Perhaps one of the clearest manifestations of the legislator’s general mandate to protect those in a weaker, more vulnerable position, is that afforded to minority shareholders in virtue of the company law remedy of unfair prejudice.
The concept of ‘majority rule’ dictates that within a company structure, a minority shareholder will effectively have little control over the way the company is operated. It has long been recognised that this can lead to problems of minority oppression.
the unfair prejudice action represents one of the main remedies available to minority shareholder/s, where the lack of voting power leaves the member/s unable to pass resolutions or block decisions
Accordingly, the unfair prejudice action represents one of the main remedies available to minority shareholder/s, where the lack of voting power leaves the member/s unable to pass resolutions or block decisions.
The various provisions of Article 402 of the Malta Companies Act comprise the statutory unfair prejudice regime in Malta which can be deployed by a minority shareholder to preserve and protect its rights and position. Essentially Article 402 states that any member of a company who complains that the affairs of the company have been, or are being, or are likely to be conducted in a manner that is, oppressive, unfairly discriminatory against, or unfairly prejudicial, to such member/s or in a manner that is contrary to the interests of the member/s as a whole, may make an application to the court for a remedy under the said Article 402.
In terms of Article 402(6) the term “member” includes a person entitled at law to represent the interests of a deceased member, a person to whom shares in the company have lawfully devolved by way of testate or intestate succession, and a trustee, who holds shares in the company.
Some situations which may constitute unfairly prejudicial conduct include:
- the failure by directors to register valid share transfers or transmissions;
- exclusion from management in circumstances where there is a legitimate expectation of participation;
- channelling business and/or granting loans to another company in which the majority shareholder/s or director/s hold a personal interest;
- the awarding by the majority shareholder to themselves of excessive financial benefits;
- abuses of power and breaches of the provisions of the articles of association;
- failure to hold annual general meetings and lay the accounts before the member/s, and depriving the member of his/her right to know the state of the company’s affairs.
There are a number of specific remedies contemplated in Article 402(3)of the Malta Companies Act, which may be ordered by the court including, inter alia, the following:
- regulating the conduct of the company’s affairs in the future;
- restricting or forbidding the carrying out of any proposed act;
- requiring the company to do an act which the applicant has complained it has omitted to do;
- providing for the purchase of the shares of any member/s of the company by other member/s of the company;
- directing the company to institute, defend, continue or discontinue court proceedings;
- providing for the payment of compensation by such person as may have been found by the court responsible for loss or damage suffered as a result of the act or omission complained of, to the person suffering the said loss or damage; and
- dissolving the company and providing for its consequential winding up.
In ‘George Borg vs Primrose Poultry Products Ltd and Robert Borg, Joseph Galea and Michael Vella’, it was held that a shareholder may bring an unfair prejudice action under Article 402 of the Malta Companies Act against directors who act improperly and cause him prejudice
In ‘George Borg vs Primrose Poultry Products Ltd and Robert Borg, Joseph Galea and Michael Vella’, qua directors of Primrose Poultry Products Ltd, decided by the First Hall Civil Court on January 16, 2012, it was held, inter alia, that a shareholder may bring an unfair prejudice action under Article 402 of the Malta Companies Act against directors who act improperly and cause him prejudice. In this case, loans were granted to another company in which the defendant directors had a personal interest, to the prejudice of Primrose Poultry Products Ltd.
The facts in this case were as follows:
The three defendant directors of Primrose Poultry Products Ltd (“Primrose”) were allegedly using Primrose’s assets to finance the activities of PGT Co. Ltd, (“PGT”) a company in financial difficulty.The majority of the directors of Primrose had a personal interest in ensuring that PGT continued trading. Robert Borg held the majority shareholding in PGT while Joseph Galea, Michael Vella and Robert Borg, as well as Robert Borg’s siblings, were employed by PGT.
George Borg was a minority shareholder and a director of Primrose. He claimed that the actions of the three other directors of Primrose were unfairly prejudicial to himself, to the other minority shareholders and to Primrose under Article 402 of the Malta Companies Act. He therefore requested the court to:
- prohibit the directors from using the company’s assets to pay any obligations of any third party, from further encumbering Primrose in any way and from recruiting any new employees;
- order the directors not to carry out any commercial activity which was not contemplated in the objects clause of the company’s memorandum and articles of association;
- order the directors not to alienate, transfer or in any way dispose of the immovable assets of Primrose;
- order the directors not to create any encumbrances, privileges, hypothecs or any personal or real right over any movable or immovable assets of Primrose;
- order the directors not to import or in any other manner acquire merchandise or food products in Primrose’s name;
- give any other order it considered fit and appropriate;
- ensure that Primrose would be paid everything it was owed by the directors, or to neutralise the unfair prejudice to the minority shareholder;
- order that George Borg would have full and free access to the accounting records, correspondence and offices of Primrose;
- order that Primrose be wound up and to give any other remedy contemplated under Article 402(3) of the Companies Act which it felt to be appropriate.
George Borg argued that PGT was clearly not in a position to repay the debts owed to Primrose. If the latter continued financing PGT’s activities, Primrose would end up insolvent and his right as a shareholder to receive any proceeds remaining after Primrose’s creditors were satisfied would be diminished.
The defendant directors on the other hand argued that George Borg’s unfair prejudice claim was incorrectly motivated and was premature due to the fact that he had never availed himself of the procedure set out in the Companies Act to remove a director. Moreover, they argued that up to the date of the institution of the court case, George Borg had always approved of the activities that were being carried out by Primrose.They further claimed the company was managed according to the company’s objects as set out in the memorandum of association, and it was important for Primrose to have close relations with PGT.
The First Hall Civil Court, in delivering its judgement, declared that George Borg’s action was well founded under Article 402(1), and it was just and equitable for the court to apply Article 402(3)(g) and order the winding up of Primrose and its consequent liquidation.
The court also appointed a liquidator under Article 227 of the Companies Act to take under his custody and control all Primrose’s property and obligations, to exercise all the powers available to him under Article 328 of the Companies Act, to take the necessary measures to safeguard Primrose’s assets and to present his report within three months from the date of delivery of the court’s judgement.
The Maltese Courts’ Interpretation of “Member”
In ‘Perit Raymond Vassallo vs Anthony and Ingrid ParlatoTrigona et, it was held that the unfair prejudice action under Article 402 was not available to a “second tier shareholder”
In ‘Perit Raymond Vassallo vs Anthony and Ingrid Parlato Trigona, architect William and Gabriella Carbonaro, architect Edward and Anna Micallef, WCO Ltd, TPT Ltd, Parade Ltd, Windsor Holdings Ltd, Regent Holdings Ltd and Winex Holdings Ltd,’ decided by the Court of Appeal on the 24th June 2011, it was held, inter alia,that the unfair prejudice action under Article 402 of the Companies Act was not available to a “second tier shareholder”. Moreover, a person had to be a registered member, to be considered as a shareholder. It was not possible to ignore the separate personality of the corporate shareholder. The fact that there was a parent-subsidiary relationship was not relevant. If a person was not a member, he had no right of action under Article 402.
The same interpretation was adopted by the First Hall Civil Court on 6th May 2013, in the case ‘Suzanne Busuttil et vs Francis Busuttil & Sons Ltd et’ which confirmed amongst other things, that a person who was not a direct shareholder, did not have action under Article 402 of the Companies Act against the company.
In ‘Jean Karl Soler et vs Ray Vassallo pro et noe’ dated February 3, 2012, the Court of Appeal stated that a spouse of a shareholder had no right to legal action under Article 402. A married woman holding shares in a company was independent from her husband, and could protect her own interests. The fact that dividends formed part of the community of acquests was irrelevant. A married woman had exclusive right to determine her share of dividends, and her spouse could not intervene, since he did not have a direct interest in the relevant company.
Matrimonial and Succession Issues
The case “Michael Debono as trustee of The J. Saliba Trusts and Mary Salibavs Mario Debono in his own name and as director of the companies, The Village Pharmacy Ltd and Karizia Company Ltd” delivered on 28th June 2012 is a noteworthy one, since the First Hall Civil Court dealt with the meaning of “member” in light of matrimonial and succession issues. The Court held, inter alia, that Michael Debono in his capacity as trustee and Mary Saliba both had legal interest to file an unfair prejudice action in their capacity as ‘universal heirs’, even if they were not yet registered members.
The Court held that Michael Debono in his capacity as trustee and Mary Saliba both had legal interest to file an unfair prejudice action in their capacity as ‘universal heirs’, even if they were not yet registered members
The facts of the case were as follows:
The First Hall of the Civil Court considered that the two companies were registered on May 16, 2005. Joseph Saliba died on September 25, 2007 and was survived by his widow Mary Saliba. His estate included 10,000 shares fully paid up in the company, The Village Pharmacy Ltd, and 2,500 fully paid up shares in Karizia Company Ltd. According to his last will, dated September 18, 2007, his universal heir was the trustee of The J. Saliba Trust and with effect from January 23, 2009 Michael Debono was appointed as trustee.
Mario Debono qua defendant argued that Michael Debono and Ms Saliba did not have locus standi to present any legal action under Article 402 since they were not registered members of The Village Pharmacy and Karizia Co. Ltd.
It resulted, however, that Mario Debono refused to register the trustee as a registered member of both companies and expected the shares to be offered to him for sale instead.
It was not disputed that the shares of J. Saliba in both companies were still registered in the name of the deceased, at the time the legal proceedings were filed and therefore the court had to establish whether Michael Debono qua trustee and Ms Saliba, as the surviving widow, were entitled to file an unfair prejudice action under Article 402 in their capacity as members of the Village Pharmacy Ltd and Karizia Company Limited.
In its deliberations the court examined the definition of “member” set out in the Malta Companies Act. Accordingly, Article 2(1) defined “member” as: “except where otherwise specifically defined, means a shareholder of a company and a partner in any other commercial partnership.”
A shareholder was defined as: “a person entered in the register of members of a company pursuant to Article 123 or the bona fide holder of a share warrant referred to in Article 121”.
A wider definition of “member” was given in Article 402(6): “member includes a person entitled at law to represent the interests of a deceased member, a person to whom shares in the company have lawfully devolved by way of testate or intestate succession, and a trustee, as defined in Article 127, who holds shares in the company.”
The court made reference to Article 123(2) of the Companies Act, applicable when one spouse was the registered shareholder and concluded that Ms Saliba should be included as a member of the companies:
“Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this Act, be treated as a single member; and, unless otherwise provided in the memorandum or articles, the name of only one of such persons shall be entered in the register of members.Such person shall be elected by the joint holders and shall for all intents and purposes be deemed vis-à-vis the company to be the member of the company in respect of all the shares so held.”
It was not contested that the shares in both companies were registered in the name of deceased Joseph Saliba. However as these shares formed part of the community of acquests and belonged to both spouses jointly, this meant that on the liquidation of the community of acquests, Ms Saliba who was already a member, ope legis, continued to be a member in the companies.
The court concluded that in view of the definition of “member” in Article 402, Ms Saliba was entitled to file legal proceedings under Article 402, even if she was not yet entered in the register of members.
Likewise, Michael Debono, as trustee, also had a legal interest, to file an unfair prejudice action under Article 402. Michael Debono as trustee of The J. Saliba Trusts was the universal heir of deceased Joseph Saliba and in this respect, he fell within the definition of “member” under Article 402 (6).
Article 402 – Is it an all-encompassing corporate solution?
the courts should not intervene and exercise their wide powers under Article 402 of the Malta Companies Act in order to provide a solution to any corporate problem when effectively there was no “unfair prejudice”
In ‘Ronald Azzopardi vs Taormina Holdings Ltd and Sovereign Hotels Ltd’, decided by the First Hall of the Civil Court on June 13, 2011, it was held, inter alia, that the courts should not intervene and exercise their wide powers under Article 402 of the Malta Companies Act in order to provide a solution to any corporate problem when effectively there was no “unfair prejudice”.
The facts in this case were as follows.
Ronald Azzopardi was a minority shareholder and director of Sovereign Hotels Ltd, and holder of 78,750 ordinary A shares and 92,250 ordinary B shares. Taormina Holdings Ltd was the majority shareholder, holding 825,000 ordinary C shares.
It resulted that, in the financial years 2001, 2002 and 2003, the company had four directors including Mr Azzopardi. The draft accounts for these years were prepared by one director, C. Gauci, who represented the majority shareholder. Even though the accounts were sent to the auditors in draft form they were never approved by the board of directors and as such were never audited and filed. Subsequently in 2009, Mr Azzopardi collected the draft audited accounts from the auditors for the years 2001-2003 and in order to finalise the said accounts he convened an annual general meeting to approve the accounts.While in the years 2001-2003, the company had four directors, in 2009 Mr Azzopardi was the sole director. As neither the majority shareholder nor any of the former directors appeared for the annual general meeting, Mr Azzopardi acted in accordance with regulation 37 of the First Schedule to the Companies Act. The meeting was adjourned and held by one shareholder. The accounts were approved and signed by Mr Azzopardi and sent to the auditors for finalisation. As the former directors refused to sign the back-dated accounts, the provisions of Article 178 of the Malta Companies Act could not be complied with and the auditors could not prepare the auditor’s report as required by law.
In his application, Mr Azzopardi claimed that he was placed in a position where it was impossible for the accounts be signed by two directors and he proceeded to file an unfair prejudice action in terms of Article 402 of the Malta Companies Act. He requested the court to declare that Taormina Holdings Ltd acted against the interests of the company and its members and that the failure of the company to file the audited accounts for the years 2001-2003 was harmful to the company, its members and directors.
In its reply, Taormina Holdings Ltd contested the legal action and submitted that:
- the company’s two former directors, C. Gauci and J. Gauci, were not a party to the proceedings and therefore an order could not be issued against them;
- the accounts should not be signed retroactively and back-dated by persons who were no longer directors. The current director, Mr Azzopardi should sign the accounts and the annual general meeting should not be presented with accounts which were not signed and not accompanied by the auditor’s report.
In delivering its judgement the court referred to Prof. Andrew Muscat’s “Principles of Maltese Company Law” wherein it is stated that:
“The directors are obliged to ensure that the accounts are drawn up clearly and in accordance with the provisions of the Act and with generally accepted accounting principles and practice. An overriding principle, however, is that accounts must give a true and fair view of the company’s assets, liabilities, financial position and profit or loss.
“The company’s annual accounts should be approved by the board of directors and the balance sheet should be dated and signed on behalf of the board by the two directors of the company. Every copy of the balance sheet which is laid before the company in general meeting or which is otherwise circulated, published or issued is to state the name of the directors who signed the balance sheet on behalf of the board. The same directors are to sign on behalf of the board, the copy of the balance sheet which is to be delivered to the Registrar.
“Directors need to exercise considerable caution in relation to the approval of the annual accounts. Indeed, if accounts are approved which do not comply with the provisions of the Companies Act, every director of the company who was party to their approval and who knew that they did not so comply or was negligent as to whether or not they so complied is liable to a penalty. For the purposes of this rule, every director at the time accounts were approved is considered to be a party to their approval unless he proves that he took all reasonable steps to prevent their being approved.”
The court concluded that Mr Azzopardi had no right to insist that the persons who today no longer served as directors of the company should sign accounts back-dated to the time when they were directors. Mr Azzopardi, who was both shareholder and director, was obliged to ensure that the accounts were approved as required by law.
In the absence of any “unfair prejudice”, “oppression”, “discriminatory act” or “abusive act” in the manner contemplated by Article 402, the court concluded that it should not intervene
Whilst acknowledging that Article 402 conferred upon the court wide powers to dispense an equitable remedy, the court stated that the Malta Companies Act also contained detailed provisions on several issues – the breach of which triggered penalties. As such, it catered for provisions on the duties of directors, the keeping and approval of accounts, the role of auditors and the function of an annual general meeting. In the absence of any “unfair prejudice”, “oppression”, “discriminatory act” or “abusive act” in the manner contemplated by Article 402, the court concluded that it should not intervene and, consequently, Mr Azzopardi’s application under this provision was dismissed.
Article 402 – Any limitations?
As effective as the unfair prejudice remedy appears to be, there also seems to be a limitation, in the sense that Article 402 lists exhaustively the orders that the court may make when asked to provide a remedy in terms of this action and, as such, prima facie, the law does not specifically grant authority to the court to issue interim measures, but only such measures as are contemplated in Article 402(3) of the Malta Companies Act. This shortcoming is also acknowledged in Prof. Andrew Muscat’s “Principles of Maltese Company Law” wherein it is stated that:
“A preliminary question should be considered: whether a court may issue an interim order pending final judgement. The position in English law is that English courts do, where appropriate, have the power to issue interim orders – usually orders for payment on account or orders designed to preserve the status quo. The Maltese Companies Act is silent on the question of whether a court, seized of an issue under Article 402 is entitled to issue an interim order. Nor does any such jurisdiction result from any general provision in the Code of Organisation and Civil Procedure…
It is significant that where the legislator wished to grant the court the power to make interim orders, the legislator did so by express provision as with the power of the court to issue a ‘provisional order’ under Article 37(5) of the Merchant Shipping Act (prohibiting dealings in a ship until the court definitely decides on the merits) and the power of the court to initially issue a warrant of prohibitory injunction for an ‘interim period’ under Article 873(7) of the Code of Organisation and Civil Procedure. In practice situations may sometimes arise where the issue of an interim order would be necessary to protect the interests of the complainant or of the company. The introduction of an amendment to Article 402 to allow the court to issue interim orders would be another tool in the court’s arsenal against oppressive, unfairly prejudicial or unfairly discriminatory conduct.”
The question whether interim orders may be issued or otherwise, in spite of the lack of an express legal provision, has been dealt with in a number of cases by the Maltese courts. In ‘Pada Builders Limited vs Philip Agius & Sons Ltd et’, decided by the First Hall Civil Court on 26th August 2011, it was confirmed that the court was vested with sufficient authority to give interim orders under Article 402.
The court, whilst making reference to the above-mentioned extract from Prof. Andrew Muscat’s “Principles of Maltese Company Law”, stated however that such a rigid position did not need to be adopted and that the court should not refuse to grant interim measures just because Maltese Company Law was silent on the question whether a court seized of a case under Article 402, had the authority to issue an interim order pending final judgement.
the court should not refuse to grant interim measures just because Maltese Company Law was silent on the question whether a court seized of a case under Article 402, had the authority to issue an interim order pending final judgement
The court opined that although our Article 402 was modelled on the English article 459 of the UK Companies Act 1985, and it appeared that Article 459 was intended to provide definitive orders, it could not be excluded that our courts had authority to grant temporary remedies. Our courts could have regard to the circumstances of the case and grant interim measures, if this was requested and if it felt that it was appropriate to prevent the company from suffering irreversible harm until the case was decided or until the conflict within the company was settled.
The same reasoning was adopted by the First Hall Civil Court in the case ‘Lonavi Properties Limited vs Balkan Power Invest Holding Limited et’ decided on the 9th June 2011.
A Question of Balance
the key to the effective and equitable application of the unfair prejudice remedy lies in the striking of an appropriate balance by the Courts of Malta between the need to protect the minority against oppression whilst allowing the majority to rule in the best interests of the company
Arguably, the key to the effective and equitable application of the unfair prejudice remedy lies in the striking of an appropriate balance by the Courts of Malta between the need to protect the minority against oppression whilst allowing the majority to rule in the best interests of the company and not languish in deadlock, in accordance with the concept of majority rule.
This Article contains general information only and neither Be. Legal Advocates nor any of its affiliate/s, partner/s and/or associate/s is/ are, by means of this publication, rendering professional legal advice or services. The intention of the Article is not, therefore, to advise you on whether or not to petition for unfair prejudice (which will depend on the facts of your case). The subject of unfair prejudice is a complex area and no article or guide can ever set out all the factors relating to a particular case. As such, this Article is not a substitute for detailed advice on your case. If you would like further explanation of any points in this Article, please contact us.