Introduction

Family owned and operated companies are not uncommon, particularly in this region of the world. Such companies often function in a more informal manner, whereby familial relationships replace bureaucratic red tape. However, when disputes between family members arise, issues of corporate governance find their way to the surface.

This was the case in Thio Keng Poon v Thio Syn Pyn [2010] SGCA 16, which saw the founder and patriarch of a family owned company unceremoniously removed from his positions as director and chairman by his own children, who were also the directors of the company.

Here, the Singapore Court of Appeal, led by Chao Hick Tin JA, demonstrated that informal family practice does not lead to relaxed corporate governance requirements. It was held that the patriarch’s removal was not in accordance with the Articles of Association, and was thus invalid. On the other hand, the patriarch failed in his attempt to rely on the expectation of familial trust and confidence in establishing his claim for minority oppression.

Directors of family owned companies should thus note that the requirements of the company’s MA and AA must still be strictly complied with, and that the rights of the members of the company are also contained therein.

Brief Facts

  1. The Appellant was the Chairman, Managing Director, Director and founder of Malaysia Dairy Industries Pte Ltd (“Malaysia Dairy”) and Modern Dairy International Pte Ltd (“Modern Dairy”). Over the years, he transferred his shares in the companies to his wife and children.  
  2. Disputes began to arise within the family after the Appellant’s eldest son (“Pyn”) began assisting in the running of the family business. The Appellant became dissatisfied as his previously unchecked powers of control over the business were progressively being reined in by his family members.  
  3. In 2007, Malaysia Dairy discovered through an independent review that the Appellant had double-claimed for certain travel costs. This precipitated the Appellant’s removal from his various positions in the companies.
  4. Following these findings, Pyn called for a meeting of Malaysia Dairy’s Board of Directors. Notice was given to all directors save for the Appellant, who was overseas. The directors (being the Appellant’s family members) unanimously approved the removal of the Appellant in accordance with Article 88(c) of the Articles of Association (“AA”), and this decision was approved and ratified at a subsequent Annual General Meeting (“AGM”).
  5. The Appellant was also removed from his positions in Modern Dairy. The Board of Modern Dairy made this decision at an AGM held following a resolution in writing.
  6. Following the Appellant’s removal, the Board of Directors of the companies consisted of his wife and children, who also constituted the majority shareholders.  

Issues

The Appellant had two grounds upon which this appeal was brought. The Court had to decide:

  1. Whether the Appellant’s removal was in breach of the AA, and if so, whether it could be rescued by section 392(2) of the Companies Act (“section 392(2)”); and
  2. Whether the Appellant’s removal constituted an act of minority oppression.

Holding Of The Court Of Appeal

The Court found that the purported removal of the Appellant from his various offices was in breach of the AA, and thus of no effect. However, it rejected the allegation of minority oppression.

Breach Of AA

The Appellant’s removal from his positions in the family companies went against their respective AAs.

  1. Malaysian Dairy’s AA required the other directors to request for the Appellant to vacate his office before any resolution to that effect could be passed. Here, no such request was made.  
  2. The resolution which removed the Appellant from his positions in Modern Dairy was similarly flawed as it stated that the Appellant had been requested to vacate his offices, when in fact no such request had been made.  

The Court of Appeal rejected the High Court’s finding that these irregularities could be salvaged by section 392(2), which provides that procedural irregularities will not render proceedings invalid if they do not cause substantial injustice. The Court also made a few observations on the operation of section 392(2).

  1. The party seeking to uphold the proceedings bears the threshold burden of proving that the irregularity is of a procedural nature.  
  2. The party challenging the proceedings then bears the burden of proving that substantial injustice was or will be caused by the irregularity.  
  3. Section 392(2) applied whether the irregularity was caused by inadvertence or by deliberate choice.  

The irregularities in question were not rescued by section 392(2) for the following reasons:

  1. The irregularities were substantive rather than procedural. The aim of giving notice to resign is to give the director in question the opportunity to consider his options, as well as to appeal to his fellow directors against his removal. The provision of these opportunities cannot be merely procedural.  
  2. Substantive injustice had indeed been caused by the irregularities. The Appellant had been denied the opportunity to exercise his choice to leave, as well as to present his case to the full Board.  
  3. The court took into account the possibility that the Board could have decided differently had the Appellant been notified. He was, after all, the patriarch of the family company, and not all his children were against him.  

The Appellant’s removal from his various offices in the family companies was thus found to be invalid.

Minority Oppression

The Appellant’s argument on minority oppression relied on two grounds:

  1. There was an unspoken understanding (“the Understanding”) between him and his family that in return for his gift of shares to them, they would allow him to retain sole overall control of the companies.  
  2. As a member, he had legitimate enforceable expectations. He also argued that these expectations went beyond what was contained in the MA and AA because the companies were family organizations built on mutual trust, confidence and co-operation. The patriarch could this expect that his children would work towards the common good of the family (see Chow Kwok Chuen v Chow Kwok Chi [2008] 4 SLR 362 (“Chow Kwok Chuen”)).  

The Court disagreed with the Appellant’s propositions.

  1. It was found that the Understanding did not exist. It was unspoken, and his family thus could not be said to be aware of it even if it was the Appellant’s intention.
  2. Furthermore, there had been an earlier deed of settlement between the parties which included an ‘entire agreement’ clause, meaning that the Understanding could not stand even if it was found to exist.
  3. The Court also expressed doubt that the existence of the familial relationship could justify the extension of legitimate expectations in a minority oppression suit. Caution must be taken before the Chow Kwok Chuen principles are applied.  

Concluding Words

This case provides a good example of the corporate governance issues that may arise in the running of a family owned company. When times are good, the informality of proceedings and the principles of familial loyalty can lead to great advantages for the company. However, when the relationship turns awry, it is often found that what stands within a family may not stand in the eyes of the law.

The Court had demonstrated that it will not relax the strict legal requirements of corporate governance even in light of family practice. Directors of family owned and operated companies should thus note that they cannot depart from the requirements of company proceedings laid out in the AA, and that their legal rights as members cannot be significantly extended merely because of the existence of a familial relationship.