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    02:59 PM Katie Chung (Senior Associate, Norton Rose Fulbright (Asia) LLP)

    The Singapore High Court Grapples with Whether Minority Oppression Claims May or May Not Be Arbitrable

        

    In a landmark decision of the Singapore High Court in Silica Investors Ltd v Tomolugen Holdings Ltd and others [2014] 3 SLR 815, [2014] SGHC 101 (“Silica Investors”), Justice Quentin Loh held that a minority oppression claim pursuant to S 216 of the Companies Act (Cap. 50, 2006 Rev Ed) may or may not be arbitrable, depending on the circumstances of the case, how the claim is framed and the remedy or relief sought. 

    Salient facts 

    The Plaintiff, Silica Investors Ltd, entered into a share sale agreement with the 2nd Defendant, Lionsgate Holdings Pte Ltd (formerly known as Tomolugen Pte Ltd), for the purchase of 4.2% of the shares in the 8th Defendant, Auzminerals Resource Group Limited (“Auzminerals”) (the “Agreement”). The Agreement contained an arbitration clause which states that (“Arbitration Clause”): 

    “12.3     Dispute Resolution

    Without prejudice to any right of the Parties to apply to a competent court for injunctive relief, any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (‘SIAC’) for the time being in force, which rules are deemed to be incorporated by reference in this clause. The tribunal shall consist of one arbitrator to be appointed by the chairman of the SIAC. The language of the arbitration shall be English.” 

    The 1st and 2nd Defendants were the majority and controlling shareholders of Auzminerals, and the 3rd to 7th Defendants were the directors and/or shareholders of Auzminerals. The Plaintiff commenced an action for minority oppression under S 216 of the Companies Act on the basis that (among other claims), in breach of the Agreement, the Plaintiff’s shares in Auzminerals were diluted by more than 50% owing to a share issuance in Auzminerals to the 1st Defendant purportedly as payment for a debt, and was wrongfully excluded from participating in the management of Auzminerals. 

    The Plaintiff sought reliefs including: 

    1. a buy-out order of the Plaintiff’s shares in Auzminerals by the 1st Defendant and/or 2nd Defendant and/or such other parties as the court may direct; 
    2. an order to regulate the conduct of the affairs of Auzminerals; and/or 
    3. an order for the winding up of Auzminerals. 

    Apart from the 2nd Defendant and Plaintiff, the other parties to the court action were not parties to the Agreement or the Arbitration Clause.

    The 2nd Defendant applied for a stay of the proceedings in favour of arbitration pursuant to S 6 of the International Arbitration Act (Cap. 143A) (“IAA”) and/or the inherent jurisdiction of the Court. The learned assistant registrar dismissed this application and the 2nd Defendant appealed.

    In the High Court, Loh J dismissed the appeal on the basis that the Plaintiff’s minority oppression claim against the 2nd Defendant is not arbitrable as the claim affected the rights of non-parties to the arbitration agreement, and the arbitral tribunal could not grant certain remedies sought.

    In coming to his decision, Loh J considered the following main issues: 

    1. whether the Plaintiff’s claim fell within the scope of the Arbitration Clause; and

    2. if the Plaintiff’s claim fell within the scope of the Arbitration Clause, whether a claim under S 216 of the Companies Act was arbitrable.

    Issue 1: Whether the Plaintiff’s claim fell within the scope of the Arbitration Clause

    Adopting the approach of the Court of Appeal in 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 (“Larsen Oil”) (at [7]–[22]), the High Court considered the following in deciding whether the Plaintiff’s minority oppression claim fell within the scope of the Arbitration Clause (at [14]):

    1. what was the proper characterisation of the Plaintiff’s claim; 

    2. what was the scope of the Arbitration Clause; and 

    3. whether the Plaintiff’s claim fell within the scope of the Arbitration Clause.

    On the proper characterisation of the Plaintiff’s claim and thus what constitutes the “matter” under S 6 of the IAA, Loh J held that it refers to the essential dispute between the Parties, as opposed to mere issues that are to be decided in the course of proceedings. As Loh J pointed out, in Robert Merkin and Johanna Hjalmarsson, Singapore Arbitration Legislation Annotated (Informa, 2009), at p 18 (footnote 4), “matter” under S 6 of the IAA refers “to the main issue, e.g. the sum allegedly owing, rather than to individual aspects of the dispute”. In identifying the “essential dispute”, the court is not bound by the manner in which the claim has been pleaded, although the court may have reference to the pleadings and the underlying basis of the claim for guidance. In the present case, Loh J found that the essential dispute between the Parties was whether the defendants conducted and managed the affairs of Auzminerals in a manner that was unfairly prejudicial to the Plaintiff. 

    As for the scope of the Arbitration Clause, Loh J applied the seminal House of Lords decision of Premium Nafta Products Ltd v Fili Shipping Co Ltd [2007] 2 CLC 533 on the broad construction of arbitration clauses (see [13] of the judgment of Lord Hoffmann, as endorsed by the Court of Appeal in Larsen Oil), and held that the Arbitration Clause in the context of the Agreement covered claims under S 216 of the Companies Act. Loh J noted that the Agreement covered not only the share sale transaction but also the relationship between the Plaintiff and 2nd Defendant as shareholders in Auzminerals. 

    Loh J found that the Plaintiff’s minority oppression claim fell within the scope of the Arbitration Clause, on the basis that a sufficient part of the factual allegations underlying the Plaintiff’s minority oppression claim related to the Agreement and thus fell within the Arbitration Clause. 

    Issue 2: whether the Plaintiff’s minority oppression claim under S 216 was arbitrable

    Section 6(2) of the IAA mandates a stay of proceedings in favour of arbitration unless the court finds that the arbitration agreement is “null and void, inoperative or incapable of being performed”. The High Court adopted the Court of Appeal’s reasoning in Larsen Oil (at [25]-[26]) in taking into consideration the arbitrability of the claim when determining whether to grant a stay under (the more discretionary) S 6(2) of the Arbitration Act (Cap. 10) (“AA”). Loh J pointed out that, pursuant to S 11(1) IAA and Article 34(2)(b)(i) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”), a stay of proceedings under S 6(2) IAA cannot be granted in the case of a non-arbitrable claim.  S 11(1) IAA states that “Any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless it is contrary to public policy to do so.” Article 34(2)(b)(i) Model Law provides that the court may set aside an award if the court finds that “the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State”.

    Loh J conducted a detailed comparative analysis of the relevant Australian, Canadian and English authorities, and succinctly set out the following four alternative approaches in deciding on the arbitrability of minority oppression claims (at [121]):

    1. Two-stage approach – the arbitral tribunal makes all the necessary findings of fact and whether there has been unfair prejudice or commercial unfairness. Where the tribunal finds that there was minority oppression, then the oppressed minority shareholder can carry on with the minority oppression claim before the court. It would then be for the court to make the appropriate orders, including winding up (see ABOP LLP v Qtrade Canada Inc (2007) 284  DLR (4th) 171).

    2. Allow all minority oppression claims to go for arbitration (adopting broadly the English Court of Appeal decision of Fulham Football Club (1987) Ltd v Richards [2012] Ch 333). If the tribunal decides that a winding up or buy-out order is appropriate, the parties can go to court to obtain the necessary orders through enforcement of the award. If the tribunal awards other remedies, the award takes effect in the normal way.

    3. If there are more than two shareholders and only some shareholders are bound by the arbitration agreement, the court should allow those shareholders bound by an arbitration agreement to proceed to arbitration and in the exercise of the court’s inherent powers of case management, stay all the proceedings in relation to those shareholders not bound by the arbitration agreement until the award is made and only then proceed with the S 216 claim in court.

    4. All minority oppression claims under S 216 are non-arbitrable as a matter of public policy (analogous to Exeter City Association Football Club Ltd v Football Conference Ltd [2004] 1 WLR 2910).  

    In an in-depth examination of the four alternative approaches above, Loh J did not find any of the approaches to be satisfactory. As a preliminary point, Loh J noted that arbitration is a consensual process, and this feature necessarily imposes a limit on the orders that an arbitral tribunal can make. This observation helpfully clarifies the scope of s 12(5) IAA which is widely worded and provides that the arbitral tribunal “may award any remedy or relief that could have been ordered by the High Court if the dispute had been the subject of civil proceedings in that Court”.  Loh J thus considered that the proper interpretation of S 12(5) IAA is that a tribunal cannot exercise the coercive powers of the courts, or make awards in rem or bind non-parties to the arbitration agreement. These conceptual and pragmatic difficulties were earlier considered in the context of orders for winding up, which the Court of Appeal in Four Pillars Enterprises Co Ltd v Beiersdorf Aktiengesellschaft [1999] 1 SLR(R) 382 considered that a tribunal had no power to grant (see Michael Hwang S.C. and Rajesh Muttath, “The Singapore Court of Appeal refuses to stay winding up proceedings in favour of arbitration” (2001) 19 ASA Bulletin 380). 

    Accordingly, the High Court held that minority oppression claims and the broad remedies available under S 216(2) of the Companies Act mean that a minority oppression claim “may straddle the line between arbitrability and non-arbitrability”, and would depend on the circumstances of the case, the claims advanced and remedies sought. In the present case, the Court refused to grant a stay on the basis that the Plaintiff’s minority oppression claim against the 2nd Defendant is non-arbitrable, as there are relevant parties which are non-parties to the Arbitration Clause and remedies sought which only the Court can grant. 

    Conclusion 

    A minority shareholder in a situation outlined in Silica Investors could consider the following approaches. First, the minority shareholder and defendant shareholder could enter into a post-dispute arbitration agreement with the other shareholders so that the minority oppression claims are heard before one tribunal. Second, the minority shareholder could commence arbitration against the defendant shareholder for a declaration that there was minority oppression under S 216(1) Companies Act,  and concurrently start a separate court action against the other non-parties to the arbitration agreement. This second route is possible as s 11(2) IAA provides that “[t]he fact that any written law confers jurisdiction in respect of any matter on any court of law but does not refer to the determination of that matter by arbitration shall not, of itself, indicate that a dispute is not capable of determination by arbitration”. The court could exercise its inherent jurisdiction to stay proceedings until the award is rendered in the arbitration, and the court could then take notice of the award on the minority oppression claims and possibly grant remedies which the tribunal is unable to grant. The second approach is more pragmatic and strategic for a minority shareholder as potential defendants to a minority oppression action are unlikely to amiably submit to an adversarial process. Silica Investors is pending an appeal before the Court of Appeal, so it remains to be seen whether the High Court’s approach would be endorsed and whether the minority oppression claim in this instance is indeed non-arbitrable.  

    * This blog entry may be cited as Katie Chung, "The Singapore High Court Grapples with Whether Minority Oppression Claims May or May Not Be Arbitrable", Singapore Law Blog (2 January 2015) (http://www.singaporelawblog.sg/blog/article/74)

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

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