Case Summaries

The Wellness Group Pte Ltd v Paris Investment Pte Ltd and others [2018] SGCA 47

SUPREME COURT OF SINGAPORE

29 August 2018

Case Summary

The Wellness Group Pte Ltd v Paris Investment Pte Ltd and others [2018] SGCA 47
Civil Appeal No 142 of 2017 and Court of Appeal Summons No 14 of 2018

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Decision of the Court of Appeal (delivered by Judge of Appeal Steven Chong):

Outcome: CoA orders that minority shareholder’s nominee be appointed as a director of the company, pursuant to an implied term in a shareholders’ agreement, absent any evidence that the nominee was obviously unfit for office or that his appointment would be obviously injurious to the company.

1 This appeal concerned the legal effect of an implied term in a shareholders’ agreement entitling a minority shareholder to appoint a director to the board of a company, where the company’s constitution conferred the power to appoint directors on the board of the company.

Background to the appeal

2 The appellant (“Wellness”) and the first and second respondents were shareholders in the third respondent (“TWG”). All four companies had signed a shareholders’ agreement, which contained an implied term that the majority shareholder(s) of TWG would be entitled to appoint two directors to the Board of Directors of TWG, and the minority shareholder(s) would be entitled to appoint one director so long as they held at least 25% of the shares in TWG (“the Implied Term”).

3 Wellness owned 30.1% of the shares in TWG. It sought to appoint Associate Professor Mak Yuen Teen (“Prof Mak”) as a director of TWG pursuant to the Implied Term. Wellness also requested (a) that the Board of TWG authorise Prof Mak to disclose to Wellness information in relation to TWG which he would have access to in his capacity as director; and (b) that TWG arrange for Prof Mak to be covered by director and officer insurance to the same extent as TWG’s other directors; and if no such insurance had been purchased for the directors, that it be purchased. These two matters will be referred to as “the Ancillary Matters”.

4 TWG refused to appoint Prof Mak as a director on the basis that it found the Ancillary Matters unacceptable. Wellness then filed an originating summons seeking, amongst others, orders that Prof Mak be appointed a director of TWG and that the respondents execute the necessary documents to give effect to his appointment. Shortly before the originating summons was heard, Wellness filed submissions stating that the Ancillary Matters were mere requests rather than conditions which Wellness sought to attach to Prof Mak’s appointment. The High Court found that this constituted a change in Wellness’ position and dismissed the originating summons in order to give the respondents an opportunity to reconsider Prof Mak’s appointment afresh without the Ancillary Matters attached.

The Court’s decision

5 The Court of Appeal held that (1) the Implied Term gave Wellness the right to have its nominee appointed as a director of TWG; (2) the respondents had breached the Implied Term by refusing to appoint Prof Mak as a director of TWG; and (3) specific performance was available as a remedy for such breach.

6 First, the Implied Term gave Wellness a right to nominate one person to be a director of TWG, with a corresponding obligation on the part of the Board of TWG to appoint that nominee as a director, subject to two important caveats. First, the nomination of a person who was statutorily disqualified under the Companies Act (Cap 50, 2006 Rev Ed) from assuming directorship, or who did not consent to act as a director, would be defective. There would clearly be no obligation to appoint such a person. Secondly, the Board of TWG would not be obliged to appoint the nominee if it was able to establish that the nominee would be obviously unfit for office or that his appointment would be obviously injurious to the company: at [33], [55] and [62].

7 The burden was not on Wellness to prove the suitability of its nominee, but on the Board to prove his unsuitability. It would not suffice for the Board to simply assert that the nominee lacked relevant experience or skills. Rather, the Board had to adduce clear evidence of the shortcomings of the nomination, such as if the nominee would be placed in a position of a conflict of interest or a breach of fiduciary duty. This might be the case if, for example, the nominee operated a business in competition with the company: at [33].

8 However, the Implied Term did not mean that Prof Mak became a director automatically upon being nominated by Wellness. This would give rise to practical problems. Moreover, the concept of de facto directorship was typically invoked to impose directors’ duties and liabilities on someone who, although not officially a director, held himself out as one and performed the functions of a director. It did not refer to a transitional category of persons who were legally recognised as directors notwithstanding that they had not yet been formally appointed: at [41] and [43].

9 The power of appointing directors remained with the Board pursuant to TWG’s Constitution, though it must now be exercised in accordance with the shareholders’ wishes pursuant to the Implied Term. The Board’s limited discretion not to appoint a nominee if he was obviously unfit for office or injurious to the company struck a balance between the shareholders’ liberty to appoint as directors the persons whom they wished to represent them on the Board, and the Board’s interest in appointing persons suitably qualified to manage and supervise the company. The Board’s exercise of its power of appointment within these limits would enable it to fulfil its fiduciary duty to TWG without denuding the Implied Term of effect: at [64], [66] and [67].

10 Secondly, the respondents had breached the Implied Term by refusing to appoint Prof Mak. Besides the rejection of the Ancillary Matters, TWG had not given any legitimate reason to refuse Prof Mak’s appointment. The respondents were not entitled to indefinitely delay Prof Mak’s appointment by placing the onus on Wellness to justify his candidature: at [83].

11 Finally, the Implied Term could in principle be enforced through an order for specific performance. An award of damages would be an inadequate and illusory remedy for Wellness’ loss of representation on the Board. Moreover, the authorities cited by the respondents did not establish that the court would not order specific performance of an obligation to appoint a director on the basis that it was a contract for services: at [85] and [86].

12 The Court therefore ordered that Prof Mak be appointed a director of TWG and that the respondents, their directors and/or officers execute or procure the execution of the documents necessary to give effect to his appointment: at [92].

This summary is provided to assist in the understanding of the Court’s grounds of decision. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s grounds of decision.

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