The First Hall Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on August 26, 2011, in the case “Pada Builders Limited vs Philip Agius & Sons Ltd and others ”, confirmed, among other things, that the court was vested with sufficient authority to give interim orders under article 402 of the Companies Act (the unfair prejudice remedy).
The facts in this case were as follows.
The company Pada Builders Ltd in its capacity as a minority shareholder in the company Black Top Ltd filed an unfair prejudice application in terms of Article 402, Companies Act, against the other shareholders having the majority of shares: Philip Agius & Sons Ltd, Schembri Infrastructure Ltd, Black Top Ltd, Philip Ltd, Mario Agius and Francis Schembri.
The parties had to give the court-appointed referees free access to any document, which they felt was necessary in order to complete their task
It was stated that the company Black Top Ltd was managed in a way that was prejudicial to its interests as well as to the interests of the company, Black Top Ltd.
Black Top Ltd manufactured tarmac. Pada Builders Ltd’s grievance was that the tarmac was sold at below market price for the sole advantage of defendant companies.
As a result, Black Top Ltd operated at a loss, with negative implications on the value of its shares.
Pada Builders claimed that this was defendant companies’ strategy in order to acquire its shares at a low price.
It was alleged, furthermore, that defendant companies benefitted from fixing a low price for the tarmac, as in this way, they could resell it to third parties and take advantage of the fact that they had purchased the tarmac at a very low price.
In reply, defendant companies denied the allegations of unfair prejudice.
On July 8, 2011, Pada Builders filed an application, requesting the court to give an interim order – for the price of Black Top’s tarmac to be approved by the company’s shareholders or for the price to be established by a technical expert, to be appointed by the court.
Defendant companies submitted that interim orders were not possible under Article 402 of the Companies Act.
It was submitted that the court could only intervene under Article 402 if it was satisfied that the defendant companies as majority shareholders committed acts of oppression, unjust acts or acts of discrimination to the prejudice and harm of Pada Builders, the minority shareholders is Black Top Ltd.
Defendant companies contended that the only solution to the problem for Pada Builders to request the court to establish with the assistance of an independent and competent expert, the true value of its shares.
After this was established, these shares could be offered for sale to the other members and in case no member was willing to purchase them, Pada Builders would be free to sell these shares to non-members.
However, Pada Builders did not make this request, pointed out defendant companies.
This court was asked to decide whether to give interim measures under Article 402.
Under Article 402, a member of a company could request protection against unfair prejudice, committed by persons who were in control of the company.
This remedy was available to a member whether or not, he was represented on the board of directors. The lack of representation on the board was not itself an act of oppression, an unjust act or an act of discrimination.
There was no absolute right to participate in the company’s management.
The unfair prejudice remedy was intended to prevent the majority shareholder from committing unjust acts and or discriminatory acts against another member.
In the case, Monreal vs Delia noe dated May 13, 1999, the court held that Article 402 safeguarded the interests of shareholders and in particular the minority shareholder. It was held that this remedy was granted to every member of a company, provided he could show that the company’s affairs were being managed in a way that was causing him to suffer or possibly suffer, some prejudice, act of oppression, injustice or a discriminatory act.
This could be the result of one single act or an act of omission.
The harm could be suffered by such member, making the application, or another member or by the general body of members.
In Saul D. Harrison & Sons plc (1995) the English Court of Appeal laid down guidelines on what was or should be deemed to be “unfairly prejudicial”, which in Maltese translated to b’mod mhux gust ta’ pregudiżżju.
The court had to see whether such act was in accordance with the company’s statute.
It also had to consider any legitimate expectations of a member.
Reference was made to the decree of June 9, 2011 in Lonarvi Properties Ltd vs Balkan Power Invest Holding Ltd et and to Chapter 16 of Principles of Maltese Company Law – Prof. Muscat, on interim measures in the context of Article 402.
“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 judgment. 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 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 complaint or of the company. The introduction of an amendment to article 402 would allow the court to issue interim orders would be another helpful tool in the court’s arsenal against oppressive, unfairly prejudicial or unfairly discriminatory conduct.’’
This court however, did not feel that it had to adopt such a rigid position. It 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.
It said that our law gave wide discretion to the court, to decide what constituted unfair prejudice and what remedies to grant.
Though our Article 402 was modelled on the English article 459 of the UK Companies Act of 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.
In Vella et vs Vella Brothers Ltd et our Court of Appeal, on March 9, 2007 held that the purpose of Article 402 was to allow the court to intervene, to protect the minority shareholder.
The court said that by virtue of Article 402, it could grant a remedy, which it felt to be appropriate, including temporary measures and orders in order to preserve the status quo, until the issue was determined or until the internal conflict within the company was resolved.
This court agreed with the reasoning of the court in Vella et vs Vella Ltd et. It confirmed that it had full authority in terms of Article 402 to grant a temporary remedy to prevent the company from suffering irreversible harm until the case was decided on until the conflict within the company was settled.
Without prejudice to the merits of the case, the court on August 26, 2011 gave the following interim measures:
1. The board of directors of Black Top Ltd had to meet within four weeks to establish by unanimous vote, the minimum price for the company’s tarmac. Minutes had to be kept of the board meeting which had to contain the resolutions and or decision of the company. A legal copy of these minutes had to be presented by the parties or any of them to the Court Registry within four weeks from the date of this decision.
2. If this board meeting was not held, for whatever reason, within four weeks, or if it was convened but there was no unanimous decision on the minimum price, in such case, the price would be established by a technical expert of the court. The court also appointed a legal referee to assist the technical expert. The referee had to take action not before four weeks from the date of this decision. The parties had to give the referees free access to any document, which they felt was necessary in order to complete their task.
3. The board of directors of Black Top Ltd had to inform their auditors that they had to calculate the valuation of each share in the company within twelve weeks. The parties had to declare whether there was any agreement to sell their shares at the price established by the auditors.
4. In case there was no agreement, the court ordered that the auditor’s report, on the share valuation, to be presented to the Court Registry within 12 weeks.
5. If by the expiry of the stated period, there was no agreement to sell/transfer shares in the company, this court authorised the technical expert to establish the following:
• The value of every share in Black Top Ltd; in 2010, in 2009 and in 2008.
• The legal referee had to assist the technical expert. The referees had to commence their task not before 12 weeks from the date of this decision. The parties had to give the referees access to every document which they considered to be relevant.
• The appointment of the referees was provisional at the expense of Black Top Ltd.
Dr Grech Orr is a partner at Ganado & Associates.