Company Law and Corporate Governance

Introduction

Yeo, Lee, Hanrahan, Ramsay and Stapledon (2008) indicates that in common law, the right of shareholders to ensure their organization is run in the most professional and diligent manner. The Singapore Companies Act recognizes the right of the shareholders. The Act requires that the aggrieved party or parties apply for a court order requiring the manager to take a certain action legalized under the law. In this case, the shareholders are requesting the company to oust Mr. See (the company director) from his position citing that he is running down the company and effusing to perform his role and duties as the director and MD of the company. The purpose of this paper is to review a case in which Mr See has been accused of breaching the fiduciary duty that has placed him on the verge of removal from the company. Arguably, under the Company Act, the Article of Association and the Common Law, the company shareholders have a strong evidence and case to reprieve Mr See of his duties as the company director.

Question: Describe the roles, responsibilities and removal of directors of a public company, and advise Mr. See

Section 1: Identification of Legal issues

There are a number of legal issues involved in this case. First, the question on whether Mr See owes fiduciary duties to the company or the shareholders raises concern in the company and under the law. The second question concerns whether Mr See has been discharging his roles and duties as the company director as stipulated by the law or otherwise he has breached the law. The third legal issue is on whether the shareholders can oust Mr See from his roles as the company director. Finally, are legal remedies available for Mr See?

Section 2: Principles to the facts

Directors’ Fiduciary Duties under the Companies Act

In Singapore, the role and duties of a director is stipulated under Section 157 of the Company Act. This duty is referred to as fiduciary duty. The Act states that, when discharging their duties, it is within statutory duty of the directors to act honestly in addition to using reasonable diligence. The Act further prohibits an officer and an agent of the company from making inappropriate use of any information regarding the company and its activities acquired by virtue of being in their position directly or indirectly to his or her advantage. In addition, it prohibits them from using such information to the advantage of any other person or even in a way that could cause harm to the company (Cavendish & Marshall Cavendish Corporation, 2006). Mr See is a company officer, currently acting as the managing director. The general application of the duty in the case of Mr See has significant implications for the responsibilities of governing the corporation that has now been vested on him. The legal duties of a company officer, including the directors under section 157 of the Act, are addition to, but not in conflict with, any other law associated with the duty of liabilities vested on the directors. Any action that may breach this duty has the likelihood to lead to civil breach. In this case, the director should be considered as having the responsibility of compensating for the damages (Calder, 2008).

Directors’ Fiduciary Duties under the Common Law

Directors have fiduciary duties under both the common law and the Company Act. Fiduciary relationship is created when one of the involved parties, such as the company, is entitled to expect another party (in most cases the company directors) to act in the company’s interest and within an absolute exclusion of the director’s personal interest. Fiduciary duty is the most demanding duty for a director because it encompasses all the other duties. Whereas the directors have the legal duty of serving the interest of the company, he or she must any act that may cause a conflict of interest, or interest of a third party in detriment of the company’s interest. Under section 157 (2) of the Company Act fiduciary, duty is statutory. First, the director has to act within the absolute interests of the company rather than for any other collateral purpose. According to Ramirez (2007), it is the responsibility of every company director to avoid getting personal interest from his act of good faith whatsoever. However, a valid consent from the company shareholders can be given to the director allowing him or her to obtain some benefits, but only after disclosing all the facts including that of his interest in the transaction. Secondly, the rule of “no secret profit” is strictly applied that, even if there is no reasonable possibility of conflict between the duty of the director and the interest of the company, then the director must provide the account of profit. However, this must only occur in cases where the profit has been made by the director is connected with his office. In the case of Regal (Hastings) Ltd v Gulliver, The House of the Lords held that the directors of the company (the plaintiff) had the role of accounting for the profit made. The decision was arrived at after considering the fact that profit was obtained arose in the when executing their duties as the company directors. There was neither bad faith nor were there disputations that the directors were honest and well intentioned (Koh, Koh & Kwa, 2009).

In its ruling, the Court of Appeal had argued that once the directors had made the decision that the company could not take up the opportunity and that their obligation to avoid making profits from their roles as the company leaders had ceased. However, the House of Lords rejected this argument. The House of the Lords went on to recognize that the directors should have been the least persons expected to have taken such an opportunity while still under their role as the company directors. The House of the Lords, in its ruling, argued that there was a need for the directors to obtain a shareholders’ consent when making such profits that was meant for their personal interests. The directors were required to obtain the consent from the shareholders to secure their freedom to make the profit for themselves. Failure to do this, there was no other option than to let the opportunity pass.

Directors’ duties- are such duties owed to the company or to the shareholders?

The directors are required to exercise their powers vested on them collectively as a board and not as individuals. The directors must remain impartialness between groups of shareholders in the company because they are responsible for running the company as a team rather than as individuals. In their capacities as company directors or managers, these persons owe fiduciary duties to the company only, according to judge decision in 1902 in Percival v Wright. In Brunninghausen v Glavanics, The Court of Appeal held that the recognition of the duty of care to the shareholders must not be in preclusion where it is taken as the duty was not in competition with the company’s fiduciary duty. The Court held on this decision despite the fact that the fiduciary duty of the directors were absolutely owed to the corporation rather than to the company shareholders (Hannigan, 2012).

The fiduciary duties of a director to shareholder may arise where there exist a confidence relationship as depicted in the Coleman v Myers case, where reliability may arise through family relationship. Moreover, in case of a limited number of shareholders, fiduciary duty of care may arise. In the case of Tai Kim San & Anor v Lim Cher Kia, the Singapore High Court held that the director had no fiduciary duty to any particular shareholder in the contract or transaction where the managing director had willingly and legally purchased the shares from two of the company’s shareholders.

Removal of a director

Disputes may arise in the company forcing some or all of the other directors to see the need for removing one of more of their colleagues from the company. Generally, many directors normally sign a service contract when joining the company in their capacities as directors. When such a director is to be removed from the company after a breach of the contract, he or she must be compensated (Blumberg, 2005).

Removal by other directors

In a public company, directors have no powers to remove another director. However, in a private company, the article of association of a private company may contain provision that allows director to remove another.

Removal by members

In a public company, members may remove a director by ordinary resolution notwithstanding anything in the company’s memorandum or article of association (s 152(1)). The members can remove a director even if the director has contract with the company specifying the duration the director will remain in office. The director in this case may be entitled to damages for breach of contract. The powers of the member to remove a director are vested under s 152, under the following procedures. Foremost, the members intending to remove a director are required to move a “special notice” of intention to the company at least 4 weeks (exactly 28 days) prior to the meeting set for consideration for a resolution (Grundei & Talaulicar, 2002). Secondly, the intention of the company to remove the director must be communicated to him or her. Finally, it is within the legal rights of the affected director to have legal representations sent to all the members of the organization. In addition, he or she has the legal rights to express his points during the meeting.

If the Article of Association for the particular company provides a procedure for the removal of one or more of its directors, the member applies such procedures. Otherwise, he can invoke the general law as specified under section 152 of the Act. Although the company’s article of association may contain restriction on removal of directors, the decision of majority members could still remove the director at any time (Cai, 2007).

Conclusion

From an in-depth analysis of the case affecting Mr See and TRM Ltd, it is worth concluding that Mr See has actually breached his legal duty to the company. According to the Company Act, Mr See the Company Act requires that he serves the interest of the company must avoid any position that may allow him obtain personal interests rather than for the best of the company. Further, as the Managing Director, he has a duty to act with sufficient care or diligence in relation to the business operations of the company (Pereira, 2006). From the analysis, however, it is worth noting that Mr See has the right to be present or be presented at the meeting called to decide his fate. According to the Act, he has the right to defend himself at the meeting. From an analysis of the principles and facts involving this case, it is worth concluding that Mr See must leave the company as it is clear he has acted in a manner likely to breach his duty to the company.

References

Blumberg, P. I. (2005). Blumberg on Corporate Groups. Belmont, CA: Cengage Learning.

Cai, H. (2007). Bonding, Law Enforcement and Corporate Governance in China. Stanford Journal of Law, Business & Finance, 13(1), 82-120.

Calder, A. (2008). Corporate governance: a practical guide to the legal frameworks. Center City, PA: Kogan Page Publishers.

Cavendish & Marshall Cavendish Corporation. (2006). Company Law. London, UK: Routledge.

Grundei, J., & Talaulicar, T. (2002). Company Law and Corporate Governance of Start-ups in Germany: Legal Stipulations, Managerial Requirements, and Modification Strategies. Journal of Management & Governance, 6(1), 1-27.

Hannigan, B. (2012). Company Law. Oxford, UK: Oxford University Press.

Koh, D. S., Koh, D., & Kwa, K. K. (2009). Issues of Law and Justice in Singapore: Some Christian Reflections. Singapore: Armour Publishing Pte Ltd.

Pereira, M. A. (2006). International Bar Association. London, UK: John Wiley and Sons.

Ramirez, S. A. (2007). The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top. Yale Journal on Regulation, 24(2), 313-359.

Yeo, V.C. S., Lee, J., Hanrahan, P., Ramsay, I., & Stapledon, G. (2008). Commercial Applications of Company Law in Singapore. Singapore: CCH Asia Pte Ltd.