A claim to read extra terms into a company's constitution was struck out

[2] The smaller shareholder I have mentioned is the claimant Canstone Management Limited (“Canstone”). Canstone owns 1.7% of the shares in the 1st defendant, Allestari Development Pte Ltd (“Allestari”). According to the register, the 2nd defendant Clarity Chinese Partners LP (“Clarity”) is the majority owner of Allestari holding 56.62% of the shares. The 3rd defendant N Century Holding Company Limited (“N Century”) holds 20.28% of shares in the Allestari according to the register. However, the relative shareholdings of Clarity and N Century are the subject of a dispute being determined in HC/OC 798/2023. The 4th to 6th defendants each hold less than 10% of the shares in Allestari. The 7th defendant, Allway Minerals and Science Technology Co Ltd (“Allway”), is the former majority shareholder of the company, having been such until 2011.

[3] Canstone is not a party to HC/OC 798/2023. However, prior to commencing this originating application it was aware that an interim injunction had been granted on N Century’s application in that matter on 25 November 2022 which restrained Clarity and the Company from altering the composition of Allestari’s board (the “Board”), including by removal or substitution of any director (the “Interim Injunction”). N Century’s application had been in response to Clarity’s attempt to remove three directors from the Board, namely Liu Xun, Guo Jian and Li Yi.

[4] Apparently concerned with how the Board of Allestari was managing it, Canstone filed this originating application seeking relief in the form of the following six prayers:

[5] I adopt in these grounds of decision the abbreviations used in these prayers, including referring to the memorandum and articles of association as the Constitution.

[6] The first prayer sought declaratory relief, that Liu Xun, Guo Jian and Li Yi had been nominated by Allway to the Board. The second to fourth prayers sought declaratory relief to imply certain terms into Allestari’s constitution concerning the composition of the Board. On the basis of those implied terms, orders were then sought that the shareholders take “reasonable steps” to remove Liu Xun, Guo Jian and Li Yi and make fresh appointments of directors in accordance with the terms claimed to be implied.

[7] The relief sought implicated the composition of the Board, notwithstanding that the Interim Injunction protected the current composition of the Board pending the resolution of HC/OC 798/2023.

[8] Moreover, the Constitution had already included a provision concerning nomination of directors to the Board, namely Art 76A, which read:

[13] Canstone appealed the decision of the assistant registrar. I dismissed the appeal. My reasons for dismissing the appeal were as follows.

[15] Declaratory relief is only granted where there is a real controversy between parties that the declaration would resolve. N Century cited the High Court decision in DNKH Logistics Pte Ltd v Liberty Insurance Pte Ltd [2019] 4 SLR 1063 (“DNKH”) at [23] in support of this proposition. In that case, there were divergent views between the parties concerning the legal construction of a fire insurance policy between DNKH and its insurer, but the real controversy was whether that policy covered the goods of DNKH’s customers that were separately insured. It was therefore premature to seek declaratory relief because there was insufficient evidence provided by DNKH concerning any co-insurance of its customers’ goods. See DNKH at [25]–[26].

[16] Starting with prayer 1, it was an undisputed historical fact that Allway had appointed the three directors (back in 2008). There was no controversy concerning this point.

[17] Canstone’s complaint seemed to be that the three directors might take instructions from Allway even after Allway had ceased to be a shareholder back in 2011. However, there was no relief sought to direct the three directors not to take instructions from Allway. There was also no evidence that the three directors currently report to or take instructions from Allway. There was also no evidence that Allway has made any attempt to instruct the three directors of Allestari or indeed assert any rights of a shareholder after it ceased to be one. At the hearing before me I asked counsel for Canstone whether Allway has asserted any right to appoint or remove directors after ceasing to be a shareholder and she confirmed that Allway has not done so. Accordingly, there was no live issue concerning any attempt by Allway to exercise rights under Allestari’s Constitution. This meant that there was no live issue concerning prayers 1 and 2.

[18] Indeed, as I have noted, one of the three directors, Li Yi, is the president and ultimate beneficial owner of Canstone. In the affidavit filed in support of this originating application, he said , apparently referring to the period when Allway was a shareholder, that his role then was to ensure that Allway’s views on issues were communicated to the Board and Allway was represented in the Board’s decision-making. He also said that at that time he took instructions from another of the three directors, Liu Xun, who he said owns or controls Allway. He said that he remained on the board after Allway ceased to be a shareholder because he “thought doing so would provide [him] with a limited platform to protect [his] interests as minority shareholder (ie, via Canstone)” . He then said that around 2016 or 2017 he began to doubt that Liu Xun was acting in the interests of Allestari . For himself, he told Allestari’s shareholders and directors in 2018 that he would only act “in the fair interests of Allestari and its minority shareholder, Canstone” and that that is what he has done.

[19] Mr Li’s evidence did not advance Canstone’s position that there was any real controversy. On the contrary, Mr Li confirmed that even though he had originally been appointed by Allway to the Board he was free to act in the “fair interest” of Allestari. He did not suggest that Allway was attempting to instruct him in relation to his duties as a director of Allestari. The highest his evidence went was his complaint about Mr Liu’s approach to his duties as director of Allestari. That however would be a matter for the shareholders of Allestari to consider either upon the conclusion of HC/OC 798/2023 when the relative shareholdings of N Century and Clarity would have been decided or potentially on a prior application by a shareholder to vary the Interim Injunction. Alternatively, if Mr Liu were really in breach of fiduciary duty (which is not actually positively alleged: like everything else in Canstone’s papers this point is left vague) and the majority shareholders refused to act, then Canstone could seek other relief afforded to a minority shareholder in such a situation.

[20] A claim may be struck out on the ground that it discloses no reasonable cause of action if it is legally or factually unsustainable: The “Bunga Melati 5” [2012] 4 SLR 546 at [39]. A claim is legally unsustainable if on the facts put forward by the claimant the remedy sought will not lie. It is factually unsustainable if the factual basis for the claim is wholly without substance.

[21] The test for the implication of terms in fact is well-established, following the Court of Appeal decision in Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal [2013] 4 SLR 193 (“Sembcorp”). That decision also concerned a provision in the constitution of a company that concerned a shareholder’s right to nominate a director to the board of that company.

[22] The law relating to the implication of terms in fact following the decision in Sembcorp may be summarised as follows:

(a) The court should identify the issue which the implied term is said to address, which is often described as the gap which the implied term would fill. Further, the court must be satisfied that the issue was not addressed because the parties did not contemplate it. See Sembcorp at [94] to [95], and [101(a)].

(c) The court should then decide the specific term to be implied by discerning that term to which the parties would have given their immediate and enthusiastic assent if the gap had been pointed out to them at the time of contracting. This is the proverbial “Oh, of course!” reply to the officious bystander’s pedantic inquiry. See Sembcorp at [98] and [101(c)].

[23] In Sembcorp the constitutional provisions in issue were principally the right of the two shareholders to each appoint three directors to the board so long as they held 50% each, and further a quorum requirement that board meetings include one director from each of the two shareholders with their vote counting as three votes regardless of how many of their directors were present. Subsequently, one party purchased 35% from the other party, who later sold its remaining 15% to a third party.

[24] The Court of Appeal held that properly interpreted the right to appoint directors ceased once a party was no longer a 50% shareholder, and that in the light of that fact there was then a gap as to whether the quorum requirement (and certain other provisions) continued to apply thereafter. The Court of Appeal considered that these further provisions (including the quorum requirement) were parasitic on the right to appoint directors and therefore that right ceasing upon a party no longer holding an equal proportion of shares “if the parties were asked at the time of the contract whether these other provisions would cease to apply if one party no longer had the right to appoint any director, the only answer they could have given was an emphatic affirmation”: Sembcorp at [126].

[25] In this matter, Art 76A gave Allway the right to appoint and remove three directors and two other named shareholders at the time the right to appoint and remove one director each. The articles were adopted by special resolution passed on 1 July 2008. Art 76A has been set out above at [8].

[26] Prayer 2 sought to imply a term that the entities named in Art 76A ceased to have the right to appoint shareholders once they ceased to be shareholders. But as I have explained at [17] there was no live controversy given that no one was asserting that such rights continued.

[27] The claim in substance was to be found in prayer 3. Prayer 3 sought the implication of a term that the majority shareholder (whoever it may be) would be entitled to appoint three directors while the second and third largest shareholders would be entitled to appoint one each.

[28] Importantly, the prayer was not for a declaration that properly interpreted the identification of named shareholders in Art 76A meant and referred to the majority shareholder and second and third largest shareholders for the time being. Such an argument would not work given the clear language of Art 76A. Instead, the prayer sought the implication of this term in parallel with the existing Art 76A.

[29] Two difficulties with this prayer were noted by N Century before the AR , namely that who the majority shareholder is will only be resolved upon the conclusion of HC/OC 798/2023 and further that once that happens it will be for the members of Allestari to decide for themselves whether to amend the Constitution to incorporate this purported implied term.

[30] N Century’s point that what if anything should replace Art 76A was a matter for the shareholders of Allestari to decide pointed to the fundamental difficulty with this prayer, namely that even though it adopted the language of necessary implication of terms it was plainly an attempt to have the Court rewrite the Constitution rather than leave this to the members of Allestari.

[31] There was no gap that was necessary to fill with an implied term concerning the appointment of directors once the three named shareholders in Art 76A ceased to be shareholders. Articles 86–88 of Allestari’s Constitution provide for the appointment and removal of directors by way of ordinary resolution (or appointment by the existing directors):

[32] The reference to Investor Director is to the member of the board that Clarity is entitled to appoint under Art 76(a) and in respect of whom removal would need to be preceded by a request from Clarity under Art 76(b). This separate entitlement is not relevant to the issues in this originating application.

[33] Furthermore, in the event of any gap in the Constitution, the default provisions under the Companies Act 1967 (2020 Rev Ed) (“Companies Act”) would apply. Section 149B of the Companies Act provides for the appointment of directors in the following terms:

[34] Likewise, s 152(9) of the Companies Act provides for the removal of directors as follows:

[35] That the company could appoint or remove directors in the ordinary way under its Constitution or the Companies Act meant there was no necessity for the company’s functioning to give special rights of appointment to the three largest shareholders by implication of this term.

[37] I considered that at the time of adoption of the Constitution it was perfectly plausible that Art 76A reflected rights that were personal to the three named shareholders while they remained shareholders, rather than rights that accompanied any specific size of shareholding. Once those named shareholders ceased to be shareholders, there could be any permutation of shareholdings with the gap between the largest, second largest and third largest varying from the marginal to the considerable. There might not even be a majority shareholder, in the sense of one that held more than 50% of the shares. There is simply no substance whatsoever to any argument that back in 2008 the three shareholders named in Art 76A (as well as all the other shareholders) would have responded “Yes, of course” to any inquiry by an officious bystander whether once those three shareholders ceased to be shareholders the position concerning appointment of directors would be that set out in this proposed implied term as opposed to any other formulation or indeed the general provisions under the Articles or the default position under the Companies Act.

[38] Moreover, as already noted, Allway ceased to be a shareholder in 2011. This meant that for more than a decade shareholders had (a) lived with the existing wording of Art 76A without apparently seeing the need to revise it and (b) not considered that the three directors had ceased to be suitable or fit directors just because Allway, the party that had nominated them, had ceased to be a shareholder. While I appreciate that this subsequent conduct of the company and its shareholders (including Canstone) does not mean that the court cannot presume different intentions on the part of shareholders at the time when the constitution (including Art 76A) was adopted, there is simply nothing to support such alleged presumed intentions at that earlier time.

[39] As an aside, I noted that prayer 2 dated the Constitution to 2006 while the documents suggested that the Constitution that incorporated Art 76A was adopted only in 2008. However, I did not consider that anything turned on whether the relevant contract was formed in 2006 or only in 2008.

[40] Thus, I concluded that the argument that by implication the wording of Art 76A should be revised to one possible formulation among many possibilities was legally and factually unsustainable. The other possibilities included the perfectly logical reversion to the general provisions under the Articles or to the default position under the Companies Act. I accepted N Century’s contention that it is not for the court to impose such a term when the members have not agreed to it.

[41] I also considered it significant that Canstone was not one of the three largest shareholders and thus was seeking the implication of a term that would not confer on it any rights. This reinforced my conclusion that there was no live controversy on which declaratory relief could be sought.

The court does not interfere with shareholders’ rights to choose board members so long as the board members meet any qualification requirements stipulated in the company’s constitution

[42] As for the remaining prayers, they were worded to follow on from the declarations sought by prayers 2 and 3 so that if those were struck out then the rest would be too.

[43] Nonetheless, there were additional and separate reasons why they were unsustainable.

[44] Prayer 4 sought a declaration that shareholders may not by contract grant a shareholder the right to nominate or appoint directors to the Board and that any contractual agreement to such effect is void. There was again no live controversy in that there was no evidence of the shareholders agreeing to grant such rights to a non-shareholder. Moreover, phrased as a blanket legal conclusion it is plainly wrong. It is not the case that shareholders are not permitted to make arrangements for the nomination of directors by third parties with such nominations being ones that the shareholders bind themselves to accept. Such arrangements are not unusual when it comes to companies that have a public, social or charitable purpose.

[48] While Canstone had not raised any point about the striking out of the originating application against all defendants and not just against N Century, I raised this point with counsel at the oral hearing and heard from both of them on it. I agreed with counsel for N Century that the prayers necessarily implicated all shareholders, including N Century. She raised the concern of a default judgment against another defendant that might then be relied on against N Century. I considered her concern to be a real one not least because of the opaque way in which relief was sought by Canstone not for a right that it would have but which other shareholders would have. Moreover, the grounds for striking out all applied to the action as a whole. Accordingly, I upheld the AR’s decision to strike out the action as a whole.

[50] I end these grounds of decision by noting that Canstone’s approach was described by its counsel as seeking “curial intervention to ensure proper corporate governance in Allestari and that the business and management of the Allestari is reserved to the stakeholders of Company [sic]”. While this objective appears a laudable one, litigation should not be commenced without specific interests of the claimant at stake. In the absence of such interests, arguments may be vague, unclear, detached from any live controversy and unsustainable. That was certainly the case here.