Oppression of minority shareholders and relief under the Companies Act of Singapore
On 25 August 2017, the High Court of Singapore ordered two shareholders to buy out a third shareholder for reasons of ‘oppression’.
Mr Leong Chee Kin, Ms Rosa Chew and Mr Ong Choon Guan were the shareholders and directors of Ideal Design Studio Pte Ltd. However, in November 2008, Leong Chee Kin was dismissed from his office as director by Rosa Chew and Ong Choon Guan. Leong Chee Kin brought a lawsuit before the High Court of Singapore against Rosa Chew and Ong Choon Guan, in which he inter alia sought relief for ‘oppression’ in accordance with the Companies Act of Singapore. To assert his claim, Leong Chee Kin relied on ‘three acts of oppression’ by the defendants: ‘(i) his removal as a director of Ideal Design Studio; (ii) his exclusion from Ideal Design Studio’s management; and (iii) the diversion of Ideal Design Studio’s business to five other similarly named companies for the defendants’ sole benefit’. On 25 August 2017, the High Court of Singapore (in a judgment delivered by V. Coomaraswamy J) awarded the claim based on oppression insofar as it was based on the third ground.
The defendants each held 7,500 of the shares of Ideal Design Studio Pte Ltd. In January 2008, Leong Chee Kin bought 2,500 shares from Ong Choon Guan for $ 6,666.66 and was appointed director. It was agreed between Leong Chee Kin and the defendants that Leong Chee Kin would bring in $ 200,000 in sales within six months and that, if he failed to do so, he would sell back his shares to Ong Choon Guan and resign as a director. As the defendants were of the opinion that Leong Chee Kin had failed to meet the sales target, in November 2008 they convened an extraordinary general meeting during which a resolution was passed that dismissed Leong Chee Kin as director.
Between January 2009 and November 2011, the defendants incorporated five companies, that all had names that began with the words ‘Ideal Design’. According to the defendants, this was a way of securing that business costs were kept low, as it enabled the defendants to distribute customers among the companies to avoid each single company exceeding the threshold of revenues that would require it to pay ‘goods and services tax’.
In the context of oppression, the court first considered whether Ideal Design Studio Pte Ltd was a ‘quasi-partnership’:
‘A quasi-partnership may now be said to be any company whose affairs are conducted with a degree of informality, ie, where the members do not transact on an arms-length basis, do not distil their informal agreements into formal contracts, and do not record their understandings in writing. The informal nature in which such companies conduct their internal affairs creates a greater risk that some members will be victims of exploitative conduct by the majority’ (para. 50).
The court considered that Ideal Design Studio Pte Ltd was not a quasi-partnership: ‘The question is not whether the plaintiff trusted the defendants when he joined Ideal Design Studio. The question is whether there was mutual trust and confidence between the parties. And in this regard, it is apparent from the evidence that, even if the plaintiff trusted and had confidence in the defendants, this trust and confidence was not reciprocated’ (para. 54). Against this background, it may not come as a surprise that, concerning the first and second argument on which Leong Chee Kin based his claim of oppression, the court came to the conclusion that these arguments did not constitute a case of oppression: ‘There was no basis for any expectation on his part that he would remain a director or continue to participate in the company’s management’ (para. 44).
However, the court did find oppression in Leong Chee Kin’s third argument. As the court considered: ‘I do not accept the defendants’ evidence that they diverted business from Ideal Design Studio for valid commercial reasons’ (para. 74). And: ‘The diversion […] was grossly commercially unfair to the plaintiff as a minority shareholder of Ideal Design Studio. The defendants thereby defeated the plaintiff’s legitimate expectation as a shareholder, and are thus guilty of oppressive conduct within the meaning of […] the Act’ (para. 77).
In conclusion, the court ordered the defendants to purchase from Leong Chee Kin the shares he held in Ideal Design Studio Pte Ltd ‘with his shares to be valued on the assumption that the defendants had not wrongfully and oppressively diverted Ideal Design Studio’s business away from it’ (para. 4).
The judgment of the High Court of Singapore can be found at: www.singaporelaw.sg, laws of Singapore, case law, free law (High Court judgments).