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    06:14 PM Shaun Pereira (Shearman & Sterling LLP)

    Arbitrating disputes under the articles of association

        

    A shareholder brings an action in court against a joint-venture company, alleging that the company has breached its articles of association. The article alleged to have been breached is mirrored in an identical clause in a shareholders’ agreement between the company and its two shareholders (for convenience, they are referred to as the “plaintiff shareholder” and the “other shareholder”). The shareholders’ agreement is a comprehensive instrument which sets out the terms of the joint venture. It obliges the company to adopt a fresh set of articles of association, which are appended as a schedule to the shareholders’ agreement, prior to completion. Those very same articles are at issue in the court action. The shareholders’ agreement contains a supremacy clause which stipulates that the shareholders’ agreement shall prevail in the event of a conflict with the articles of association. The shareholders’ agreement also contains an arbitration clause.

    The question in BTY v BUA [2018] SGHC 213 (“BTY v BUA”) was whether the court action ought to be stayed under s 6(1) of the International Arbitration Act for the dispute to be resolved in arbitration, in accordance with the arbitration clause in the shareholders’ agreement. The dispositive question was whether the dispute in the court proceedings fell within the scope of the arbitration clause.

    Facts

    The dispute related to the company’s adoption of a set of annual accounts. The company had presented the accounts in contention for adoption at a meeting of the board. The accounts were adopted by a majority of the board, comprising the three appointees of the other shareholder. The remaining two directors, who were appointees of the plaintiff shareholder, refused to vote for their adoption.

    The plaintiff shareholder’s position was that the board’s adoption of the accounts was a breach of Article 61 of the articles of association. Article 61 designated “[a]dopting or approving the annual accounts” a reserved matter which required the consent of both shareholders. Clause 11 of the shareholders’ agreement was to the same effect. The company’s position was that Article 61 and Clause 11 applied only to the adoption of the annual accounts by shareholders at a general meeting, and not to the adoption of annual accounts at a meeting of the board of directors. It does not appear to have been in dispute that both Article 61 and Clause 11 had the same meaning and effect, and that the adoption or approval of the accounts in breach of Article 61 would have equally amounted to a breach of Clause 11 and vice versa.

    The plaintiff shareholder commenced the court action seeking a declaration that the approval of the accounts by the board was a breach of Article 61 and therefore of no effect. The plaintiff shareholder also sought an injunction to restrain the company from relying upon, or distributing or disseminating those accounts to third parties, amongst other relief. The company sought a stay of the court action on the basis that the dispute fell within the arbitration clause in the shareholders’ agreement.

    Decision

    The court applied the two-step test, articulated in Tomolugen Holdings Ltd and another v Silica Investors Ltd and other appeals [2016] 1 SLR 373 (“Tomolugen”), for whether the dispute fell within the arbitration clause in the shareholders’ agreement. The first step required the court to identify the “matter” in respect of which the litigation had been brought. The second required the court to consider whether the matter was the “subject” of the arbitration clause.

    The court acknowledged that the “matter” in respect of which the litigation had been brought encompassed the substance of the controversy in the litigation. While the court was conscious not to give undue regard to the manner in which the claim for relief had been framed, the court found it significant that the sine qua non of the plaintiff shareholder’s claims for relief was the adoption of the accounts in breach of the articles. The court therefore characterised the matter as “whether [the accounts] had been adopted or approved by [the company] in breach of the Articles” (at [64]).

    The court then turned to consider the scope of the arbitration clause in the shareholders’ agreement. The court applied a generous approach to the construction of the broadly-worded arbitration clause, but nonetheless concluded that the matter in the court action did not fall within it. The arbitration clause, on its proper construction, applied only to “the private contractual relationship between the parties created by the [shareholders’ agreement] itself” (at [79]). Disputes under the articles of association were matters of company law, which could not have been contemplated to fall within the arbitration clause in the shareholders’ agreement.

    The court placed especial emphasis on the fact that relations between the plaintiff shareholder and the company were governed by two different legal relationships that existed on two separate legal planes (at [81]–[90]). The shareholders’ agreement created contractual rights that derived their force from the law of obligations. The articles, by contrast, were of a “fundamentally different legal character” to a private contract; they were an integral part of a corporate law regime cloaked with statutory force. Since the shareholders’ agreement and the articles created two distinct relationships operating on separate planes, a reasonable person in the position of the parties would not have understood the arbitration agreement in the shareholders’ agreement to extend to disputes arising under the articles (at [117]).

    Comment

    The court’s decision is a remarkably rigorous and crisp statement and application of the principles relevant to a stay application under s 6(1) of the International Arbitration Act. It contains an illuminating analysis of the different legal character of the intersecting rights that shareholders and the company hold against one another, and the consequences of those distinctions between the categories of rights.

    However, it is suggested, with respect, that the court’s delicate analysis of these intricate legal points may have obscured a deeper and more fundamental consideration that would have led it to the opposite outcome. The court’s reliance on the legal distinction between contractual and corporate rights runs counter to the non-technical approach to the interpretation of arbitration clauses that has been embraced by modern commercial courts the world over. Courts are enjoined to interpret arbitration clauses as rational businessmen would: Larsen Oil and Gas Pte Ltd v Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) [2011] 3 SLR 414 at [13]. Rational businessmen are unlikely to draw fine distinctions between the provenance of the rights at stake in a litigation when those rights—albeit springing from different legal sources—arise out of the self-same relationship and the same matrix of facts.

    The court’s approach to the construction of arbitration clauses in BTY v BUA would seem, for example, to countenance contrasting outcomes when applied to a common law claim in negligence and a statutory claim for breach of duty, even if both originate from the same contractual relationship between the same parties and arise from the same set of facts. By parity of reasoning, the parties’ private law rights under the common law of negligence would have been matters that could have been attenuated or supplemented by contract; but their statutory duties would form an independent relationship that exists on a separate legal plane. This is at odds with the prevailing assumption that parties are taken to have intended that any dispute arising out of the same relationship would be decided by the same tribunal: Premium Nafta Products Ltd v Fili Shipping Co Ltd [2008] 1 Lloyd’s Rep 619 at [13].

    The decision in BTY v BUA would also appear to allow a party to circumvent the operation of an arbitration clause by artfully pleading of its case. The search for whether a dispute falls within an arbitration clause cannot be determined by the legal form in which the case is put: Lombard North Central plc and another v GATX Corporation [2012] 1 Lloyd’s Rep 661 at [14]. Yet in BTY v BUA, if the plaintiff shareholder had sought precisely the same relief premised on the same factual substratum, save that it alleged a breach of Clause 11 of the shareholders’ agreement instead of Article 61 of the articles of association, the court’s characterisation of the matter would necessarily have changed (“whether [the accounts] had been adopted or approved by [the company] in breach of the shareholders’ agreement”). The court would, presumably, have stayed the court action in favour of arbitration. There is something wholly unattractive in the notion that the plaintiff shareholder could effectively dictate the forum in which the same substantive dispute is heard by a strategic choice of language in its originating process.

    It is submitted, with respect, that the true sine qua non of the dispute was whether the annual accounts had been adopted or approved in accordance with the procedure agreed upon between the shareholders and the company. This anodyne characterisation of the matter would have identified the crux of the dispute in a manner that would not have been susceptible to artificial pigeonholing based on how the claim for relief had been framed. The reality is that the procedure for adoption and approval of accounts could equally be contained in a shareholders’ agreement or in the articles. A failure to follow that procedure could amount to a breach of either or both those instruments. And in this case, the shareholders’ agreement and articles in fact contained identical stipulations as to the adoption and approval procedure.

    There is a powerful argument that the matter, so characterised, falls within the scope of the arbitration clause in the shareholders’ agreement. It is plain that the shareholders’ agreement was intended to be given primacy over the articles. It would have been entirely sensible, given the character of the commercial relationship between the parties, that any disputes over whether the proper corporate procedures had been complied with (even if they would amount both to breaches of the shareholders’ agreement and the articles) would fall to be resolved in accordance with the arbitration clause in the shareholders’ agreement.

    It is nothing to the point that a breach of the articles of association may give rise to different remedial consequences from a breach of the shareholders’ agreement. The correct approach is to identify the substance of the controversy, and to determine whether it falls within the arbitration clause. Once that is established, the tribunal will be empowered on the reference to grant the relief sought by the plaintiff shareholder, depending on whether the plaintiff shareholder chooses to rely on the breach of the shareholders’ agreement, the articles, or both. The court recognised that a tribunal constituted under the shareholders’ agreement would have had the power to grant the relief the plaintiff shareholder sought in the court proceedings (at [106]).

    A concluding remark on arbitrability

    A final interesting aspect of BTY v BUA is the court’s obiter remarks on arbitrability. The court did not have to decide whether the dispute was arbitrable because it concluded that the dispute did not fall within the arbitration clause. But if it had to decide the point, the court would have concluded that the dispute was non-arbitrable. The court emphasised the important public nature of the company’s accounts, which had to be lodged with ACRA under the Companies Act, and were accessible by the public (at [158] to [160]). That aspect of the dispute over the company’s annual accounts engaged “the public interest in the ‘matter’ which is at the heart of this litigation”.

    While it is true that a company’s accounts serve an important statutory and public function, the defining criterion of a non-arbitrable dispute is one whose “subject matter … is of such as nature as to make it contrary to public policy for that dispute to be resolved by arbitration”: Tomolugen at [75]. It is arguable that there is no public policy against resolving in arbitration a dispute about compliance with the procedures for approving and adopting accounts, especially if the company and all its shareholders are bound by the arbitration clause. The outcome of the arbitration may be such that the accounts have to be expunged from the public register; that is certainly a matter an arbitral tribunal will not have power to compel. But there is no impediment to the shareholders or the company seeking the relevant orders from the court on the basis of the determinations made in the arbitration: see, for example, Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759.

    * This blog entry may be cited as Shaun Pereira, “Arbitrating disputes under the articles of association”  (23 November 2018) (http://www.singaporelawblog.sg/blog/article/225)

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

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