A trend is emerging that business lawyers need to read family law reports to discern new legal principles1. This is perhaps not surprising as wealthy individuals hold their personal wealth through corporate entities. In Singapore, such a scenario gave rise to the need for the High Court to consider whether the shareholders of a company may resolve to manage the company when the directors are unable to act. In a learned and closely reasoned judgment, giving full weight to the variance under Singapore law from the English position on the implication of terms2, the Court in TYC Investment Pte Ltd v Tay Yun Chwan Henry  SGHC 192 (TYC Investment) ruled that the shareholders of a company in a general meeting can in fact possess “reserve powers” of management. While the default rule under the Companies Act (Cap. 50) is that the business of a company incorporated in Singapore shall be managed by its directors, unless varied by the company’s articles, the shareholders in general meeting have implied reserve powers.3
The principles for determining such reserve powers of a general meeting may be summarised as follows.4
- The scope of shareholders’ reserve powers is narrow, and the express terms of the contract between the shareholders and the directors should be respected as far as possible – reserve powers may not be exercised to contravene an express term in a company’s articles.
- Shareholders do not have reserve powers unless the board is unable or unwilling to act – the fact that shareholders disagree with a bona fide board decision will not in itself be sufficient to show unwillingness of the board to act.
- If the board is unable to act due to a deadlock, and the deadlock can be broken in some other way under the company’s constitution, then the Court should refuse to recognise that shareholders have reserve powers of management.
In the case of TYC Investment, the Court applied the above principles to validate the appointment of solicitors to commence legal action against one of the two directors of the company, who had prevented the redemption of shares pledged with a bank by her to secure her personal indebtedness and that of companies under her control. The Court found that the board of directors was indeed deadlocked, with no contractual remedy under the articles of the company to break the deadlock. The Court was moreover mindful of the nature of the decision - a case where the board could not itself make a disinterested decision since it involved potential legal action against one of the only two directors.
In contrast, the Court refused to hold that the shareholders could authorise one of the directors to unilaterally sign cheques. This was because it had been agreed in prior matrimonial proceedings and incorporated into the articles of association that all payments by the company had to be approved by both directors – which prompted the wry observation by the Court that this was “... a recipe for disaster...”
The judgment in TYC Invesment repays re-reading for its practicality and sensitivity to commercial realities. By allowing reserve powers in appropriate limited situations, the Court has recognised the lacuna that would occur if a board of directors is neither competent nor willing to manage the affairs of the company and shareholders are not allowed any reserve powers whatsoever.
Although there exists the remedy of the statutory derivative action for shareholders in such a scenario, academics have pointed out that such a remedy is not without its limits.5 The court in TYC Investment has accepted counsel’s submission6 that the remedy of derivative action does not need to be resorted to before a general meeting can exercise its reserve power as the remedy is generally directed at proceedings commenced by minority shareholders and not by the majority in general meeting.7
The decision in TYC Investment is a considered departure from the position in certain other jurisdictions that where the powers of management are vested in the directors, the general meeting does not have the power to intervene in the management of the company’s business.8 While the organs of a company should not ordinarily usurp each other’s powers,9 there is a need to allow for good corporate governance, and avoid situations where a company is at the mercy of errant directors who fail to comply with their contractual and fiduciary duties.10