Many businesses start out with the best of intentions: a group of like-minded friends keen on turning an idea into a successful enterprise. Along the way, parties may not see eye to eye and the relationship sours.
Singapore has about 180,000 local small and medium-sized enterprises (SMEs) that make up 99% of the enterprises in Singapore. In most SMEs, the shareholders are usually the directors. Thus, disputes between the directors inevitably become shareholder disputes. The following types of shareholder disputes will be discussed in this article:
- Disputes over differences in business direction;
- Allegations of misappropriation of company funds; and
- Disputes over how to resolve disputes.
Disputes over Differences in Business Direction
In the 2015 case of Lim Yew Ming v Aik Chuan Construction Pte Ltd and others, a director who was also the majority shareholder wanted to expand into the renewable energy sector. The other directors disagreed as the company had previously been active only in the construction industry and boarding business. The director who was the majority shareholder then sought to convene an extraordinary general meeting (EGM) to pass a resolution to remove the dissenting directors.
However, the company’s constitution required a quorum of 2 shareholders to pass such a resolution. The minority shareholders, in deciding not to attend the EGM, effectively blocked the proposed resolution. This resulted in a management deadlock.
This scenario might be a more common problem than previously thought as most SMEs simply adopt wholesale sample company constitutions from the Accounting and Corporate Regulatory Authority (ACRA). Article 51 of ACRA’s sample constitution provides that “No business is to be transacted at any general meeting unless a quorum of members is present” and that “2 members present in person form a quorum”.
To prevent such a deadlock that may arise from shareholder disputes, SMEs should include deadlock clauses in their constitution or shareholders’ agreement
- What situations amount to a deadlock;
- How deadlocks are to be resolved; and
- When deadlocks should be resolved.
Allegations of Misappropriation of Company Funds
Sometimes, a company may want sue its directors for failing to act in the best interests of the company. To sue these errant directors, the board of directors are required to appoint lawyers. In some instances, particularly for SMEs, these errant directors might be (majority) shareholders. Such errant directors may then seek to convene an EGM to remove the directors who appointed these lawyers. In doing so, they effectively prevent the board of directors from appointing lawyers to sue them.
Such was the case in Ang Thiam Swee v Low Hian Chor, where one Mr Gan, a director, was accused of misappropriating company funds. Unfortunately for him, the remaining directors, Mr Ang and Mr Low, refused to attend the EGM, depriving Mr Gan of the required quorum and bankruptcy proceedings were successfully brought against Mr Gan.
In a remarkable turn of events, Mr Low then tried to wrestle control of the company from Mr Ang by alleging that Mr Ang had misappropriated funds as well. The High Court saw through his motives and dismissed Mr Low’s suit.
Disputes over How to Resolve Disputes
However unlikely it might sound, shareholders may disagree about the where and how to solve disputes. In some instances, parties may have agreed to arbitrate any disputes arising from a contract. In spite of this, one party may still insist on bringing their dispute to court.
Such was the case in Tomolugen Holdings Ltd v Silica Investors Ltd. The parties had entered into a Share Sale Agreement to purchased shares of Auzminerals Resource Group Ltd (AMRG). This agreement contained an arbitration clause, which provided that “any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination” was to be resolved by arbitration in Singapore.
In spite of this arbitration agreement, Silica Investors Ltd decided to sue in court for oppression and unfair prejudice. Silica Investors Ltd alleged that, among other things:
- they were excluded from participation in the management of AMRG; and
- AMRG expended resources to identify and develop mining assets for the benefit of its majority shareholder.
Conclusion
Some of these disputes may be avoided or resolved out of court by having a well-drafted shareholders’ agreement. Though a shareholders’ agreement is not obligated by law, there are many benefits to it. Our 100%-editable Singapore-focused Shareholder Agreement template is a good starting point.
