DISPOSITIONS BY WAY OF TRANSMISSION – ARE THEY CAUGHT BY A PRE-EMPTION CLAUSE?
One of the common clauses found in a company’s Memorandum and Articles of Association (“M&AA”) is a pre-emption clause. In the High Court decision of Lim Beng Nga and others v Yat Guan Pte Ltd and others [2020] SGHC 54 (“LBN v YG”), Aedit Abdullah J decided that, among others, the disposition of shares in LBN v YG operated by way of transmission, and hence was not a transfer caught by the pre-emption clause in question.
Salient facts. As not all the facts of LBN v YG are relevant to the discussion of this issue, we will briefly summarise the salient facts.
The M&AA in question in LBN v YG had a pre-emption clause which reads as follows ([49] LBN v YG):
“28. A share may be transferred by a member or other person entitled to transfer to any member or any person approved by the Board of Directors, but save as aforesaid and save as provided by Articles 31 and 32 hereof, no share shall be transferred to a person, who is not a member, so long as any member is willing to purchase the same at fair value.”
Two of the shareholders of the Company had passed away. An EGM was called to approve the transfer of their shares by their Administratrix and their Executor respectively, and during the EGM, the transfers were approved. This was subsequently challenged by the Plaintiffs on the basis that, inter alia, the dispositions breached the pre-emption clause in the Company’s M&AA ([6] – [15] LBN v YG).
Summary of the dispute. The Parties in LBN v YG disputed whether disposition from a personal representative to a beneficiary constituted a transfer, and hence would be caught by the pre-emption clause, or whether it constituted a transmission, and hence it would not be caught by the pre-emption clause ([34] – [35] LBN v YG).
Disposition by a personal representative to a beneficiary. The High Court held at [37] LBN v YG that, applying Guan Soon Development Pte Ltd v Yeo Gek Lang Susie (administratrix of the estate of Teo Lay Swee, decreased) and others [2006] 3 SLR(R) 387, a disposition by a person representative to a beneficiary should be characterized as a transmission of the equitable interest in the shares.
The High Court then referred to Seah Teong Kang v Seah Yong Chwan [2015] 5 SLR 792 at [38] – [39] LBN v YG and held that the general proposition is that the disposition by the executor to a beneficiary only transmitted the beneficial interest, and not the legal interest. To obtain legal interest, the shares had to be registered by the company.
How to interpret pre-emption clauses. The High Court made clear that pre-emption clauses had to be interpreted in a case-by-case basis, given that the kind of transfers that would fall under the clause in question would depend on the clause’s construction in context of the articles as a whole ([43] LBN v YG).
Nonetheless, in most cases, the pre-emption clause is intended to refer to a bare legal transfer ([44] LBN v YG). This “ordinary rule” may not apply if the M&AA makes clear it was only to, e.g., pre-empt the sale of shares ([45] LBN v YG). Alternatively, if the M&AA excludes the recognition of trusts, it would support the “ordinary rule” as it shows that the company does not recognize beneficial interest in the shares and hence would be concerned only with legal transfers ([46] LBN v YG).
Interpretation of Art. 28. In LBN v YG itself, the High Court held that Article 28 in question only pre-empts legal transfers ([48] LBN v YG) as there is nothing in the M&AA which suggests that it only applies to transfer or beneficial title or sales ([52] LBN v YG). This was supported by other articles which required transferor to specify a fair value of the shares (as opposed to sale price of the shares), and the proposing transferor can either sell or transfer the shares ([52] LBN v YG).
The High Court also observed that Article 28 was similar to two pre-emption clauses found in earlier decisions, and the courts had interpreted those decisions to support the “ordinary rule” ([53] – [54] LBN v YG). In addition, Article 6 of the M&AA in question provides that the Company is to disregard equitable interests, which further supports the “ordinary rule” ([55] – [56] LBN v YG).
The result of the above is that the High Court held that the disposition of shares by the Administratrix and the Executor constituted dispositions from a personal representative to a beneficiary, and hence were not transfers caught by the pre-emption clause ([58] LBN v YG).
Takeaway. As made clear by the High Court in LBN v YG, the issue before the Court is not new. Nonetheless, LBN v YG makes clear that if a Company’s M&AA does not clearly deal with issues pertaining to transmissions and transfers, it may potentially lead to disputes between shareholders (and their administrators / executors) later.
Concerned shareholders should therefore carefully consider if their Company’s M&AA addresses the issue of transmissions versus transfers, bearing in mind the distinction between legal and beneficial interests in shares, and decide if there is a need to consider amending the relevant M&AA in question.
Tags: Company; Memorandum & Articles of Association; Pre-emption clause; Transfer; Transmission
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