Minority Shareholder Oppression in Singapore
As a minority shareholder of a company, you may invariably find yourself being outvoted at shareholder meetings by majority shareholders.
However, mere disagreements between majority and minority shareholders are usually insufficient to demonstrate oppression. Oppression involves an element of unfairness, where majority shareholders use their dominant power to advance their interests at the expense of minority shareholders.
Fortunately, under Singapore’s law, there are rights and legal remedies available to minority shareholders in the case of oppression.
Who are minority shareholders?
Minority shareholders are shareholders who hold less than 50% of the shares in a company. They do not hold majority control over the company and can thus be easily outvoted by majority shareholders when business decisions are made.
As opposed to minority shareholders in publicly listed companies, minority shareholders in private companies are more vulnerable to oppression by the majority shareholders; often because it is a challenge for them to exit the company by selling their shares. Privately held companies do not have a ready market where its shares can be readily transacted.
Rights of shareholders
The Companies Act of Singapore bestows certain rights to a shareholder of a company to protect their interests. For example:
Right to attend and vote in general meetings
The most important right that is conferred on shareholders is the right to attend and vote in general meetings. A company typically holds a general meeting on an annual basis.
The Companies Act requires shareholders’ approval for certain matters. An ordinary resolution is passed by a simple majority of those present and voting at a general meeting. A special resolution must be passed by at least 75% of those present and voting at a general meeting.
Examples of matters that require an ordinary resolution include:
- Appointing or re-appointing a director.
- Removal of a director before the expiration of his period of office.
- Disposal of the whole (or substantially the whole) of the company’s undertaking or property.
- Issuing of shares.
Examples of matters that require a special resolution include:
- Changing the name of the company.
- Changing from a public company to a private company and vice versa.
- Approving a reduction in the company’s share capital.
- Approving an amalgamation with another company.
- Approving a voluntary winding-up.
Right to demand adherence to the company’s constitution and the Companies Act
All shareholders have the right to make sure that the company abides by its constitutional documents (i.e. shareholders’ agreement) and the Companies Act.
Moreover, before investing in the company, it is advisable for any minority shareholder to negotiate for specific rights to protect their interests; for example, a right to veto any new issue of shares which may potentially dilute the interest of a minority shareholder.
Any shareholder can bring an action against the company if their interests are or may be affected by the company contravening any provision in the company’s constitution or the Companies Act.
For example, if the company states clearly in its constitution that their business is to sell food but later decides to venture into a completely unrelated business such as interior design, shareholders have the right to object to the new business venture.
Right of access to information
Shareholders have the right to access certain kinds of information regarding a company. These types of information include:
- Electronic Register of Members.
- Minutes of general meetings.
- Company’s Register of Charges.
- The Register of Director’s shareholdings, key management personnel, debenture holders and substantial shareholders.
Shareholders also have the right to receive the audited financial statements of a company. Companies need to send their financial statements to their shareholders at least 14 days before the documents are shown at a general meeting.
In the case of private companies that do not hold general meetings, shareholders have the right to receive a copy of the company’s financial statements within five months after the end of the financial year.
Right to bring legal action on behalf of or against the company
Shareholders can apply to court for permission to initiate legal proceedings on behalf of the company. In such cases, these shareholders must show that their action is for the benefit of the company. Before commencing any proceedings, the shareholders must give notice to the directors of the company.
A shareholder may also bring a legal action against the company if:
- The company is being operated in a manner that is oppressive to one or more shareholders.
- The company takes or plans to take an action that unfairly discriminates against certain shareholders.
What constitutes oppression against minority shareholders?
In legal terms, an act is only considered oppressive when commercial unfairness occurs; breach of a written contract or legitimate expectations between the shareholders must cause commercial unfairness to the aggrieved shareholder.
Examples of oppressive acts may include:
- Dilution of minority shares.
- Denial of access to company information.
- Exclusion from management.
- Misuse of company funds.
- Misappropriation of company assets.
Fine line between personal wrongs and corporate wrongs
Under Section 216 of the Companies Act, minority shareholders can initiate an oppression action in their own names to protect themselves from unfair prejudice by majority shareholders. A successful oppression action would most often result in personal remedies for the minority shareholders.
On the other hand, the statutory derivative action under Section 216A of the Companies Act enables minority shareholders to initiate an action in the company’s name. The derivative action is intended to right the wrongs done to the company in cases where those in control of the company (i.e. directors) have caused harm or breached their fiduciary duties to the company. The derivative action ultimately results in remedies to benefit the company.
In simple terms, claims for reliefs that solely involve personal wrongs committed against shareholders should be brought by way of an oppression action, whereas corporate wrongs committed against the company should be remedied by way of a statutory derivative action.
However, the distinction between personal wrongs and corporate wrongs may be challenging to apply in practice. This is because it is common for acts that are allegedly oppressive to an individual minority shareholder to simultaneously constitute a wrong to the company. For example, breach of fiduciary duty by the company’s director could also involve commercial unfairness towards minority shareholders.
Oppression of minority shareholders in a quasi-partnership
A quasi-partnership (a company that is formed or managed on the basis of mutual trust and confidence) is common in Singapore. Such companies are conducted with a degree of informality and may not have formalised their agreements or understandings in writing. Claims in minority oppression can thus often happen as this informal nature creates a greater risk of exploitative conduct by majority shareholders.
Legal remedies for oppression of minority shareholders
Depending on the overall circumstances, the court has the authority to order any legal remedy it deems fit to resolve the matter, regardless of what the claimant requests for.
Essentially, legal remedies for oppression of minority shareholders are provided for under section 216(2) of the Companies Act,which include:
As and when the court deems appropriate, it can order an injunction to the activities of the company. An injunction is an order to stop or cancel certain actions.
Some examples of an injunction include:
- Stopping a company from holding a general meeting.
- Stopping a company from passing or acting on a board resolution.
- Stopping a company from entering into a transaction.
The court may order the company to change its articles of association or other constitutional documents to ensure the proper function of the company and cure past irregularities.
For example, the court may order that:
- The board of directors be appointed according to the court.
- The company’s bank accounts be operated with the signatures of two directors.
The court may order the wrongdoer to pay damages to minority shareholders.
An order for damages will only be made if it can be shown that the minority shareholder suffered losses directly caused by the actions of the wrongdoer. To award such damages, the loss to the minority shareholder must be measurable.
When the company is profitable, the court may order that the majority shareholders buy all the shareholding of the aggrieved minority shareholder. This buy-out ensures that minority shareholders receive their fair value from the company and no longer have to be associated with affairs of the company.
The value at which the shares must be purchased will be the market value of the shares on the date of the order, or a fair price determined by the court.
The winding up of the company may also be ordered by a court in an oppression proceeding. This is usually a last resort by the court if no other solution is sufficient or feasible for the shareholders.
Winding up may be ordered in circumstances where:
- Equal shareholders are at irredeemable odds with respect to the direction of the company.
- The company is no longer able to carry on its primary business.
- The relationship between shareholders has completely gone sour.
During winding up, shareholders’ personal assets are protected by the law. The maximum loss of a shareholder will depend on the amount of their shareholding in the company.
How can a company reduce the risk of oppression claims?
It can be challenging to completely safeguard a company or majority shareholders against oppression claims. However, a company can take proactive steps to minimise the risk of disputes.
The most common way to minimise disputes is to execute a shareholder’s agreement. Under the agreement, specific rights and obligations between different shareholders can be laid down. This type of agreement helps parties foresee future disputes and resolve them beforehand.
It may be typical for family businesses to ignore the need for formal agreements in writing, but this can give rise to internal conflicts and disagreements. In order to minimise such disputes, it is recommended for all parties to adhere strictly to corporate formalities, regardless of the shareholders’ relationship.