The article titled “Safeguarding Members’ Given Rights to General Meetings: The Raison D’etre of Section 314 of the Companies Act 2016” was authored by Sebastian Liew and Lau Zhong Yan, and was published by the Malayan Law Journal at  2 MLJ cdlxv.
This post contains an executive summary of the article, as well as the full text of the article below.
General meetings of a company are a quintessential part of company law and a key instrument in ensuring good corporate governance. In such forums, members are able to express their observations, vote on key resolutions and influence the management direction of the company.
Under the Companies Act 2016, a member holding or representing at least 10 percent of the issued share capital of a company may either directly convene a meeting of members or require the board of directors of the company to convene a meeting of members. As straightforward as this process may seem, in practice, factional struggles within a company may frustrate the calling or conduct of a meeting of members. This would then lead to an impracticable scenario. Common circumstances that form an impracticable scenario, though not exhaustive, are:
(a) deadlock situations;
(b) intentional uncooperative attitude of the directors;
(c) persistent efforts to derail the meeting; or
(d) deliberate refusal to attend the meeting after a proper and valid notice had been issued causing a failure to meet quorum.
If, for any reason, it has become impractical to either call or conduct a meeting of members, the aggrieved member may seek judicial assistance. The courts have wide and discretionary powers to intervene and to order that a meeting of members be called, held and convened. The courts will only exercise their powers if the applicant can show sufficient evidence of attempts to call or hold a meeting of members and those attempts have been futile. A further prerequisite to warrant judicial intervention is that the applicant must satisfy the court that all avenues to call or conduct a general meeting of members have been exhausted. If an applicant can still call or conduct a general meeting, then in the circumstances, a meeting may not be impracticable.
In situations where the court deems that it is impracticable to call or conduct a general meeting of members, the scope of the court’s intervention is confined to facilitating the calling or conducting of a meeting of members, commonly to lift a deadlock. The courts are however generally reluctant to exercise their powers to dictate how a company should run, to examine the fairness of resolutions tabled, or to order specific appointments/removals of particular directors in the company.
To summarise, the courts will neither interfere in the domestic affairs of a company nor dictate the manner in which a company conducts its affairs. The role of the judiciary in such applications is narrowed to facilitating the calling or conducting of a meeting, in order to enable a company to run its own affairs. The rest is left to the members of a company to decide at the court convened meeting. It is trite that the judiciary is not institutionally equipped to dictate how a company should run.
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Meetings of members are a quintessential part of company law and a key instrument in ensuring good corporate governance. It provides an important platform for members to express their observations, to vote and to influence the management direction of the company. If a company is unable to call or conduct its general meetings, it would be a grave impediment to corporate democracy.
Under the Companies Act 2016 (‘CA 2016’), there are two avenues open to a member to call for a general meeting of a company. These rights are pursuant to s 310 and s 311 of the CA 2016. Failing the aforementioned statutory avenues, s 314, empowers the Court to order a meeting of members upon production of sufficient evidence. The s 314 test is premised on impracticability, whereby, without judicial intervention, a general meeting cannot be called or conducted as prescribed by the CA 2016 and/or by either the articles or constitution of the company.
This article aims to provide a bird’s-eye view on s 314 applications under the CA 2016 (‘314 Application’). This article examines the judiciary’s considerations in ordering a meeting together with the prerequisites to making a 314 Application; i.e. what might be expected of from an applicant.
CALLING A MEETING OF MEMBERS
The general position is that a member of a company that holds at least ten% of a company’s issued share capital has a legal right to convene a meeting of members or require the directors of a company to convene a meeting of members. A member with a lower shareholding percentile may have the same right to convene meetings, subject to the constitution of the company.
Sections 310 and 311 of the CA 2016
A member may directly exercise his/her statutory right and convene a meeting of members under s 310 (b) of the CA 2016. Alternatively, a member may require that the board of directors convene a meeting of members under s 311 of the CA 2016. In the latter, the convening of the EGM is placed in the hands of the directors, whereas, in the former, greater control of the process is placed in the hands of the convener.
As straightforward as this process may seem on paper, in practice, factional struggles within a company may give rise to obstacles that are designed to stifle what would otherwise be a validly convened meeting. Typical tactics may include intentional maneuvers to inquorate a general meeting or using the quorum provision as a de facto veto mechanism to frustrate a meeting.
These scenarios are particularly prevalent where one faction is attempting to exert greater influence in the company, classically by reconstituting the board with its nominees thereby potentially diminishing a controlling member’s foothold within the company. In such circumstances, a 314 Application comes into play.
SECTION 314: COURT-CONVENED MEETING
As a 314 Application is predicated on the impracticability in either calling or conducting a meeting of members, the Court is authorised to order a meeting of members once an applicant can provide strong evidence to warrant judicial intervention. The evidence of impracticability must therefore be sufficiently detailed in an applicant’s affidavit in support of a 314 Application.
The judiciary has given a wide and generous construction as to what would amount to an impracticable scenario. In Tamabina Sdn Bhd v Nakamichi Corporation Berhad, it was held that to show impracticability, it is necessary to show evidence of attempts and/or efforts to call and hold a meeting, and that such attempts or efforts have been futile. The reason for such futility must also be attributed to some circumstances that made it impossible to hold the meeting.
As a point of reference, the case of Tamabina also provides a non-exhaustive list of common circumstances that forms impracticable scenarios. These circumstances could be due to ‘a deadlock situation, an intentional uncooperative attitude of the directors, a persistent effort to derail the meeting, a deliberate non-attendance at meeting after a proper and valid notice had been issued so as to force the meeting to be called off for want of quorum’.
Similarly, the English Court in re El Sombrero Ltd adopted a broad construction of the expression ‘impracticable’ stating that it arose if the meeting could not, as a practical matter, be called or conducted. It however further specified that refusal to attend was sufficient to give rise to impracticability. Hence, the refusal to attend and causing a failure to meet quorum requirements can be grounds for judicial intervention.
Is it impracticable for a meeting to be called and/or conducted before exhausting both sections 310 and 311?
To warrant judicial intervention, an applicant must satisfy the Court that there is no other alternative but for a meeting to be ordered under judicial supervision. In essence, a prerequisite to a 314 Application is that all available legal avenues prescribed in the CA 2016 has been exhausted. If an applicant can still call or conduct a general meeting under ss 310 and 311, then in the circumstances, a meeting may not be impracticable.
In Kemunting Tin Dredging (M) Bhd & Ors v Baharuddin Ma’arof & Ors, the conclusion reached was that the judiciary would only intervene if it was not practicable for an applicant to call for a meeting. On the facts, the applicant could still call for a general meeting under ss 143 and 145 of the repealed 1965 Companies Act (pari materia to ss 310 and 311). As such, it was deemed practicable to convene a meeting and the court dismissed the application, thereby refusing to intervene.
As a practical point, it is imperative that before making a 314 Application, an applicant should first ensure that both s 310 and s 311 of the CA 2016 has been exhausted. Failure to exhaust the available statutory avenues may be detrimental and could negatively impact an applicant’s prospects of success regardless of the strength of the evidence before the court.
Is there an argument that there exist a possibility that the majority will exercise its superior voting powers to oppress the minority if granted a 314 Application?
The majority shareholders are entitled to have nominees on the board of directors to make policy and/or executive decisions. Equally, if the majority members are in favor of changing the composition of the board or filling the board with its nominees, there is no wrong done even if it displaces the minority’s influence. The general rule is supremacy of the majority is a fundamental principle of company law, where the minority must subscribe to the rule of the majority.
The Privy Council in Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung establishes that only when the majority rule passes over into rule oppressive of the minority members, then a wrong may have been committed. Accordingly, a minority member who does not agree with the proposed resolutions can only institute proceedings when an actual cause of action arises and not pre-empt a speculative wrong. A member must not transgress his/her obligations and initiate deliberate acts to block any proposed resolutions to be considered at a scheduled meeting. The rationale is that an aggrieved party must seek redress through the appropriate remedies recognised by law and not to paralyse the company.
In Lee Yee Wuen v Kien Yiap Trading Sdn Bhd & Anor, the second defendant had contended that the court’s discretion cannot ignore the minority rights nor be used to advance the interest of the majority. Part of the allegations was that the plaintiff would act against the best interest of the company with her choice of prospective directors. The Court affirmed the principle of the majority rule and stated that the will of the majority will prevail as long as there is no oppression. The learned Judge further asserted that the minority cannot use the quorum provision to curtail the rights of the majority.
In this regard, there is no given right to equal management participation unless expressed in a shareholders’ agreement or specifically provided for in the articles/constitution of a company. If there is a real danger that oppression might result from a court-convened meeting, then the court will not lend its aid to the commission of any acts that would be oppressive to any shareholders. This is subject to the materials before the courts.
Members have autonomy to exercise their voting rights to advance their own self-interest over the interest of other members at a general meeting.
Further to the foregoing discussion, there are no restrictions or guidelines on how members should exercise their voting rights on matters tabled at a general meeting. To illustrate, taking the common subject of removal and/or the appointment of additional directors in a bid to seize control of the board, the members present are entitled to table and vote as they desire regardless if such resolutions are unfavorable to rival faction members.
The rationale is that a member of a company does not owe a duty to the company and is entitled to prioritise his/her interest above the interest of any other. The law does not require nor can it compel members to vote in any other person’s interest but their own. A member’s shareholding is after all a genus of property and a member may exercise the consequent voting rights that accompany such properties in advancement of their own self-interest.
A 314 Application can therefore effectively serve to thwart any deliberate acts or maneuvers by a rival faction committed with the objective towards blocking or frustrating the passage of resolutions that are unfavorable to their interests.
THE SCOPE OF JUDICIAL INTERVENTION
The Courts are given wide and discretionary powers to order a meeting of members. The Courts are however generally reluctant to exercise its powers under s 314 to order for specific appointments and/or removal of particular directors. As such, prayers under a 314 Application should pursue for a meeting to be convened within a specified timeframe and/or for a direction that a one-member meeting be quorate.
It is well-established law that the courts favors the adoption of a minimalistic interventionist approach. The reasoning behind is to avoid interfering in the domestic affairs of a company and/or to dictate the manner a company may conducts its affairs. The position is that the exercise of judicial power ought to be restricted and that judicial non-intervention in corporate affairs should constantly be in the forefront of the judges’ thoughts. After all, the core purpose of a 314 Application is to allow a meeting to be held to enable a company to run its own affairs.
In Teo Tiong Hoe @ Peter v Chiew Shir Ley, the Court found that the appointment of an independent director was a matter for the company to resolve and not for the courts to decide. It was held that whatever was to be tabled and considered in the meeting is for the members to deliberate and to resolve. The Court had confined its authoritative scope to ordering for a meeting to be called, held and convened.
In Hong Kong, the Court of First Instance in Re Success Plan Ltd held that the courts should confine itself to the consideration on whether a meeting of the company should be ordered to get it out of a ‘frozen’ state. It was noted that it was neither necessary nor desirable for the court at this stage to go any further to examine, in advance, the fairness of individual resolutions, as that would in effect pre-empt future considerations or how business should be conducted.
In the Singaporean case of Naseer Ahmad Akhtar v Suresh Argawal, the High Court held that on a point of principle, it is not the role of the court to intervene in the affairs of the company and dictate the way it conducts its affairs. It was further noted that on a point of practice, the courts are not institutionally equipped to dictate how a company should run. Hoo Sheau Peng JC (as she then was) at page 1064 held:
There are a myriad of difficulties involved in the running of any company, even at the best of times. Where relationships are friable and tensions fraught, it would be quite beyond the court to impose conditions to allow the company to keep going.
The emphasis on the prevention of over-reaching orders or micromanagement of the affairs of a company is consistent in Malaysia, Hong Kong and Singapore. In the circumstances, it is well settled that the scope of judicial intervention ought to be restricted to the narrow purpose of facilitating the meeting, for instance, to lift a deadlock.
A 314 Application can be seen as a measure to preserve a shareholder’s legal and statutory rights to call or conduct a general meeting, which is widely regarded as a key corporate governance vehicle. However, due to the interventionistic nature of this legal recourse, it requires a delicate balance to be drawn as the judiciary is not institutionally equipped to administer on corporate affairs. The proposition is that judicial intervention ought to be confined to enabling the company to run its affairs rather than dictating the manner in which it conducts its affairs.
In summary, whether a 314 Application is allowed or dismissed may ultimately boil down to two key factors, whether an applicant had (i) duly exhausted all possible avenues under the CA 2016 prior to making the application; and (ii) had provided strong and sufficient evidence to show that it has been impracticable to convene a meeting without the court’s intervention.
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.