Minority oppression can happen when majority shareholders decide to act in an unfair or prejudicial way
Minority shareholders of a company (i.e. those holding less than 50% of the voting share capital of a company) will invariably find themselves being outvoted at shareholder meetings by the majority shareholders. However, this notion of majority rule sometimes exposes the minority to abuse or otherwise causes the minority to be prejudiced or treated unfairly.
There is a legal remedy for oppressed minority shareholders
Section 216 of the Companies Act (Cap. 50) provides the minority shareholders, who are unable remedy the prejudice or discrimination suffered, with relief and protection against majority abuse.
The touchstone of oppression is unfairness
Mere disagreements between majority and minority shareholders are usually insufficient to demonstrate oppression. Instead, oppression manifests itself when majority shareholders use their dominant power to advance their interests at the expense of the minority. Whether the complaint is one of unfair prejudice, oppression, discrimination or disregard for minorities’ interest, ultimately, the touchstone in establishing oppression under section 216 of the Companies Act is unfairness.
Notably, the most prevalent form of minority shareholder oppression occurs in closely held family-owned private corporations that are quasi-partnerships. In fact, it is extremely rare for a shareholder in a public company to seek recourse in oppression because that shareholder always has the option of selling his shares in a liquid market, and exiting his investment that way.
What is a quasi-partnership?
A quasi-partnership is a company that is formed or managed on the basis of mutual trust and confidence. Such companies are conducted with a degree of informality ie. the members do not transact on an arms-length basis, do not formalise their agreements and do not record their understandings in writing.
In a quasi-partnership, the members tend to operate on the belief that the majority would take their interests into account and that any problems would be civilly ironed out.
How do you determine if specific conduct is unfair?
The unfairness of a party’s conduct is measured against shareholders’ legitimate expectations that are derived from:
- Strict legal rights as set out in shareholders’ agreements, the company’s constitution and/or the Companies Act;
- Informal agreements and understandings based on the personal relationships in quasi-partnerships; or
- Informal agreements and understandings between shareholders regardless of whether the company is a quasi-partnership.
A claim in minority oppression is generally easier to establish in (2) and (3) as the informal nature in which such companies conduct their affairs create a greater risk of exploitative conduct by the majority. The courts will, therefore, insist on a higher standard of corporate governance in such companies and are willing to scrutinise the parties’ past conduct and communications to determine the existence and scope of any informal arrangements between the shareholders which makes a particular shareholder’s (usually the majority shareholder) exercise of his legal rights commercially unfair.
Personal wrongs vs Corporate wrongs
Section 216 of the Companies Act is to be invoked when the wrong affects the shareholders in their personal capacity as opposed to pure corporate wrongs, which are wrongs that result in losses to the company. For instance, the mismanagement of a company’s assets which cause loss to the company would generally be considered a corporate wrong. Such wrongs should be litigated via a derivative action under section 216A of the Companies Act where a shareholder has to apply for leave from the Court to sue the company’s directors in the name of the company.
However, in recent years, the courts have made it clear that an applicant may be able to rely on facts which give rise to a corporate wrong as the basis for proving oppression within the meaning of section 216 of the Companies Act so long as they can show that they were personally aggrieved by the acts of the oppressors. Thus, a complainant can pursue an oppression action based on mismanagement of a company’s assets if this act evidences the manner in which the wrongdoer has conducted the company’s affairs in disregard of the complainant’s interest as a minority shareholder and where this complaint cannot be adequately addressed by a derivative action.
Usually more than one instance of impugned conduct when minority oppression is alleged
When minority oppression is alleged, there is usually more than one instance of impugned conduct. The Courts have established that either a single act or a course of conduct could amount to oppression. In reaching a decision, the Court is required to examine all the relevant facts and circumstances in order to determine whether the conduct under scrutiny is oppressive.
What are some examples of oppressive conduct?
Depending on the circumstances of the case, the following may constitute oppressive conduct:
- Improper diversion of business
- Unfairly restricting the payment of dividends
- Payment of excessive remuneration to directors
- Dilution of a minority’s shares contrary to an informal understanding
- Persistent denial of access to information about a company
- Exclusion from the participation in management of the company
- Misuse of company funds
What can a company do to minimise the risk of oppression claims?
While it is impossible to completely avoid oppression claims, it is important for companies to implement measures to minimise the risk of such a claim being commenced.
One way to do so is to have all shareholders execute a shareholders’ agreement which could address the resolution of potential disputes between the majority and minority shareholders.
The second safeguard is for the majority to ensure that corporate formalities are adhered to. Such formalities are typically ignored in family businesses which operate on the basis of mutual trust and confidence. However, when disputes arise between shareholders of these companies, it will be too late to change history and solve the problems created by ignoring corporate formalities.
It is advisable for such family companies to engage lawyers or other consultancies which can provide valuable input and strengthen corporate governance practices.
What are the remedies available to a victim of oppression?
Oftentimes, an oppressed shareholder will need to turn to the courts to obtain a remedy.
The court has wide discretion to order any remedy which it deems fit to bring an end to the oppressive conduct and is not constrained by the relief sought by the applicant. In this regard, the court may:
- Restrain the prejudicial act;
- Order that the minority shareholders’ interest be bought out at an equitable and fair value;
- Order that the company be wound up (usually a draconian remedy of last resort);
- Order that a derivative action under section 216A of the Companies Act be pursued where the oppressive acts result in loss to the company.
When a company is profitable, and if oppression is made out, the present trend is for courts to remedy the oppression by ordering a buy-out of the oppressed shareholder’s interest at fair value.
An order for winding up is generally justified only where the gravity of the case extends to serious mismanagement and where as a result of an impasse, there is no active and competent management steering the company in the right direction, or alternatively if there is a management deadlock.
Frequently asked questions
Question 1: Are minority oppression claims arbitrable?
Yes. The Singapore Court of Appeal has held that minority oppression disputes under section 216 of the Companies Act are arbitrable. However, there must first be a contractual basis for the resolution of disputes by way of arbitration. This will usually be found in the shareholders’ agreement. If there is no such arbitration agreement, then the shareholder’s remedy lies in court litigation.
Question 2: Can a minority oppression claim be brought against shareholders who are not in the majority?
Yes. Oppression can be found against a person who holds the dominant/controlling power in a company even if this person is not a majority shareholder. Dominance is not shown only on a consideration of how many shares a person owns. Rather, extraneous factors such as his ability to control other votes or to dictate policy by some other means should also be taken into account.
Question 3: Can a majority shareholder bring a claim for oppression?
Yes, it is possible for “reverse oppression” to occur where a majority shareholder is unable to avail himself to self-help remedies to put an end to the oppressive conduct. This may occur where a majority shareholding does not correspond with voting control in the particular circumstances or where a majority’s voting power is insufficient, neutralized, entirely circumvented or irrelevant.
Question 4: Can the court order that the majority sell out to the minority?
Yes. The Singapore courts have a wide unfettered discretion to remedy the oppression. This would also include ordering the majority to sell their shares at fair value to the minority.
Question 5: Are all family companies quasi-partnerships?
No. To establish a quasi-partnership, an applicant must show that there was a relationship of mutual trust and confidence between the shareholders. Thus, for instance, a quasi-partnership will not exist in a family company formed by a patriarch where there is a bilateral relationship of mutual trust and confidence between each child and the patriarch but no such relationship between each child and all other children.
Question 6: Does the adjudication of a section 216A derivative action preclude the commencement of a section 216 minority oppression action if both proceedings concern the same subject matter?
No. The statutory basis, rationale, tests and requirements for a derivative action and minority oppression action are fundamentally different. Section 216 of the Companies Act is a mechanism which provides a direct personal remedy to a shareholder who has been unfairly treated. On the other hand, section 216A allows individual shareholders to pursue an action for and on behalf of the company against directors who have engaged in wrongdoing ie. the shareholders are not seeking to enforce their own personal rights but rather they are seeking corporate relief.
Have a question on minority oppression?
If you have any question on minority oppression, you can request a quote from Pradeep Pillai.
This article is written by Pradeep Pillai of PRP Law LLC. Pradeep Pillai heads the team at PRP Law LLC which specialises in shareholder disputes and has been involved in Singapore litigation concerning minority oppression.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.