Shareholder activism is not a privilege - it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal. Mark Mobius
One would reasonably argue that shareholders in the same company pull the same rope, in the same direction; this on the premise that it is in their sole interest to ensure that the company operates efficiently, effectively and in harmony with the objectives of those who drive it financially, hence the concept of majority rule.
The will of the majority or the majority rule is an established general principle of company law which ensures that any decisions taken by the company conform to the will of the majority of the shareholders; the same shareholders who share a common (financial) incentive to see that the company thrives. Though a seemingly obvious and well-adjusted rule, (one that democratic countries operate in very much the same way), this rule which was so vigilantly observed in the judgment Foss vs. Harbottle, does have its flaws and is not immune to abuse and has, consequently, had to be kept in check first by the principle of 'fraud on the minority' and more recently by the 'unfair prejudicial remedy.'
Article 402 of the Maltese Companies Act provides all shareholders, (particularly but not limitedly) minority shareholders, with the so-called "unfair prejudicial remedy", allowing them the possibility to seek redress before the courts in the event that the conduct of the company's affairs, whether by act or omission, is oppressive, unfairly discriminatory or unfairly prejudicial to its member/s. The unfair prejudice action is effective and far reaching but, in some respects, it is also limited in that it lists exhaustively the orders that the Court may make when asked to provide a remedy in terms of this action. This means that while any complaint (provided it is well founded) may be brought to its attention, the Court may only grant such measures as are strictly conveyed by law.
One such limitation was recently brought to the fore in a preliminary ruling in a case currently pending before the First Hall of the Civil Court, more particularly in relation to the powers of the Court to grant interim relief to a shareholder or shareholders invoking the unfair prejudice action. In this case the remedy sought by the plaintiffs in terms of Article 402(g) of the Companies Act was the dissolution and consequential winding up of a group of companies in which they were minority shareholders, on the back of serious allegations of unfair prejudice by those shareholders in the driving seat. In the light of the remedy sought, the plaintiffs also requested interim protection asking the Court to appoint a provisional administrator arguing that since effectively proceedings that could lead to the dissolution and consequential winding up of the company had been initiated they were also entitled to ask for the appointment of a provisional administrator to protect the interests of the Company and its shareholders until a final determination by the Court. Defendants, however, counter-argued that article 402 does not confer such power upon the Court, and that it is only under the provisions of those provisions of the Companies Act specifically dealing with the dissolution and consequential winding up of companies (Article 214 et seq.) that the court may make such an order. In finding for the Defendants, the Court, having considered the position both in Malta and in England noted that while English law does provide for interim measures in its equivalent provisions dealing with the unfair prejudice action, Maltese law does not and that it should therefore be assumed that had the Maltese legislator intended to give the Court the power to make interim orders in the context of Article 402, then the law would have specifically provided for them as it did in England - ubi lex voluit dixit.
In considering the notion of interim measures, it is interesting to note, that while the majority of the provisions of the Maltese Companies Act have been imported from the UK, article 402 was in fact modelled on article 174 of the New Zealand Companies Act 1993. The difference between the Maltese provision and its counterpart, however, is that while Article 402 lists exhaustively the orders a Maltese Court may make, the New Zealand counterpart hints at the possibility of granting further measures stating that, "...if, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, [the following...]".
Indeed, in determining and deciding the matter the Maltese Court inferred that Maltese law may be lacking in this respect and quoting an extract from Prof Muscat's "Principles of Maltese Company Law," stated ""before examining the different types of order that can be made by the Court, 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...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 rule result from any generic provision in the Code of Organisation and Civil Procedure. It is significant that where the legislator wished to grant to a court the power to make interim orders, the legislator did so by express provision...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..."
In view of the above, the Court, while recognizing the importance of interim measures in order to maximize minority shareholder protection, also recognised that at present the law is silent on the issue regarding the appointment of provisional administrators and thus denied plaintiff's request.
This judgement, albeit partial, has brought to light a lacuna in what is surely the most important provision of the Maltese Companies Act affording protection to minority shareholders from oppressive behaviour of the majority. Arguably, the Court could have applied the provisions relating to the appointment of a provisional administrator in the context of an unfair prejudice action requesting the dissolution and winding up of the Company but in this particular case the Court gave a strict interpretation of the law denying the plaintiffs this (and arguably any other) interim remedy. It did, however, call for a review of this position. The question is whether this ought to be taken up by the legislator or whether one ought to wait for this issue to be reconsidered by the Courts in the absence of any rules of precedence in Malta.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
