The right of oppressed minority shareholders to a buy-out order when the financial condition of the company has been obscured by the minority’s oppressors

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The right of oppressed minority shareholders to a buy-out order when the financial condition of the company has been obscured by the minority’s oppressors


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Date Published: 26 July 2022 



 

Introduction

Wei Fengpin v Raymond Low Tuck Loong & 2 Ors [2022] SGCA 32 (“Wei Fengpin”) was an appeal by a minority shareholder to the Court of Appeal. The minority shareholder successfully established that he was oppressed by the defendants at trial. However, for various reasons, the High Court did not order the oppressors to buy out the oppressed minority’s shares. This part of the High Court’s decision was overturned on appeal.

The Court of Appeal clarified that buy-out orders ought to be made in favour of oppressed minority shareholders even where the financial condition of the company has been obscured by the oppressing majority. This article highlights some key takeaways from Wei Fengpin.

The facts of Wei Fengpin and the decision below

In Wei Fengpin, the minority shareholder had commenced an oppression action in the General Division of the High Court and successfully established that he was indeed oppressed by the defendant-majority shareholders. The High Court was minded to order a buy-out. However, the High Court did not do so, because a winding up order had been made and the company’s accounts were unaudited for a substantial period of time. In short, it was difficult and would likely be expensive and time-consuming to establish a fair value for the minority shares.

Accordingly, the High Court did not award the minority shareholder with a buy-out, but made other orders ostensibly aimed at remedying the personal wrongs committed against the minority shareholder. The majority shareholders (who were also directors of the company) were ordered to return various sums which they had paid out to themselves in breach of the company’s articles. These payments were also found to be acts of oppression, as the majority shareholders caused the company to make these payments to the exclusion of the minority shareholder, without giving him notice. The minority shareholder was also a director of the company.

The decision of the Court of Appeal

The Court of Appeal substituted this part of the High Court’s decision with an order that the majority shareholders buy the minority shareholder out at US$5 million. Among other things, the Court of Appeal confirmed that there is no strict requirement in law for share valuations to be carried out on the basis of fully audited accounts.[1] Moreover, the Court of Appeal emphasized that the lack of financial information was a result of the majority shareholders’ misconduct and acts of oppression.[2] To therefore refuse to order a buyout on the basis of a lack of information caused by the oppressors would be “tantamount to sanctioning wrongdoings and rewarding the oppressor. That would be to turn justice on its head.”[3]

The Court of Appeal also held that the mere fact that the company was in liquidation and that the liquidator of the company could take appropriate steps to redress the wrongs committed by the oppressors was insufficient, precisely because such an act on the part of the liquidator addresses only corporate wrongs (namely, the wrongs committed against the company) and not the wrongs that have been committed against the minority shareholder personally. The latter is what section 216 seeks to address.

In Wei Fengpin, the Court of Appeal valued the shares at US$5 million. This was the acquisition value of the minority’s shares. The Court of Appeal held that this valuation was appropriate as the acts of oppression began almost immediately after the minority shareholder acquired his stake in the company. Moreover, the Court of Appeal did not find the mere fact that the minority shareholder paid this US$5 million to a then-exiting shareholder as negating the propriety of a buyout order based on the oppressed shareholder’s acquisition price. While the Court of Appeal acknowledged that this method of valuation was less than ideal, the Court of Appeal stated that the oppressors should not be permitted to rely on their own failure to argue that any valuation based on acquisition price would be unfair to them.

Conclusion

Wei Fengpin reinforces the principle that oppressed shareholders can legitimately expect the remedy of a buy-out order under section 216 of the Companies Act 1967, if they are able to establish that they have indeed been oppressed by the defendants in the action. The Court of Appeal’s express clarification should also serve as a warning to potential disputants that the obscured financial condition of the company is not a bar to the remedy. This is even more so the case where the obscured financial condition of the company is the fault of the oppressors.

[1] at [33].

[2] at [33].

[3] at [33].


Disclaimer: This update is provided to you for general information and should not be relied upon as legal advice.

 

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    Ravi has 32 years of legal experience. He specialises in corporate advisory and provides legal advice to directors and CEOs on laws and rules relating to directors’ duties and corporate governance. He has a wealth of experience in advising local and regional companies on investment agreements, joint ventures, and corporate structures.


    Daphne Tan is an Associate at CNPLaw LLP. Her main area of focus is in contentious work, and her past experience in this area encompasses civil, corporate, and commercial disputes across the construction, investment, telecommunication, food and beverage, real estate, and entertainment sectors.

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      Daphne is a Senior Associate in the firm’s Dispute Resolution team. Her main area of focus is in contentious work, and her past experience in this area encompasses civil, corporate, and commercial disputes across the construction, investment, telecommunication, food and beverage, real estate, and entertainment sectors.


      Every business involves an amalgam of various stakeholders, such as investors, shareholders and directors. Ideally, each of these stakeholders should have a common vision of what is best for the company. However, this is rarely the case when individual interests are factored into the equation.

      Stakeholder conflicts (regarding issues such as breaches of fiduciary duties, derivative actions, shareholder oppression, management deadlocks, management compensation, dividend payments and buy-outs) can be a thorny issue and can leave a company crippled if not addressed promptly.

      Given the diversity of interests at play, we appreciate that a multi-faceted approach is usually the most cost-efficient method of resolving stakeholder conflicts. Therefore, we provide clients with ready access to an integrated team of lawyers (combining the experience of our corporate, dispute resolution and employment law practices where applicable) who will effectively engage the relevant stakeholders in discussions on how best to resolve their differences amicably.

      More often than not, clients are able to avoid costly protracted court proceedings and resolve stakeholder conflicts with discretion and expediency.





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      At CNPLaw, our dispute resolution lawyers seek to provide support to our clients through the lifecycle of transactions. At the very beginning, we seek to mitigate risk and avoid disputes. However, should it transpire to the latter, our lawyers work closely with our clients to either resolve the matter through alternative dispute resolution matters like arbitration and mediation, or through litigating the matter, either in the civil or criminal courts. We have extensive legal experience at every level of the Singapore courts of justice, and our lawyers have appeared in a number of cases reported in the Singapore Law Reports.




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