One of the most common grievances heard from a shareholder is that the company he or she has invested in is being run by a thief, a bully or a fool. For example, directors may divert the company’s money to themselves. If the directors are also the majority shareholders, they are unlikely to bring an action against themselves for breach of fiduciary duties.
Under Singapore law, as in most common law jurisdictions, there are two remedies available to shareholders who find themselves in such dire straits. Both of these remedies are prescribed in the Companies Act (Cap 50):
1. First, a minority shareholder may apply for an order under Section 216 of the Companies Act on the basis that the controlling shareholders are managing the company in a manner unfair to the minority shareholder. This is known as a “Minority Oppression Action”; or
2. Second, a minority shareholder may apply to the court under Section 216A of the Companies Act to bring an action, in the name of and on behalf of the company, against the directors on the basis that the directors are in breach of their fiduciary duties to the company. This is known as a “Derivative Action.”
It is not uncommon for lawyers to advise their clients that a Minority Oppression Action is the more strategic choice.
There are two reasons for this: First, in order to obtain leave to commence a Derivative Action, a minority shareholder first has to give 14 days’ notice to the directors of his or her intention to apply the court, so that the directors of the company may bring the action themselves. The minority shareholder also has to show that he or she is acting in good faith, and that it is prima facie in the interests of the company to bring forth the action.
The notice requirement gives the directors valuable time to get the affairs of the company in order, and may even present an opportunity to steal the initiative by “taking over” the action. In addition, the directors have a first shot at killing the action at the leave application. The minority shareholder is also forced to lay their cards on the table, or risk falling at the first hurdle. In contrast, a Minority Oppression Action is controlled entirely by the minority shareholder, for his or her own benefit. There is no need to obtain leave, give notice or prove that the action is brought in the interest of the company.
Second, a Minority Oppression Action under Section 216 of the Companies Act gives rise to a wider range of remedies, including an order to vary or cancel any transaction, an order for the majority shareholder to buy out the minority shareholder (or vice versa), an order relating to the future management of the company or an order for winding up. In contrast, a Derivative Action invariably results in an order for the directors to pay damages or restitution to the company.
Given these advantages, the question of whether and when a shareholder should even be allowed to commence a Minority Oppression Action for a wrong done to the company can be a controversial issue.
In the recent case of Ho Yew Kong v Sakae Holdings Ltd & Anor Appeal  SGCA 33, the Singapore Court of Appeal, comprising Sundaresh Menon CJ, Tay Tong Kwang JA and Steven Chong JA, addressed this question head on.
The Court of Appeal framed the issue in stark words: “is a plaintiff who brings an oppression action under s 216, instead of seeking leave to commence a statutory derivative action under s 216A, abusing the process?”
The facts in Ho Yew Kong v Sakae that are relevant to this issue may be summarized as follows. The respondent, Sakae, had entered into a joint venture agreement (JVA) with the majority shareholder Gryphon Real Estate Investment Corp. (GREIC) to acquire and develop units in a shopping mall, through an investment vehicle (the JV Company). Sakae was the minority shareholder, holding 24.69 percent of the JV Company’s issued share capital, while GREIC held the remaining 75.31 percent.
Under the terms of the JVA, GREIC and Sakae were each entitled to equal representation on the board of directors of the JV Company. However, in practice, Sakae left the management of the JV Company to GREIC and its controlling shareholder, one Mr. Ong.
Sakae subsequently brought a Minority Oppression Action under Section 216 of the Companies Act against GREIC, Mr. Ong and other parties, including the director nominated by GRIEC. The alleged oppressive acts consisted of seven transactions by which (among other things) a substantial amount of money was diverted from the JV Company to entities that were either directly or indirectly related to Mr. Ong.
Before the High Court, the defendants raised a number of defences, including a general defence that Sakae’s claims were essentially claims in respect of corporate wrongs. The defendants argued that the proper plaintiff in this case was therefore the JV Company. Further, the losses asserted by Sakae merely reflected the loss sustained by the JV Company, and not Sakae.
The High Court rejected this defence, holding that an action under Section 216 could be brought where the plaintiff shareholder was relying on the unlawfulness of an errant director’s conduct as “evidence of the manner in which the director had conducted the company’s affairs in disregard of the plaintiff’s interests as a minority shareholder” and “where the plaintiff’s complaints could not be adequately addressed by the available remedies in favour of the company alone.” The defendants appealed.
On appeal, the Court of Appeal held that Section 216 should not be used to vindicate wrongs that are in substance committed against a company rather than a personal wrong in nature. However, the court of appeal acknowledged that “an area of potential uncertainty lies in the overlap between personal wrongs and corporate wrongs.” The question, in the Court of Appeal’s mind, was whether there was an abuse of process.
After reviewing the approaches taken by the courts in the UK, Hong Kong, Australia and Canada, the Court of Appeal adopted the following analytical framework to ascertain whether a claim that is being pursued under s 216 is an abuse of process is as follows:
- What is the real injury that the plaintiff seeks to vindicate?
- Is that injury distinct from the injury to the company and does it amount to commercial unfairness against the plaintiff?
- The Court of Appeal explained that the court would examine whether the real injury which the plaintiff suffers as a shareholder was distinct from and not merely incidental to the injury which the company suffers; and
- What is the essential remedy being sought and is it a remedy that meaningfully vindicates the real injury the plaintiff has suffered?
- Is it a remedy that can only be obtained under Section 216?
- The Court of Appeal stated that if the essential remedy sought is one that can only be obtained in an action under Section 216, then that would tend to be a strong indicator that the action brought under that provision is not an abuse of process .
Applying these principles to the facts, the Court of Appeal dismissed the defendants’ appeal and allowed Sakae’s Minority Oppression Claim. The Court of Appeal agreed with the trial judge that in light of the carefully negotiated terms of JVA, Sakae had suffered a personal injury to its “legitimate expectations as to how… its financial investment in the Company in particular would be managed.” As such, while the directors’ conduct also constituted a wrong against the company, it separately amounted to a distinct personal wrong against Sakae.
Turning to the question of remedy, the Court of Appeal noted that in its pleadings Sakae had desired either a winding up of the company or a buyout of its shares in the JV Company, in addition to a request for the defendants to make restitution to the JV Company. The Court of Appeal accepted that in these circumstances, the essential remedy sought by Sakae was to exit the joint venture, and the orders for restitution were ancillary in that they were necessary in order to ensure a fair realisation of Sakae’s investment.
The Court of Appeal’s holding in Ho Yew Kong v Sakae is important for minority shareholders who are considering similar actions. The choice between a Minority Oppression Action and a Derivative Action can have far-reaching consequences. If a minority shareholder chooses to commence a Minority Oppression Action instead of applying for leave to commence a Derivative Action, the defendants may, following the trial, make a submission that the action was wrongly brought in law. If the Court agrees, the claim will then fail at this final hurdle, after the plaintiff shareholder has committed its personal resources, and having spent years fighting the case. The plaintiff shareholder would not be able to remedy his or her case through an amendment of pleadings. He or she would have to start from ground zero and apply for leave under Section 216A of the Companies Act. If the shareholder has limited resources, this could spell a fatal blow.
Therefore, it is important for an aggrieved shareholder and his or her lawyer to carefully consider at the outset whether the fact pattern in each case justifies reliance on Section 216 of the Companies Act, or if it would be safer to apply for leave under Section 216A.
Based on the Court of Appeal’s holding in Ho Yew Kong v Sakae, the question of whether a wrong is a “corporate wrong” or a “personal wrong” is highly fact-specific and to some extent a question of degree. After all, in every case, all shareholders have a “legitimate expectation” that the directors will not mismanage the company or divert money to themselves. However, the question is whether the shareholder can point to a particular promise or expectation that arose between shareholders. For example, if there was an understanding that a minority shareholder would receive dividends based on a fixed proportion of the company’s annual profit, the court may decide that the diversion of the company’s money is really an attempt to undermine this understanding.
Therefore, once a shareholder has decided to make a claim for Minority Oppression instead of a Derivative Action, it is critical that the shareholder and his or her lawyer work together to shape the narrative in a suitable fashion.
In addition, it is critical to seek remedies that go towards unravelling the the minority shareholder’s unhappy situation, such as seeking an order for a buyout or an order for winding up. Only when there is a genuine attempt to exit or reverse the existing arrangement would the court be convinced that the Minority Oppression Action is justified and not an abuse of process.