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    01:20 PM Liu Xuanyi (LLB, BBM (Finance), Singapore Management University)

    Shareholder access to company financials: no right to know? - Ezion Holdings v Teras Cargo Transport Pte Ltd [2016] SGHC 175

        

    Introduction

    Let us suppose a situation where shareholders desire to judge for themselves the financial state of the company, but the company has failed to hold annual general meetings (“AGMs”) in the past three years. This situation lends itself to an important question: are shareholders entitled to receive financial information not yet presented at an AGM?

    This question was recently considered by the Singapore High Court in Ezion Holdings Ltd v Teras Cargo Transport​ Holdings Pte Ltd [2016] SGHC 175 (“Ezion Holdings”). The Court held that s 203 of the Act did not provide members with a general right to financial information of the company (see [12], [20], [28] and [34]). The Court further opined that members’ right to financial information under s 203 of the Act stemmed from their right to vote at general meetings (see [21]).  

    This case reminds us that shareholders do not stand in the same position as directors of a company. While directors are responsible for managing a company’s affairs and are automatically entitled to a company’s books (see Lim Kok Leong v Seen Joo Company Pte Ltd & Ors [2014] SGHC 239), the same cannot be said for shareholders. In this connection, the decision is also a timely reminder of the rights that shareholders should expressly reserve in a company’s constitution in order to enjoy general access to financial information.

    In this comment, given that the case did not turn on any material distinction between the rights of a member or shareholder, the two terms will be used interchangeably.

    Background

    The facts of this case are relatively simple. The plaintiff, Ezion Holdings (“Ezion”), was a minority shareholder of the defendant, Teras Cargo Transport Pte Ltd (“Teras Cargo”) (see [2] of the decision).  In this action, the plaintiff sought an order from the Court for the defendant’s financial statements and accounts for the financial year ending in 2015 (“FY 2015”).

    To put Ezion’s application in context, Teras Cargo’s financial information for FY 2015 was neither audited nor prepared at the time of the suit. Its last audited accounts were for the FY 2012. Other financial information that remained unissued at the time that Ezion commenced proceedings included Teras Cargo’s accounts for the FY 2013 and FY 2014. The Court noted, however, that audited financial information for the FY 2013 was produced at an AGM three months after Ezion had commenced proceedings.

    At the time of the suit, there were also no other proceedings, including a statutory derivative action and action for minority oppression (see [2]).  The Court also noted (at [33]) that Ezion’s application was not framed as an action for minority oppression. On these facts, Ezion founded its action upon s 203 (3) of the Act and argued that s 203 entitled a member to request a copy of the company’s financial statements and accounts. Ezion also submitted that, on a proper reading of s 203(1) of the Act, the accounts did not have to be audited and laid before a right arises to the statements. In the alternative, Ezion argued that its entitlement to the company’s financial information arose out of an article in the company’s s constitution. This article was similarly worded to s 203 of the Act.

    Teras Cargo, on the other hand, submitted that Section 203 of the Act is limited to financial statements already prepared for the purposes of a general meeting. According to Teras Cargo, the right under Section 203(1) concerned only audited copies of financial statements that are to be laid in an AGM.

    Teras Cargo further contended that Section 203(3) applied to a situation where a member is not provided with a copy of the audited financial statements ahead of a general meeting, and that the member could ask for such documents to make a decision on whether to approve these statements at the general meeting.

    The decision

    The learned Aedit Abdullah JC rejected Ezion’s application, holding that s 203 of the Act does not expressly provide a member or shareholder of a company with the right to financial statements before they have been prepared (see [12]).

    In arriving at this decision, the learned judge noted several salient points: –

    (1)   Shareholders or members are provided with reports under s 203 of the Act so that they may exercise their vote at general meetings, which is the normal occasion for the members to exercise their powers (see [21]). Hence, members are entitled to the financial statements and accounts only as such reports need to be given for a general meeting. Hence, the right to financial information cannot be dissected from the right to vote. In the Court’s view, this reading of s 203 is particularly relevant because of the differing roles and powers of directors and members. 

    (2)   While a member has a right to bring an action of minority oppression, that action is distinct and separate from one founded upon a free-standing right for individual shareholders to obtain financial information (see generally [26], [31] and [33]). As the Court commented at [26], the authorities cited by Ezion focused on minority oppression and do not support an independent right for shareholders to obtain financial information. Furthermore, sympathy for Ezion’s lack of information about Teras Cargo’s affairs did not constitute a reason for the Court to override the express words of s 203 (see [22]).

    (3)   Because the relevant articles of Teras Cargo’s constitution were materially similar to s 203 of the Act, Ezion could not rely on these articles to invoke the right to financial information (see [25]). 

    (4)   Finally, it is not appropriate for the courts to create shareholder rights that are not consonant with the statutory regime in place (see [31]). On this, the Court held that the present statutory regime seeks to balance the rights and obligations of multiple parties and allowing an unqualified right to financial information would impose additional burdens on the company and its directors. Furthermore, the lack of the right to information is balanced out by other shareholder rights, such as powers exercisable at meetings, the right to bring an action for minority oppression and the right to bring common law or statutory derivative actions. The learned judge also stressed that the question of whether any change should be made to the present regime is a matter for the relevant agencies to consider.

    Commentary

    Various relationships exist in the intricate web of company law. These include, inter alia, relationships between: (i) members and the company; (ii) members inter se; (iii) the company and creditors; (iv) the company and directors; and (v) members and directors. Against this backdrop, the Court's decision is a timely reminder of the balance that the law seeks to strike when these relationships are concerned. The decision also provides noteworthy points regarding shareholder rights and company meetings. We now turn to discuss these points.

    Balancing shareholder rights against the role and duties of directors

    First, shareholder rights must be balanced against the role of directors and existing burdens borne by the directors and their company.

    Whilst the importance of shareholder rights cannot be discounted, it must be firmly recognised that directors are ultimately the persons tasked to run the company. Unduly onerous burdens ought not to be placed upon directors, especially considering the stringent duties that the law imposes on directors. For instance, directors are also under the duty to consider whether acceding to members’ requests for information would be in the best interests of the company (Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627).  Furthermore, as Aedit Abdullah JC held at [31], a general right for shareholders to access company information (especially when considering the suite of rights already available to shareholders) may well introduce additional costs and burdens on the company and its directors. The Court will thus be slow to extend shareholder rights beyond what is expressly provided by the present statutory regime.

    Interestingly, the Court also noted that whether the present statutory regime should be amended is a matter for the relevant agency (presumably the Accounting and Corporate Regulatory Authority and Ministry of Finance) to consider. One amendment for consideration is the introduction of a limited right for shareholders to inspect the company’s books (outside of minority oppression). In Edman v Ross (1922) SR (NSW) 351 (“Edman”), Street CJ held that a shareholder enjoys a limited right at common law to inspect the books of a company. That right is limited to cases where the shareholder could show that he or she had a particular interest in a particular dispute, and where inspection would be limited to documents relevant to that dispute (see Edman at 358). This decision was cited by Andrew Ang J in Lian Hwee Choo Phebe and another v Maxz Universal Development Group Pte Ltd and others [2010] SGHC 268, where the learned judge suggested at [89] (albeit in the context of a minority oppression application) that that ‘there is in principle no absolute bar against granting shareholders, in limited circumstances, access to specified financial information’. Beyond that, s 247A of the Corporations Act 2001(Australia) also provides that the courts may in circumstances (where the applicant is acting in good faith and the inspection is to be made for a proper purpose) authorise members to inspect the books of the company.

    The importance of general meetings

    Second, this case stresses the importance of general meetings in regulating the relationship between members and the company.  Without company meetings, a shareholder’s influence over the company is likely to be diminished. This is because shareholders’ power to regulate company affairs arise mainly from their right to vote at meetings, including on matters such as appointment of directors and amendments to the company's constitution. As the Court noted at [21], general meetings constitute the usual occasion for shareholders to exercise their powers. Indeed, in exceptional circumstances, the failure to hold annual general meetings may amount to unfairness and therefore minority oppression (see [33]). 

    In this connection, one should note that section 175A of the Act provides that private companies may, with the approval of all shareholders, dispense with the need to hold annual general meetings. Nevertheless, minority shareholders in joint ventures may find themselves without the usual occasion for them to exercise their rights if they agree to the dispensation of AGMs. For this reason, they should proceed cautiously. Minority shareholders should also consider reserving certain rights expressly, a point to which we now turn.  

    Reserving the right to financial information

    Finally, if shareholders consider it crucial to have the right to access financial information, it may be prudent for them to expressly reserve such rights in the company’s constitution or by way of shareholder agreements.

    Ezion Holdings instructs that the Act does not expressly provide shareholders with the right to general information. The decision also illustrates that the Court is unlikely to recognise such a right if the company’s constitution does not expressly provide for it. These pronouncements, however, do not prevent parties from agreeing on the terms of access to the books and accounts of a company in a carefully drafted shareholders agreement. Such agreements may also be incorporated into the company’s constitution. If such measures are taken, shareholders possess two tools in their armoury when annual general meetings are not held, and when financial information relating to the company is not furnished in a timely fashion. Shareholders may seek to enforce a contractual right under the shareholder agreement. Alternatively, they may rely on the right to compel the company to furnish such information under the company’s constitution (see generally s 39 (1) of the Act, and the recent Singapore High Court decision of Independent State of Papua New Guinea v PNG Sustainable Development Program Ltd [2016] SGHC 19 at [36] to [63], where the High Court discussed the effect of the company’s constitution as a contract between a company and its members).

    Conclusion

    Ultimately, the Court seeks to strike a balance between the rights of shareholders and the obligations and rights of other parties, such as the directors and the company. Given the present statutory regime, the Singapore courts are unlikely to recognise shareholder rights that are not expressly provided for under the Act. This case therefore emphasises the importance of drafting for mechanisms to facilitate access to company information—an expecially crucial ex ante consideration when parties are contemplating to take up a minority stake in a joint venture. In this regard, legal advisors should anticipate the types of records that shareholders may require access and expressly reserve rights of access in shareholder agreements, as discussed above.

    * This blog entry may be cited as Liu Xuanyi, “Shareholder access to company financials: no right to know? - Ezion Holdings v Teras Cargo Holdings Pte Ltd [2016] SGHC 175” (19 September 2016)  (http://www.singaporelawblog.sg/blog/article/170)

    ** A PDF version of this entry may be downloaded here

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