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Resolving Shareholder Disputes

Fortis Law’s lawyers’ article on “Resolving Shareholder Disputes” has been published and featured in the Asian Legal Business.

Author: Patrick Tan

Unlike directors of a company, shareholders of a company are, subject to certain exceptions, generally not bound by fiduciary duties and may vote as they please. Given the potentially divergent interests of various shareholders, disputes between shareholders are not uncommon. This article focuses on the main dispute resolution mechanisms available to shareholders of a company.

Shareholder agreements

In Singapore, companies frequently use shareholders’ agreements to regulate the rights and obligations of each shareholder. Shareholders’ agreements are essentially contracts entered into by the shareholders, and fall under the ambit of Singapore’s contract law (if Singapore law is the applicable law). Subject to certain exceptions, the laws of Singapore do not generally specify the exact scope or the limit of these agreements.

That said, in instances where the shareholders’ agreement is lacking, the constitution of the company (or its memorandum and articles of association) may then serve the same purpose, for the company’s constitution serves as a contractual agreement between shareholders, and between shareholders and the company.

In light of the above, it is advisable for potential shareholders and companies to ensure that the shareholder agreements and the constitution of the company is properly and clearly drafted, as this can save the parties involved a great deal of time, money, and emotional burden when resolving a dispute.

Derivative Action

Shareholders are generally not allowed to sue directors and controlling shareholders of the company due to the proper plaintiff rule, as the company should be the plaintiff instead. This places shareholders in a difficult position as the company, being under the control of the wrongdoers, will unlikely rectify the situation.

That said, there are instances where shareholders are allowed to sue in the name of the company via derivative actions based on either common law or statute.

An example of a statutory derivative action can be found in s 216A of the Companies Act, which provides that a minority shareholder may apply to the Court to bring an action against the company’s directors or majority shareholders when the exercise of the directors’ powers or the conduct of the company’s affairs are oppressive to him.

That said, shareholders need to be aware that derivative actions may not always be available. For instance, it was decided in Petroships Investment Pte Ltd v Wealthplus Pte Ltd and others and another matter [2016] SGCA 17 that a statutory derivative action pursuant to s 216A of the Companies Act is not available when a company is in liquidation. The Court of Appeal further opined that a derivative action should not be available to a company in liquidation.

Written by: Patrick Tan