RESERVE POWERS OF MANAGEMENT MAY DEVOLVE TO SHAREHOLDERS WHEN BOARD IS DEADLOCKED

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1 NOVEMBER RESERVE POWERS OF MANAGEMENT MAY DEVOLVE TO SHAREHOLDERS WHEN BOARD IS DEADLOCKED In the recent case of TYC Investment Pte Ltd & Ors v Tay Yun Chwan Henry & Anor [2014] SGHC 192 (10 October 2014), the Singapore High Court had to consider whether shareholders of a company could pass a resolution in a general meeting to approve the appointment of solicitors to act for the company and commence proceedings against a director, if such director was able to veto any proposed board resolution to commence such proceedings leading to a situation where the board was deadlocked. The case concerned a family holding company, TYC Investment Pte Ltd ( TYC ), and a deadlocked board comprising just two directors who are also ex-spouses. The two directors are Dr Henry Tay Yun Chwan ( HT ) and Ms Jannie Chan Siew Lee ( JC ). HT and JC are also shareholders of TYC. The Court held that reserve powers may devolve to shareholders in general meeting if certain requirements are met. This Update takes a look at the decision. Facts The Payment Clause TYC bound by Payment Clause In 2012, HT and JC entered into an agreement as part of the settlement of the ancillary matters of their divorce. One of its clauses (the Payment Clause ) provides that the approval of both HT and JC is required before payments can be made by TYC. Specifically, it states that cheques can only be signed by either HT or JC if there is a corresponding payment voucher approved by the other. An unintended side effect of the Payment Clause is that HT and JC are in a position whereby either could, by refusing to sign a payment voucher (or a cheque for a signed payment voucher), prevent the other from causing TYC to make any payment. As noted, the Payment Clause is set out in a deed of settlement (amended by a subsequent amendment deed) entered into between JC and HT. TYC is bound by the terms of this deed of settlement, including the Payment Clause, by virtue of a subsequent deed entered into by it (the TYC Deed ). In this deed, TYC agreed to be bound by all the provisions of the deed of settlement (and amendment deed). TYC s articles of association further provide that no provision of any of the deeds can be amended unless all the shareholders of TYC agree. These documents and their provisions are therefore indirectly entrenched as part of TYC s constitutive documents.

2 NOVEMBER Article 8 of the articles of association Resolution to appoint lawyers TYC s articles of association also contain the following article, Article 8, which was at the heart of this dispute: [HT] and [JC] shall be the permanent Governing Directors of the Company until they resign from the office and whilst they retain the said office, they will have authority to exercise all the powers, authorities and discretion by these Articles expressed to be vested in the directors generally including the power to convene a general meeting of the Company, and of all the other directors, if any, for the time being of the Company, shall be under their control and shall be bound to conform to their discretion in regard to the Company s business. [emphasis added] In July 2012, shortly after the TYC Deed was entered into, JC refused to approve certain payments by TYC. This led to HT convening an extraordinary general meeting ( EGM ) of shareholders. At this meeting, a resolution (the Resolution ) was passed (along with several others). The Resolution approved the appointment of lawyers and the commencement of an action against JC for her refusal to approve the various payments due from TYC. During the court proceedings, the parties settled the issues relating to most of the outstanding payments, save for one. The Singapore High Court therefore only had to consider whether the shareholders of TYC acting at the EGM had the power to pass the Resolution, and also whether JC should be ordered to approve the remaining outstanding payment. Decision Powers of management vested in directors Section 157A of the Companies Act Whether the Resolution was valid, and hence whether the appointment of the lawyers was valid, turned on whether the company acting in EGM had the power to authorise HT to appoint lawyers to commence legal proceedings. As noted by the Court, the general rule is that the powers of management are vested in the directors of a company and not its shareholders. The corollary of this is that shareholders may not, as a general rule, usurp the management powers of the directors. The usual remedy for shareholders unhappy with a director s decisions is to remove him. This position is enshrined in Singapore law under section 157A of the Companies Act, which provides as follows: (1) The business of a company shall be managed by or under the direction of the directors.

3 NOVEMBER (2) The directors may exercise all the powers of a company except any power that this Act or the memorandum and articles of the company require the company to exercise in general meeting. This was also the position reflected in the articles of TYC. Reserve powers of management Principles applicable to reserve powers The question was therefore whether company law recognises that there exist reserve powers of management vesting in shareholders that may arise where the board is deadlocked or otherwise refuses to act. The Court examined various English and Australian authorities which had considered both the existence and scope of such reserve powers. It concluded that such reserve powers may devolve to the shareholders in general meeting on the following grounds: Such reserve powers are a matter of implication under a company s constitution on the basis of necessity or business efficacy. Insofar as shareholder reserve powers are a matter of implication, their scope is narrow and the express terms of the contract between the shareholders and directors should be respected as far as possible. Section 157A of the Companies Act is predicated on the existence of a board of directors that is both competent and willing to manage the affairs of the company. If this predicate is absent or otherwise incapable of fulfilling its purpose, it does not make sense that the company should be powerless to act simply because of the general rule that powers of management are ordinarily exercisable by the directors alone. The Court then distilled the following set of principles as to the reserve powers of the general meeting: Reserve powers do not devolve to the shareholders unless the board is unable or unwilling to act. The fact that shareholders disagree with a bona fide board decision will not in itself be sufficient. However, if the directors who are preventing the company from suing are the wrongdoers themselves, this requirement is more often than not satisfied. If the deadlock in management may be broken in some other way under the company s constitution, then the court should refuse to recognise that shareholders have reserve powers of management. The reason for this proposition is that reserve powers are implied under a company s constitution on the basis of necessity. The corollary to this proposition is that mere convenience will not justify the exercise of management powers by shareholders.

4 NOVEMBER The scope of the reserve powers which the shareholders may exercise would depend on the facts of each case, and the cases have not established any general proposition governing the issue of scope: o Reserve powers may not be exercised to contravene an express term in a company s articles. o A convenient test as to scope is what is reasonably necessary in the circumstances of the case to break the deadlock in management. The resolution in general meeting to commence proceedings must be passed in accordance with the requisite majority as prescribed by the company s constitution. Absent any super majority requirement contained in the company s constitution, the power to commence proceedings may be authorised by an ordinary resolution. Application to the facts of the case Limit of the reserve powers Applying the above principles to the facts of the case, the Court held that it was reasonably necessary for the EGM to have the limited power to appoint solicitors to commence proceedings to determine the rights and obligations of the relevant parties under the circumstances, so as to break the deadlock in management: The proceedings had been commenced against a director who herself could prevent the company from suing. The source of the deadlock in the present case was the Payment Clause, which required both HT and JC to approve payments by TYC. The appointment of additional directors would not have broken the deadlock in this respect. Article 8 of TYC s articles of association meant that any additional directors appointed would have been bound by HT s or JC s discretion in respect of the management of TYC. TYC therefore did not have a contractual remedy under its articles of association to break the deadlock in relation to the matters raised at the EGM. It further held, however, that these reserve powers would not extend to empowering the EGM to authorise HT to unilaterally sign cheques on TYC s behalf: Such a power would have been inconsistent with the Payment Clause, which was binding on TYC. Implication of a reserve power which would, in effect, allow the EGM to determine payment matters for itself, or worse, to re-write the rights and obligations of the parties in the circumstances of this case would not be reasonable.

5 NOVEMBER Court refused to order payment No breach of fiduciary duty by JC While the Court held that the lawyers for the proceedings had been validly appointed by the EGM and the proceedings validly commenced, it refused to make an order requiring JC to approve payment to the lawyers for the work done for the proceedings. It noted that whether the amounts charged were reasonable and ought to be paid by TYC were matters for TYC and its directors to decide. It was not something that should be determined by the court in these present proceedings. The same conclusion was reached as regards whether JC should be ordered to approve the one outstanding payment on which parties had not been able to reach a settlement. The Court noted that the payment was in relation to the provision of professional services. JC had expressed valid concerns about the quality of the services rendered. In the circumstances, the Court opined that JC had had an honest, bona fide belief that the fees charged ought not to be paid because the service provider had not discharged fully or properly its obligations under the terms of the engagement. It could not therefore be said that she had been in breach of her fiduciary duties as a director of TYC by refusing to approve payment. Our Comments / Analysis It is clear from the decision that a company s memorandum and articles of association are paramount, and reserve powers cannot be exercised to contravene express terms in a company s articles and association, which has contractual effect between the members and the company, and between the members themselves. As shareholder reserve powers are a matter of implication under a company s constitution on the basis of necessity or business efficacy, reserve powers will only arise in exceptional cases and will be narrow in scope. Although the scope of shareholder reserve powers will be dependent on the particular factual matrix of a case, the decision provides useful guidance on the principles that the court will consider in recognising such powers.

6 NOVEMBER If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact any of the following partners: Chan Hock Keng Head Commercial & Corporate Disputes Practice DID: Click here to see Hock Keng s CV. Joy Tan Deputy Head Commercial & Corporate Disputes Practice DID: Click here to see Joy s CV.

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