Shareholders have, on certain occasions, exited or refused to attend certain meetings to avoid approving decisions which they do not agree with. Such a strategy is more commonly used in small and medium enterprises or joint venture corporations where the chances of deadlock are considerably higher, particularly if each stakeholder holds a similar shareholding in the relevant company. From a tactical point of view, some shareholders refuse to attend such meetings so that the necessary quorum requirements are not met, thereby invalidating the meetings and preventing any decisions from being made.

To further complicate matters, issues arise when corporate decisions are made following the conclusion of such meetings where there is an absence of a quorum. In such event, section 392 of the Companies Act (Cap. 50) (Act) provides that such a proceeding is not invalidated by reason of any procedural irregularity, unless the court is of the opinion that the procedural irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the court. There are well-established principles in Singapore under the Act and common law which govern the latter situation where a shareholder is proceeding with a decision in breach of the articles of association (Articles) and/or any shareholders’ agreement due to lack of quorum.

Lim Yew Ming v Aik Chuan Construction Pte Ltd and others

An interesting development in corporate governance has arisen from the recent decision of Lim Yew Ming v Aik Chuan Construction Pte Ltd and others [2015] SGHC 101, where the High Court of Singapore exercised its discretion under section 182 of the Act to order that a meeting of only one shareholder (which lacked a quorum) be called, held and conducted.

This case involved a family-owned company where the majority shareholder held 51.5% and the remaining six shareholders, all being family members of the majority shareholder, held the other 48.5% of the company. Two of the minority shareholders were also directors of the company. The majority shareholder, on two occasions, had attempted to convene extraordinary general meetings (EGMs) to remove these two directors. His efforts, however, were thwarted due to a lack of quorum, as the other shareholders had refused to attend the EGMs.

The High Court in Lim Yew Ming followed a string of established English law cases, where the English courts set out that the lack of quorum would not prevent a corporate decision, such as the appointment or removal of a director, from being made, such decision which is something a majority shareholder would have the right to effect. The Singapore courts adopted a holistic approach to determining whether there was any “impracticability” and whether to exercise their discretion under section 182 of the Act.

Such “impracticability” will generally be construed by the courts if the circumstances arise such that the meeting could not practically be conducted. However, the Singapore courts have held that there is no threshold requirement that there has to be a deadlock affecting the daily operations of the company for such “impracticability” to arise.

With some qualifications . . .

While the general position adopted in Singapore is that a quorum requirement does not confer a veto power on a minority shareholder by his/her ability to prevent a shareholders’ meeting from being held by his/her refusal to attend such meeting, the court in its judgement in Lim Yew Ming suggested that some factors would persuade the court not to exercise its discretion in determining that a one-member quorum was valid.

For example, the court may take a different view if a minority shareholder has a special right attached to his/her shares, implying that his/her presence at such meetings is indispensable. A similar reasoning was applied by the Singapore Court of Appeal in the case of Chang Benety v Tang Kin Fei [2012] 1 SLR (Chang Benety), albeit in the context of section 392 rather than section 182 of the Act, where in view of the special nature of the quorum provision, the court found that there will prima facie be substantial injustice to the side which exercised its deadlock rights. The court in Chang Benety highlighted that if the minority shareholder can show evidence to imply that the minority shareholders intended to have their interests represented such that the company is prevented from making decisions that would prejudice their positions, then the court may hold that there is a substantial injustice to the minority shareholder where a meeting has been held despite such a quorum requirement being breached.

Factors which evidence that there are special rights attached to the shares of minority shareholders include a shareholders’ agreement requiring specific representation at a meeting, enshrining a provision that decisions are to be made on a cooperative and consensual basis among shareholders, or a specific quorum requirement that does not only specify a minimum number but also representation (either in terms of shareholding or on the board of directors). Where it appears that the Articles or a shareholders’ agreement intends to create a class right in favour of certain shareholders, the courts may be less inclined to exercise their discretion.

Another relevant case is Golden Harvest Films Distribution v Golden Village Multiples [2007] 1 SLR 940, which involved a joint venture company set up by entities belonging to two conglomerate companies (i.e. Golden Harvest and Village Roadshow). Each of the two conglomerates nominated three directors to the board. The Articles of the joint venture company provided that the chairman would have a casting vote in the event of a deadlock at the board level. The issues before the Court of Appeal were whether the appointment of the chairman was irregular, and if so, whether the board meeting had not been invalidated by the procedural irregularity of not meeting the quorum requirements, as such irregularity had neither caused nor might have caused “substantial injustice that cannot be remedied by any order of the Court” under section 392 of the Act. The Court of Appeal refused to invalidate the meeting on the ground that the substantial injustice had been perpetrated in the opposite direction by the persons who failed to attend the meeting so as not to constitute a valid quorum. It was observed obiter in this case that the three directors nominated by Golden Harvest who hung up the phone and left the board meeting were in the wrong by walking out of the meeting before the board could begin to conduct its business.

While section 182 and section 392 of the Act are and should remain distinct provisions with separate considerations, the issue of section 182 has not been discussed extensively in the Singapore courts; thus, it is likely that the Singapore courts will follow a similar approach to that of the English courts. The English courts have, in the past, distinguished cases on whether the relative shareholding of the parties was equal (i.e. whether the shareholding interests of the parties are relatively equal or if the majority shareholder is clearly in control of the company) or whether the quorum provision intended to also create a class right in favour of a certain shareholder (or if there is evidence of parties’ express or implied acceptance that there would be certain constraints on the rights of certain shareholders).

A special case for family-owned companies?

While it was argued in Lim Yew Ming that family-owned companies should be subject to a different standard and should be treated as a different category of companies, the Singapore courts rejected this argument, subject to any special circumstances on a case-by-case basis, such as any pre-existing partnership arrangements between family members.

What can be done to avoid such deadlock?

The decision in Lim Yew Ming is a positive one for majority shareholders in Singapore, particularly because it is not a pre-requisite that there be a deadlock in the day-to-day operations of the company for the court’s discretion under the Act to be invoked. However, it seems unlikely that the courts will exercise such discretion where there are indications that shareholders are willing to negotiate and reach a compromise.

Practically speaking, however, to avoid events of deadlock or having to make such an application to the court, directors and shareholders should ensure that the Articles of the company, or the shareholders’ agreement, sufficiently and clearly governs the proceedings of meetings, including quorum. The Articles may specify that if the requisite quorum of two or more is not present, the meeting will be adjourned for a specified period of time, after which whoever present, even if insufficient to meet the two-person quorum requirement, shall be sufficient quorum at such adjourned meeting. Where there are groups of shareholders in a company, in addition to having a numerical requirement, i.e. two for quorum, it is possible to put in place a provision in the shareholders’ agreement and/or the Articles of the company stating that each group’s representative will have to be present in order to constitute a valid quorum.

A well-drafted shareholders’ agreement with clear and comprehensive deadlock provisions can sometimes help to resolve a deadlock. However, not all companies have shareholders’ agreements in place, as in the case of Lim Yew Ming, and not all companies’ Articles are adequate for deadlock resolution. In such situations of deadlock, shareholders may be forced to resort to drastic measures in the event that the deadlock cannot be resolved, such as winding up the company.

The shareholders can put in place certain management structures to avoid situations of deadlock, such as an independent director’s swing vote or casting vote, or the rotation of the chairman of the meeting. The Articles of a company may provide that the chairman of a meeting (in practice, usually the chairman of the board) may have a right to demand a poll after a vote on a show of hands resulting in a deadlock. Such chairman may also have a second or casting vote in the event of the deadlock if provided by the Articles.

Other deadlock resolution mechanisms which can be included in a shareholders’ agreement include, in the event of a deadlock or a potential deadlock, put and call options, or referrals to specific shareholders or the chairman or chief executive of the company as the deciding vote. In more drastic circumstances, there may be provisions allowing for referral to mediation, expert determination, or arbitration. In cases where such deadlock absolutely cannot be resolved, the parties may then exercise their put and call options, or enter into a voluntary winding up of the company if it is unable to continue operating as one commercial entity.

In conclusion

It is clear from the case of Lim Yew Ming that if a shareholder refuses to attend meetings with the objective of preventing the requisite quorum from being formed, the court will exercise its discretion, with limited qualifications, that may affect important corporate decisions. Shareholders should recognise that meetings are an important decision making mechanism within a company which allow for commercial decisions to be proposed and debated openly upon, and therefore avoid disrupting proper corporate processes and decision making.