The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on May 6, 2013, in the case ‘Suzanne Busuttil and others vs Francis Busuttil & Sons Ltd and others’ held, among 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.

The court said that at law, the concept of second-tier shareholding did not exist. A member had to be a registered shareholder in the company. If an applicant was a member in another company, he did not have the right to invoke article 402.

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

The facts in this case were as follows:

Suzanne Busuttil, Brian Busuttil and the company Stealth Holding Ltd filed an unfair prejudice action under article 402 of the Companies Act against Francis Busuttil & Sons Ltd, B&S Contractors Ltd, Franco Busuttil, Michael Busuttil, Joseph Busuttil, Christian Busuttil, Jean Paul Busuttil, as well as directors of Francis Busuttil & Sons Ltd, B&S Contractors 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 Busutill & Sons (Marketing) Ltd.

Article 402 (1) and (6) of chapter 386 provides:

(1) “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.”

(6) “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.”

Suzanne and Brian Busuttil as beneficial owners of defendant companies felt aggrieved that the affairs of the companies were managed in a manner which was oppressive to them and unfairly discriminatory against them, and against the interest of all members.

It was stated that there was lack of observance corporate governance principles and transparency, and lack of respect to the minority shareholders.

They claimed that the directors acted in breach of their fiduciary duties, had conflicting interests and did not act in the best interest of defendant companies.

Allegedly the companies were managed by an oligarchy of a few directors, who refused to provide information to the plaintiffs, despite their repeated requests. Instead they were furnished with incomplete and misleading information. They were not given financial plans and reports regarding the project of the new factory and the new offices of Francis Busuttil & Sons Ltd.

By applying to the court, they requested the court to provide a remedy so that the companies would be managed in accordance with the principles of corporate governance as required in terms of article 136 (2) (A) of the Companies Act.

Defendant companies, in reply, pleaded that plaintiffs Suzanne and Brian Busuttil as well as Stealth Holdings Ltd were not members and therefore were not entitled to file these legal proceedings. It was furthermore argued that while action was made under the unfair prejudice provision, article 402, the plaintiffs’ grievances were mostly against the acts of directors, who purportedly acted in breach of article 136A Companies Act. They said that the court should dismiss the plaintiffs’ requests, as these were unfounded.

It was stated that the companies were managed according to law, in the interest of all members, and that there was no basis for unfair prejudice action under article 402.

The court limited its decision to whether applicants Suzanne Busuttil, Brian Busuttil and Stealth Holdings were entitled to invoke the unfair prejudice remedy as members of defendant companies. At issue was whether the court could allow second-tier shareholders to exercise this remedy.

The court noted that Suzanne Busuttil confirmed that she personally, as well as her brother Brian and Stealth Holdings Ltd were not direct shareholders in Foster Clark Products Ltd, Francis Busuttil & Sons (Marketing) Ltd, B&S Exports Ltd and B&S Manufacturing Ltd. They were, however, beneficial owners. Their argument was that the entire group should be considered as a quasi-partnership.

On the other side, the defendants argued that once they were not direct members in any of the defendant companies, they did not qualify as members, and were entitled to the unfair prejudice remedy. The court considered that the remedy under article 402 was available only to a member.

Article 2 of chapter 386 defined ‘member’ as “except where otherwise specifically defined”, means a shareholder of a company and a partner in any other commercial partnership. ‘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”. Article 402 (6) extended slightly the meaning of member.

In ‘Vella vs Vella Brothers Ltd et’ (March 9, 2007), the Court of Appeal expressly stated that article 402 was modelled upon article 459 of the UK Company Act 1985 (now article 994 of the UK Company Act 2006). Article 112 of the UK Companies Act 2006 defined a member as:

• The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration become members and must be entered as such in its register of members.

• Every other person who agreed to become a member of a company, and whose name is entered in its register of members, is a member of the company.

Reference was made at case law.

In the case ‘Architect Raymond Vassallo vs Anthony Parlato Trigona et’ dated June 24, 2011, the court held that a person who was not a direct shareholder, did not have action under article 402 against the company.

The court said that at law the concept of second-tier shareholding did not exist. A member had to be a registered shareholder in the company. If an applicant was a member in another company, he did not have the right to invoke article 402 in respect of another company. The court could not ignore the principle of separate legal personality.

In ‘Jean Karl Soler et vs Ray Vassallo pro et noe’ dated February 3, 2012, the court said that a spouse of a shareholder had no right to legal action under article 402. A married woman 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 did not have to intervene, as he was not directly interested.

Further, in ‘Joseph Calleja pro et noe vs Vincent Calleja’, dated July 8, 2004, it was held that action of unfair prejudice could only be made by a member.

The court said that in this case, Suzanne Busuttil, Brian Busuttil and Stealth Holdings Ltd were not members of Foster Clark Products Ltd, Francis Busuttil & Sons (Marketing) Ltd, B&S Exports Ltd and B&S Manufacturing Ltd. In this respect, they were precluded from filing legal proceedings under article 402 chapter 386 against the four defendant companies.

This court agreed with the decision of the Court of Appeal in Architect Vassallo vs Parlato Trigona et that under our law, we did not have the concept of second tier shareholding. A member only had the right to file action under article 402, re: Professor Andrew Muscat – Principles of Company Law pages 961-962.

The word “includes” instead of “means” in article 402 (6) was not intended to widen the interpretation of member. The word “includes” indicated that we did not have an exhaustive provision of law. The intention was not to exclude persons who would otherwise have qualified, but by strict interpretation of the term “member”, they would not have been included.

Reference was made to Boyle & Birds Company Law page 711, eighth edition, 2011, “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.

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 expectations 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 article 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…”

For these reasons, on May 6, 2013, the First Hall of the Civil Court gave judgment by accepting the plea that plaintiffs Suzanne and Brian Busuttil as well as Stealth Holdings Ltd were not entitled to exercise the unfair prejudice action (article 402) against the defendant companies. It declared that the defendant companies were not the legitimate defendants, and freed them from these proceedings.

Dr Karl Grech Orr is a partner at Ganado Advocates.