The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi, on January 31, 2014, in the case “Suzanne Busuttil and others v Francis Busuttil & Sons Ltd and others”, confirmed that there is no appeal from a decision of the First Hall of the Civil Court, under the unfair prejudice provision, article 402 of the Companies Act.
The facts in this case were as follows.
Suzanne Busuttil and Brian Busuttil, in their own name and as directors of Stealth Holding Ltd filed an application in terms of article 402 Companies Act (unfair prejudice) against the following persons: “Francis Busuttil & Sons Ltd, B&S Contractors Ltd, Franco Busuttil, Michael Busuttil, Joseph Busuttil, Christian Busuttil; and Jean Paul Busuttil as directors of Francis Busuttil & Sons Ltd, Foster Clark Products Ltd, Francis Busuttil & Sons (Marketing) Ltd, B&S Exports Ltd, B&S Manufacturing Ltd, and Chris Degiorgio as director of Foster Clark Products Ltd and of Francis Busuttil & Sons (Marketing) Ltd.
The applicants claimed that the affairs of the company were managed in an oppressive and unfairly discriminatory manner against the members or all the interests of members. Article 402 (1) of the Companies Act provides:
“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, or that any act or omission of the company have been or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole, may make an application to the court for an order under this article.”
The applicants stated that there were serious shortcomings in the management, non-observance of corporate governance principles, lack of transparency and no respect to minority shareholders. They said that they had presented their complaints to the board and to the other shareholders several times but they were not given any reply.
Allegedly the management of the defendant companies violated director duties as codified in article 136 A Companies Act: infringing – basic duties against self-dealing and conflict of interest, the corporate opportunity doctrine – to act in the best interest of the company, failure to provide information in order to give them a complete financial picture, adopting a dictatorial management system, obtaining unauthorised benefits which were not approved by its members.
They submitted that there was lack shortage of information: the information was incomplete and misleading. There were also instances when some board members concealed to the board of directors information.
The applicants said that they were entitled to have the companies managed in a serious way, in order to protect their interests and to end the damage to the companies.
Faced with this situation, the applicants asked the court to give such directive to stop the abuse and for the company to be managed in a regular manner, in accordance with the principles of good corporate governance, in terms of the Companies Act, including article 136 A (2) (A), under such directions which the court could provide.
In reply, the defendants pleaded that as applicants were not shareholders of Foster Clark Products Ltd, Francis Busuttil & Sons (Marketing) Ltd, B&S Exports Ltd, B&S Manufacturing Ltd – they should be freed from the proceedings. Defendants maintained that there was lack of integrity of the proceedings as the shareholders of the companies – Francis Busuttil & Sons (Marketing) Ltd and B&S Contractors Ltd were not party to these proceedings and that these members should be called into the suit.
They said that it was not clear what remedy applicants sought. While the applicants appeared to invoke article 402 of chapter 386, their grievances were all directed against the directors, to ensure that the directors complied with corporate governance provisions as required by the Companies Act including article 136 A (2) (A), per article 140 of chapter 386. In addition, they said that the applicants’ allegations were unfounded and that the defendants’ companies were managed according to law, in the interest of all shareholders. There were no reasons to invoke article 402 Companies Act (unfair prejudice) and the applicants’ requests should be dismissed, they maintained.
On May 6, 2013, the First Hall of the Civil Court accepted the defendants’ pleas, that applicants could not invoke article 402 Companies Act against the companies – Foster Clark Products Ltd, Francis Busuttil and Sons (Marketing) Ltd, B&S Exports Ltd, B&S Manufacturing Ltd, as they were not members of these companies. It declared that these four companies were not legitimate defendants and freed them from the proceedings.
The court considered the definition of ‘member’ under article 402 (6) Companies Act which provides: “In this article, 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, as defined in article 127, who holds shares in the company.”
Reference was made to Vella v Vella Brothers Ltd. In the case Architect Ray Vassallo v Anthony Parlato Trigona dated June 24, 2011, the Court of Appeal held that only a member could apply under article 402 Companies Act and that we did not have the concept of second tier shareholder. A shareholder of another company could not apply – as this went against the principles of separate personality. The relations of parent/subsidiary were not relevant.
In Jean Karl Soler et v Raymond Vassallo pro et noe, dated January 3, 2012, it was held that a spouse of a shareholder had no legal action under article 402, Chapter 386. It was irrelevant that the dividends formed part of the community of acquests. It was not necessary for a spouse of a member to sue.
In Joseph Calleja, dated July 8, 2004, the court confirmed that only a member could apply under article 402 Companies Act. A member included the heir of a shareholder. The court said that the applicants did not qualify as a member of the companies Foster Clark Products Ltd, Francis Busuttil & Sons (Marketing) Ltd, B&S Exports Ltd, and B&S Manufacturing Ltd and were precluded from filing an unfair prejudice action under article 402, against these four companies.
The court noted that our law did not recognise the concept of second tier shareholding and only a member qualified to file an action under article 402, Companies Act. Sub-paragraph (6) of article 402 contained the word ‘includes’, however, this did not mean that the court should give a liberal interpretation to the term ‘member’.
Our law only did not wish to exclude a person who had a right to be included but if the term had to be strictly interpreted, such person would have otherwise been excluded. Reference was made to Boyle & Birds Company law:
“… Section 994(1) allows a member to apply to the court by petition for an order under the section – this may theoretically include a passive majority – it is not necessarily restricted to a minority member...”
More recently, the Court of Appeal has emphasised that in general, members have no legitimate expectation beyond the legal rights conferred on them by the constitution of the company. This applies unless it can be shown that a ‘legitimate expectation’ arises out of a fundamental understanding between shareholders, which formed the basis of the association
“In a number of cases, it has been held that in the case of a small private ‘quasi-partnership’ type of company, the court may take account of the ‘legitimate expectations’ of members. However, in a more substantial company, such a ‘concept’ has no place. More recently, the Court of Appeal has emphasised that in general, members have no legitimate expectation beyond the legal rights conferred on them by the constitution of the company. This applies unless it can be shown that a ‘legitimate expectation’ arises out of a fundamental understanding between shareholders, which formed the basis of the association. This may confer a right to participate in management…
“Even in the case of a ‘quasi-partnership’ type of company, dismissal from employment and a position on the board will not necessarily establish unfair prejudice…
“Although a petitioner for relief under s.994 must be a shareholder before he can petition, he is entitled, after he becomes a shareholder, to support his petition by relying on conduct that took place before he became a shareholder...”
An appeal was made from the decision of the First Hall of the Civil Court. The court had to consider whether an appeal from the decision of First Hall under article 402 Companies Act was possible. This point had been dealt with by the Court of Appeal in J. Shaw et v D.L. Shaw et dated November 27, 2009. In the latter case, the court pointed out that article 402 did not provide for appeals, unlike under article 401 of chapter 386 and in absence of any provision for appeals under article 402, it was not possible to simply make cross-reference to chapter 12 provisions.
The principle to be applied here – was ubi voluit lex dixit: any decision under article 402, was more in the nature of a decree, with no right to appeal – and it could only be revoked by specific procedure to revoke such decrees, if from such a decree there was a right of appeal.
The court, in the latter case said that article 402 provided an ad hoc remedy which had to be filed by way of application to the court and not sworn in terms of chapter 12 of the Laws of Malta.
This remedy under article 402 was introduced at a time when under chapter 12 we had two procedures: one by application and another by writ of summons. It followed therefore that the mode and procedure of appeals from suits initiated by writ of summons was not automatically applicable ope legis to suits – presented by way of an application.
This court agreed with the decision of the court in J. Shaw et v D.L. Shaw dated November 27, 2009.
For these reasons, on January 31, 2014, the Court of Appeal gave judgment by accepting the defendants’ pleas that as the applicants were not shareholders of Foster Clark Products Ltd, Francis Busuttil and Sons (Marketing) Ltd, B&S Exports Ltd, B&S Manufacturing Ltd , they could not invoke the unfair prejudice action against such companies. It also declared the appeal to be null and void.
Dr Karl Grech Orr is a partner at Ganado Advocates.