly conveyed by law.
One such limitation was recently brought to the fore in a preliminary ruling in a case that is pending before the First Hall of the Civil Court. The issue relates to the powers of the court to grant interim relief to a shareholder that invokes the unfair prejudice remedy.
In this case the remedy sought by the plaintiffs in terms of Article 402(g) of the act was the dissolution and consequential winding-up of a group of companies in which they were minority shareholders, following serious allegations of unfair prejudice by the controlling shareholders. In light of the remedy sought, the plaintiffs also requested interim protection and asked the court to appoint a provisional administrator. They argued that since the proceedings could lead to the dissolution and consequential winding-up of the company, they were entitled to ask for the appointment of a provisional administrator to protect the interests of the company and its shareholders until a final determination by the court.
The defendants counter-argued that Article 402 does not confer such power upon the court, and that it is only under those provisions of the Companies Act specifically dealing with the dissolution and consequential winding-up of companies (Article 214 onwards) that the court may make such an order.
In finding for the defendants, having considered the position both in Malta and in England, the court noted that although English law provides for interim measures in its equivalent provisions dealing with the unfair prejudice action, Maltese law does not. It should therefore be assumed that had the Maltese legislature intended to give the court the power to make interim orders in the context of Article 402, the law would have specifically provided for them, as it does in England.
Although most of the provisions of the Maltese Companies Act were imported from the United Kingdom, Article 402 was modelled on Article 174 of the New Zealand Companies Act 1993. However, the difference between the Maltese provision and its counterpart is that while Article 402 lists exhaustively the orders a Maltese court may make, the New Zealand counterpart hints at the possibility of granting further measures, stating that:
"if, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, [the following…]" (emphasis added)
In deciding the matter, the Maltese Court inferred that Maltese law may be lacking in this respect and, quoting an extract from Professor Muscat's Principles of Maltese Company Law, stated that:
"before examining the different types of order that can be made by the Court, a preliminary question should be considered: whether a court may issue an interim order pending final judgement. The position in English law is that English Courts do, where appropriate, have the power to issue interim orders… The Maltese Companies Act is silent on the question of whether a court, seized of an issue under article 402 is entitled to issue an interim order. Nor does any such rule result from any generic provision in the Code of Organisation and Civil Procedure. It is significant that where the legislator wished to grant to a court the power to make interim orders, the legislator did so by express provision… [In] practice situations may sometimes arise where the issue of an interim order would be necessary to protect the interests of the complainant or of the company… The introduction of an amendment to article 402 to allow the Court to issue interim orders would be another tool in the Court's arsenal against oppressive, unfairly prejudicial or unfairly discriminatory conduct."
In view of the above, the court, while recognising the importance of interim measures in order to maximise minority shareholder protection, also recognised that at present the law is silent on the issue regarding the appointment of provisional administrators, and therefore denied the plaintiff's request.
This judgment, albeit partial, has brought to light a lacuna in what is surely the most important provision of the Companies Act, affording protection to minority shareholders from the oppressive behaviour of the majority. Arguably, the court could have applied the provisions relating to the appointment of a provisional administrator in the context of an unfair prejudice action requesting the dissolution and winding-up of the company, but in this case the court followed a strict interpretation of the law, denying the plaintiffs this (and arguably any other) interim remedy. It did, however, call for a review of this position. The question now is whether this should be taken up by the legislature or whether it would be preferable to wait for this issue to be reconsidered by the courts in the absence of any rules of precedence in Malta.
For further information on this topic please contact Krystyna Grima at Fenech & Fenech Advocates by telephone (+356 2124 1232), fax (+356 2599 0645) or email (firstname.lastname@example.org).