Nathalie Ker discusses a recent case on the scope of shareholders’ reserve powers.
In Company Law, there is usually a clear division of power between the board of directors and the shareholders of a company. Subject to the articles of association, the business and affairs of a company are managed by the board of directors. However, where there is deadlock in the board of directors, shareholders may be vested with reserve powers of management under the common law in order to break such deadlock.
When do shareholders have such reserve powers? How is the scope of such powers determined? These were the underlying questions behind the legal issues that were before the Singapore High Court in the recent case of TYC Investment Pte Ltd and others v Tay Yun Chwan Henry and another
 SGHC 192.
BACKGROUND OF THE COMPANY
The case concerns TYC Investment Pte Ltd (“TYC”), a family holding company for the well-known Singaporean luxury watch retailer, The Hour Glass Limited (“THG”), and other family assets. The dispute arose out of the 2010 divorce proceedings between Dr Henry Tay Yun Chwan (“Tay”) and Ms Jannie Chan Siew Lee (“Chan”), the founders of THG. Tay and Chan were also the founders and the only directors of TYC, each holding a founder share in TYC which gave them 46% and 44% of the voting rights respectively. The other shareholders were their three children.
Article 8 of the Articles of Association of TYC provided that Tay and Chan were to be the permanent ‘Governing Directors’ of TYC until they resigned from office, and all other directors would be under their control and would have to conform to their discretion regarding TYC’s business. Article 8, with its restrictions on any other directors of the Company, was central to the dispute at hand.
THE DIVORCE SETTLEMENT AND PAYMENT CLAUSE
As part of the settlement of the divorce proceedings, three agreements were entered into by Tay and Chan (“Settlement Agreements”). One of these agreements contained a payment clause (amended by a subsequent agreement) (“Payment Clause”) which required payments by TYC to be approved by both Tay and Chan, and neither could sign a cheque on TYC’s bank accounts unless the other had signed a voucher approving the payments.
TYC was bound by the Payment Clause by a deed entered into among Tay, Chan and TYC. Article 16 of the Articles of Association of TYC further prohibited TYC from amending, varying or waiving its rights and obligations under the aforesaid deed without the unanimous consent of the shareholders of TYC.
What neither Tay nor Chan foresaw in the drafting of the Payment Clause was that either of them could unilaterally cause TYC to withhold payments of apparently legitimate expenses by simply refusing to sign a corresponding voucher.
EVENTS LEADING TO THE DISPUTE
The events leading up to the suit revolved around the refusal of Chan to approve various payments by TYC. As most of the disputes over the payments were settled by the time the suit was heard by the Court, the only payments in issue were payments of fees to KPMG in connection with its engagement to advise on accounting and tax issues arising from the Settlement Agreements, and fees due to solicitors, TSMP Law Corporation (“TSMP”), in connection with the commencement of the suit.
As a result of Chan’s refusal to approve payments, Tay convened an Extraordinary General Meeting (“EGM”) of TYC on 4 September 2013 to pass resolutions to appoint TSMP to commence an action against Chan and to authorise Tay to unilaterally sign cheques and vouchers to effect certain payments. The EGM was attended by Tay and one of the three children. As they collectively held 51% of the voting rights in TYC, the resolutions were passed.
Chan opposed the appointment of TSMP, arguing that the appointment by way of the resolutions on 4 September 2013 was improper as the management and administrative powers of TYC vest with its board of directors.
The Court had to decide whether the shareholders of a company in general meeting could pass a resolution to approve the appointment of solicitors and to commence proceedings against a director where such a director was able to veto any proposed board resolution to commence such proceedings.
THE DECISION OF THE COURT
Lee Kim Shin JC began his legal analysis by considering the issue of the division of powers between the board of directors and the shareholders of a company and an examination of the seminal common law authorities. Section 157A of the Singapore Companies’ Act, which states that “the business of a company shall be managed by or under the direction of the directors
” and that “[t
]he 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
”, was also brought into the equation.
It was concluded that section 157A settled the position that where powers of management are vested in the board of directors, then ordinarily, the board alone could exercise those powers. This position was reflected in Article 73 of the Articles of Association of TYC.
The Court then went on to consider whether there was an exception to the general position where shareholders had ‘reserve powers
’ of management when the board of directors was in deadlock. After reviewing various English authorities and an Australian authority, the Court concluded as follows: