Major Transaction: Non-Compliance and recourse available to shareholders
The general principle under section 129 (1) of the Companies Act (the "Act") is that the business and affairs of the company shall be managed by, or under the supervision of, the Board. Section 129 (2) of the Act further provides that the Board shall have all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company i.e. without having direct interference or oversight by shareholders. Section 130 of the Act is a derogation from the usual principle in section 129 inasmuch as it imposes a requirement for major transactions to be approved by shareholders.
A major transaction is a transaction where a company purchases or sells assets or incurs an obligation that has a value of greater than half of the company's existing assets. Section 130 prescribes that where the value of the company's assets is greater than half but less than 75%, the major transaction shall have to be approved by ordinary resolution or contingent on approval by ordinary resolution. Conversely, if the value of the company's assets is greater than 75%, the major transaction shall have to be approved by special resolution or contingent on approval by special resolution.
It is important to note that the statutory requirement for shareholder approval does not, in fact, transfer the authority to initiate and enter into major transactions from the directors to the shareholders. Rather, it creates a precondition to the exercise by the directors of their authority to initiate and complete the transaction. Whilst the shareholders exercise their powers to authorise the entry into a major transaction pursuant to section 130, the authority to complete the transaction remains with the directors. The rationale behind the requirement to have shareholder approval is that certain transactions have "such far-reaching effects that they should be referred to shareholders. Shareholders should not find that, without warning, massive transactions have transformed the company in which they invested".
A failure by the board of a company to comply with section 130 can have far-reaching consequences. These consequences are principally two-fold, firstly, whether the transaction would be valid if shareholder approval has not been obtained and secondly, the potential liability which directors could incur in failing to seek shareholder approval.
On the issue of validity, the general rule is that the transaction would be valid on the applicability of the "internal management rules" which essentially provides that parties dealing with a company, acting in good faith and without knowledge of any irregularity, are entitled to assume that a company's internal policies and proceedings have been followed and complied with. As an exception to the general rule, the validity of the transaction could be challenged where the transaction is entered by the company with a person who has or ought to have, by virtue of his position or relationship to the company, knowledge that the transaction was entered into without the requisite shareholder approval and that shareholder approval should have been obtained by the board of the company for such transaction. Such exception could for instance apply where the transaction is made between related companies having the same directors.
On the second point, directors may be personally liable for breach of directors' duties if they fail to seek shareholders' approval in respect of a major transaction. In that respect, it is important to note that a director's duty to act in good faith and in the best interests of the company under section 143 of the Act includes the duty by a director to obtain the authorization of a meeting of shareholders before doing any act or entering into any transaction for which the authorization or consent of a meeting of shareholders is required by the Act or by the company's constitution. In addition to the risk of incurring personal liability, the Court may also fine directors for having acted in breach of the Act and also make an order for the disqualification of a director.
Notwithstanding the above, it is apposite to note that the Court has power to grant relief to directors for breach of duties in certain circumstances where the Court is of the view that the directors have acted honestly and reasonably and that, having regard to all the circumstances of the case, they ought fairly to be excused for the negligence, default or breach.
Where the board of a company has failed to comply with section 130, a shareholder may, with the permission of the Court, bring a derivative action in the name of the company against the directors for breach of fiduciary duties. However, the difficulty for a shareholder in bringing a derivative action is that it would need to establish that the company has suffered a loss as a result of the non-compliance by the directors of section 130. It would not be possible for a shareholder to bring a derivative action for a reduction in the value of its shares.
Another recourse available to shareholders would be to apply to Court under section 178 of the Act on the basis that the affairs of the company are being conducted in a manner which is oppressive, unfairly discriminatory or unfairly prejudicial to that shareholder. If the application is successful, the Court may make such order as it thinks fit including an order requiring the company or any other person to acquire that shareholder's shares or requiring the company or any other person to compensate that shareholder. This equitable remedy empowers the Court to intervene by restraining the exercise of any strict legal rights where the Court considers it just and equitable to intervene in order to afford protection to a shareholder against any "oppressive, unfairly discriminatory or unfairly prejudicial act". However, it is worthy to note that section 178 of the Act is disapplied for Global Business Corporations and Authorised Companies. Accordingly, a shareholder of a Global Business Corporation or of an authorised company cannot avail itself of the recourse set out in section 178.
Other than set out above, a shareholder may also seek the winding up of a company under the Insolvency Act on the ground that the directors have acted on the affairs of the company in their own interests rather than in the interests of the shareholders as a whole, or in a manner which is unfair or unjust to other shareholders.
The objective of section 130 is to afford protection to shareholders when there is a substantial transaction involving a company in which they have invested. For that reason, the Act requires the board to seek the approval of the shareholders for a major transaction. As discussed above, the potential implications for directors in failing to comply with section 130 can have far-reaching consequences.
It is therefore recommended for the board to carefully assess the value of every transaction to be entered into by a company to determine whether it would fall within the purview of section 130. The board may, in reaching such determination, seek the assistance of a professional accountant. Last but not least, it is important to note that section 130 of the Act does not apply for an investment company or an authorised mutual fund.