The court ruled that shareholders' pre-emptive rights under the Companies Act 2016 are subject to the company's constitution, allowing majority decisions to prevail in corporate transactions, thus dismissing claims of oppression by a dissenting minority shareholder.

JUDGMENT

Nallini Pathmanathan FCJ:

Introduction

[1] The issuance of new shares by a company for the purposes of raising capital for business acquisitions, growth, and expansion is often a prescription for litigation. The balance between the pursuit of lawful entrepreneurial goals by management, by raising capital through the issuance of new shares, as against the pre-emptive rights of shareholders, is a legitimate concern in company law. The shareholders' fear of share dilution and voting power is to be weighed against the need to restructure and pursue growth in the interests of the company as a whole.

[2] This concern could, arguably, be met by statutorily providing that existing shareholders always enjoy a mandatory pre-emptive right to buy newly issued shares. But this can be detrimental to the company itself in terms of its ability to raise fresh financing without delay, as it would be necessary to offer the shares to existing shareholders first. This is time consuming and favourable market conditions might be lost. The management or Directors, therefore, need a degree of flexibility in order to effect growth for a company.

[3] In order to achieve an equilibrium between these legitimate competing concerns, the law strikes a delicate balance between the protection of existing shareholders on the one hand, and the ability of the company to pursue its optimal financial goals on the other.

[4] There are three definable rules or criteria that contribute towards achieving this balance:

(a) rules concerning the allocation of powers between Directors and shareholders to decide on the issuing of new shares;

(b) pre-emptive rights in case new shares are sold; and

(c) fiduciary duties of Directors engaging in the sale of new shares.

[5] That such a balance has, indeed, been considered and statutorily provided for in this jurisdiction in relation to the issuance of shares is evident in the structure of the Companies Act 2016 ('the Act'), which prescribes the basic tenets that contribute to such a balance.

[6] Sections 75 and 85 of Part III entitled Management of Company in Division 1, Subdivision 1, provide for the allocation of powers between Directors and shareholders on the issuance of new shares and pre-emptive rights in relation to the same.

[7] In ensuring that a balance is struck between the competing interests of shareholders and Directors in pursuing their business goals, s 75(1)(a) of the Act prohibits the management of a company from exercising any power to allot shares in the company without the prior approval of the company in a general meeting. Section 85 further safeguards the shareholders' rights by providing pre-emption rights in relation to the issuance of new shares. However, this is subject to the constitution of the company.

[8] Section 85 (1) of the Act reads:

85. Pre-emptive rights to new shares

(1) Subject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders.

[Emphasis Added]

[9] In relation to regulating the management of a company, Division 2 Subdivision 3 of Part III demarcates the Directors' duties and responsibilities in deciding on the strategic pathway for a company, including the pursuit of entrepreneurial goals, stipulating rules to regulate Directors' decisions, acts and/or omissions.

[10] To give full effect to this balance as provided for in the Act, the correct legal construction or interpretation has to be accorded to the relevant statutory provisions regulating the interests of the shareholders on the one hand, and the Directors and the company on the other. Any such interpretation should result in a reasonable, proportionate, and harmonious construction to be afforded to the provisions of the Act, rather than perpetuating a purpose differe