Corporate rescue - raising new capital

How do you rescue a company in financial trouble?

One method is of course to raise new capital. This of course will not be easy. One change in the law that makes the process slightly easier is the removal of the concept of par value. Formerly, all shares had to have a par value which was the minimum price at which a company could issue its shares. In normal times, this was not too much of a restriction.

However, in bad times, it was unlikely that a new investor would be willing to pay par value for the shares. For example, if the existing shareholders paid $1 for each $1 share of the company's, with the company in desperate straits, a new investor would demand that new shares be issued to him at a much lower price, especially since it would not be clear how long the company would survive. The par value rules would prevent this new issue without court approval.

Now, without the rules relating to par value, companies will have more flexibility in raising capital.

section 216 - a trap for the unwary

Section 216 of the Companies Act is known as the oppression or unfair prejudice section.

Where someone has harmed the company but is in control of the company (for example, a director), the rule in Foss v Harbottle prevents shareholders starting a lawsuit against the wrongdoer.

However, section 216 allows the shareholder to apply to court and the court may allow an action (or lawsuit) to be started against the wrongdoer in the name of the company. However, this course of action is not recommended.

The foreign equivalents of this section have been described by judges as "a shambles" and "a legal minefield". These are warnings that even experienced lawyers may have a hard time navigating the complicated case law relating to this section. Perhaps using section 216A may be a better choice.

Directors duties, enforcement and s 216A

What happens when directors of the company who have breached their duties are also the ones in control of the company, e.g. through their majority shareholding?

Section 216A of the Companies Act provides a "simple" method to enforce the duties owed to the company. A minority shareholder of a private company can serve a 14 day notice on the board requiring them to take legal action in respect of a wrong done to the company. If the board fails to take the action, the shareholder can then apply to court for permission to start the lawsuit. The section requires the court to be very lenient in granting permission since the main requirement is that the lawsuit should prima facie (or at first sight) be in the interests of the company. The court should not examine the lawsuit in great detail to check whether it has a good chance of succeeding.

If the court grants permission, then the 2nd stage begins - the director(s) is sued for breaches of duty, which have to be proved on a balance of probabilities.

This second stage is called a statutory derivative action since the lawsuit is in the name of the company, and any damages awarded are derived from the harm to the company, and not harm to the shareholder.

Malaysian Dairy Industries case

The recent major company law case over the past few days has been the Thio Keng Poon case where the founder of Malaysian Dairy Industries (MDI), a major milk distributor, sued his wife and children for removing him from his post of managing director.

Although this wife and children own the majority of the shares in the company and other family companies, he is claiming that he controls the shares until he dies, and that his family is therefore not allowed to use his shares to remove him. This raises issues of trust law - whether there is a trust over the shares with Thio Keng Poon having the life beneficial interests, and his family being merely trustees of this life interests (and therefore having restrictions on what they can do with the shares).

The family is claiming that he breached his directors' duties by double claiming for his travel expenses. If these allegations are true, they would at the very least be offences under the Companies Act or the Penal Code. As such, convictions for double claiming could be regarded as offences that might disqualify him from the position as director.

The case has just closed with the defence arguing no case to answer. This means that the defence takes a big risk - they will call no witnesses but will argue that the plaintiff cannot win based on the evidence produced so far. The benefit is the trial is shortened and the defendants do not have to submit to cross-examination by the plaintiffs' lawyers.

Directors duties - more on Regal Hastings

This post will cover the breaches of directors' duties in Regal Hastings.

The company had set up a subsidiary to undertake a project. However, the directors of the holding company later found that the subsidiary did not have enough capital to undertake the project. The holding company also did not have enough additional funds to inject into the subsidiary. The holding company directors then decided to invest personally in the subsidiary. Later, these investments paid off as these directors made a good profit.

A court later found that the directors had breached their duty to the holding company. They could have injected their investment into the holding company which could then increase the capital of the subsidiary. Their method had bypassed the holding company to which they owed fiduciary duties, and thus deprived the holding company of the potential profits.

Directors' duties - the Regal (Hastings) case

The Raffles Town Club is in the news again today with reports of the trial of its lawsuit just being concluded. The Club which is actually a company, is suing its past directors for breach of directors' duties. This echoes the famous (to company law students and corporate lawyers) case of Regal (Hastings) v Gulliver.

This case involved some directors who had taken an opportunity belonging to their company, being sued by the company after ownership of the company had been sold to new owners. The new board then used the company to successfully sue the former directors. The end result was that the new owners received a windfall since some of the price of buying control of the company was offset by damages recovered for breaches of directors duties.

The moral of the story is that if you are a director, before you sell control of your company to new owners, make sure that all previous actual and potential breaches of directors duties are regularised. Some of the steps might include making full and frank disclosure to the general meeting and then passing resolutions to approve past acts and to waive any breaches. Indemnities against future lawsuits might be also obtained from new owners although these indemnities may not always be effective. Legal advice should be sought to avoid problems.

It is unclear what steps the former directors of Raffles Town Club had taken to avoid a Regal Hasting situation. We eagerly await the court's written judgment for more details.