An extract from The Mergers & Acquisitions Litigation Review, 2nd Edition
Shareholder claimsi Common claims and procedure
Minority shareholders would need to come together as a 10 per cent shareholding block to establish oppression or mismanagement through legal proceedings in the relevant high court. Despite the fact that the minimum shareholding required for bringing such action has been reduced from 20 per cent pursuant to the 2017 Act, these cases remain rare and difficult to substantiate; however, they are also the most common.
Close to all of the reported decisions of the high courts of Pakistan demonstrate a conservative approach to establishing oppression and mismanagement. Shareholders must demonstrate serious unfair prejudice and tangible detriment; mere allegations of irregularity are not held to suffice.7 In the majority of cases in which allegations of fraud, dishonesty or violation of fiduciary duties are brought against directors or management personnel of a company, courts are again reluctant to find in favour of the aggrieved, applying a high threshold for proof.ii RemediesPre-closing
The directors of a company owe fiduciary duties to pass resolutions in the best interests of all shareholders. Minority shareholders may file a petition before the relevant high court for oppression or mismanagement; provided the minority represents at least 10 per cent of the shareholding of the company.
Such petition may also be brought for unfair prejudice to the public interest, and for conducting the business of a company in an unlawful or fraudulent manner, or contrary to its constitutional documents. However, as discussed, the courts in Pakistan borrow principles from the English jurisdiction, burdening the shareholders with establishing material and unjust exercise of authority and unfair treatment in order for a claim to succeed.8
Notably, high courts also decline intervention in matters for which the powers of investigation and enforcement vest in the SECP, and to which alternative penalties and procedures apply. This includes claims in respect of:
- non-disclosure of information;
- non-issuance of notices of meetings to shareholders;
- the valuation of shares or share swap ratios; or
- matters in which appropriate resolutions of the shareholders have not been obtained.
Moreover, the usual – albeit severe – delays in the courts of Pakistan, as well as the costs involved, do not encourage minority shareholders to litigate.
Nevertheless, shareholders are entitled to the mandatory public offer pursuant to the 2015 Act and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017. Shareholders may also challenge the appointment and removal of directors, as well as matters concerning violations in procedure or otherwise in respect of annual and other general meetings of a company at which the necessary resolutions for approving proposed mergers or schemes are to be passed.Post-closing
Shareholders would have recourse to contractual remedies, including for the recovery of general and special damages. The Contract Act 1872 of Pakistan governs the creation and enforcement of contracts and types of contracts, as well as consequences of breach. The Specific Relief Act 1877 provides the circumstances in which specific performance of contracts and injunctions for breach may be sought in legal proceedings.
The civil courts or arbitral tribunals (under the Arbitration Act 1940) have jurisdiction for adjudicating contractual disputes. However, in the province of Sindh, any claim of a value of 15 million Pakistani rupees or more will be brought in the High Court of Sindh. Appeals lie to a district court if originated in the civil courts or otherwise to a division bench of the high court, and further to the Supreme Court of Pakistan.iii Defences
Pakistani jurisprudence upholds the principle of company law that shareholders, directors, employees and officers of a company are distinct from it. The corporate veil for offences attributed by law to companies will not be lifted by the courts to pass ordinary liability for acts or omissions of a company unless there is substantial proof of gross negligence, fraud, misfeasance or other criminal misconduct on the part of the person.9 Certain provisions of the 2017 Act nevertheless place personal liability on directors, such as for failure to disclose conflicts of interest or for authorising or undertaking related-party transactions.
Ultimately it is the best interests test that applies, judged from a reasonable standard, in like employment or directorial position and circumstances. Compliance with prescribed and internal company policies and procedures would also serve as a defence. It is not common for the SECP or any court to penalise directors where no material prejudice is shown to have been caused.iv Advisers and third parties
The Chartered Accountants Ordinance 1961 and the by-laws framed thereunder govern the practice of chartered accounts and provide for consequences of professional misconduct. Claims against advisers and third parties are not prevalent in Pakistan. However, the SECP has, from time to time, sought to enforce penalties against auditors for illegal or untrue accounts prepared for companies.
In one known instance, Hascol Petroleum Limited filed an appeal before the CCP, challenging its approval of the acquisition by Pakistan State Oil Limited of shares in Pakistan Refinery Limited, alleging that the subject acquisition did indeed present competition concerns. However, the appeal was dismissed on merit.10v Class and collective actions
There are little to no class actions reported in Pakistan in the context of M&A. However, a constitutional petition brought on behalf of the purported labour union of K-Electric is currently pending in the High Court of Sindh challenging the proposed acquisition by Shanghai Electric Power Development (Hong Kong) Co Ltd of shares in K-Electric.vi Insurance and indemnification
Insurance does not play a major role in current M&A practice.
Directors may be indemnified by companies through private agreements for liabilities arising out of acts done in the course of appointment or employment.vii Settlement
With the introduction of the 2017 Act, companies, their respective boards of directors, management, shareholders and creditors are encouraged to settle disputes through mediation. Parties are free to choose the juridical forum and choice of law governing contracts (but only to the extent that such law is proved to the satisfaction of the court (which satisfaction is within the discretion of the court) and not considered contrary to the public policy of Pakistan); hence, the majority of disputes are settled in foreign courts or arbitrations.
Settlements may be achieved before or during the course of legal proceedings. Most pre-closing disputes are negotiated between the parties.