Change of share ownership - Singapore court considers implications on joint venture agreement

The Singapore case of Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2012] SGHC 118 (High Court), [2013] SGCA 43 (Court of Appeal) considered the effect of a change of share ownership on the provisions of a 50:50 joint venture agreement. As joint venture and shareholders agreements for cross-border transactions in South-East Asia are commonly expressed to be governed by Singapore law, the implications of Sembcorp are potentially wide-ranging.   Michael Walter and Kwok Hon Yee from our Singapore office provide an overview and analysis of this important decision.

Facts

In 2001, Sembcorp purchased 50% of the shares in PPL Shipyard from PPL Holdings. Sembcorp and PPL Holdings entered into a joint venture agreement ("JVA"). The JVA contained various provisions usually found in a JVA including the following:

• Clause 5.1: The board of directors of PPL Shipyard was to comprise six directors with each shareholder having the right to appoint three directors so long as they each held 50% of the shares.
• Clause 5.3: The quorum for board meetings was to be two directors with at least one director nominated by each party being present. Each "party" was to have three votes at a board meeting regardless of the number of directors present.
• Clauses 5.5 to 5.8: The chairman and deputy chairman of the board were to be nominated by Sembcorp and PPL Holdings respectively. The managing director and deputy managing director were to be nominated by PPL Holdings and Sembcorp respectively. The executive committee of the board was to comprise four members with two members nominated by Sembcorp and two members nominated by PPL Holdings.
• Clause 7: Certain reserved matters required unanimous shareholder approval.
• Clause 11: Any party intending to transfer its shares had to offer the shares to the other party.
• Clause 24: Each party was required to do all things reasonably within its power to give effect to the "spirit and interest" of the JVA and the memorandum and articles of association of PPL Shipyard.

Some of the provisions of the JVA were reflected in the articles of association of PPL Shipyard although the articles were not identical to the JVA.

In 2003, Sembcorp acquired additional shares in PPL Shipyard from PPL Holdings which increased its holding to 85%. Sembcorp also appointed three additional directors to reflect its majority ownership of PPL Shipyard. No amendments were made to the JVA or the articles to reflect the majority ownership of Sembcorp. The parties worked consensually to address issues which arose from time to time.

Things came to a head in 2010 when the owner of PPL Holdings decided to sell all its shares in PPL Holdings to a competitor of Sembcorp.

Various claims were made by Sembcorp including calling for a transfer of PPL Holding's remaining 15% stake in PPL Shipyard. Sembcorp also sought a declaration that when it acquired its majority interest, the provisions of the JVA and articles which were premised upon 50:50 ownership ceased to apply. Sembcorp also argued that PPL Holdings had breached the "spirit of the JVA" obligation in clause 24 when it failed to ensure that the offer from the competitor for PPL Holdings was rejected.

High Court

The High Court dismissed Sembcorp's claims:

• In relation to the claim for PPL Holding's 15% stake, the High Court held that there was no basis to imply a term in the JVA that neither party could, without offering its shares to the other, act in any manner which would cause the other to end up being a "partner" in PPL Shipyard with a party owned or controlled by someone other than the principals of the parties to the JVA.
• In relation to the claim for a declaration, the High Court held that there was no basis to imply a term that the provisions in the JVA premised upon 50:50 ownership would cease to apply upon either party acquiring a majority of the shares.
• The claim for breach of the "spirit of the JVA" clause was dismissed as PPL Holdings remained part of the joint venture (albeit owned by a new party) and could continue to contribute to the joint venture.

Court of Appeal

On appeal, Sembcorp did not pursue the claims in relation to the 15% stake and the "spirit of the JVA" clause and focused instead on four aspects of the board's control in the event that the equal shareholdings of the parties changed:

• The composition of the board.
• The voting rights at a board meeting.
• The quorum requirement for board meetings.
• The appointment of the chairman, deputy chairman, managing director and deputy managing director.

The Court of Appeal allowed the appeal and found in favour of Sembcorp:

• In relation to the right to appoint directors to the board, the Court of Appeal held that clause 5.1, as drafted, provided that when there was no 50:50 ownership, neither party can, by reference to clause 5.1, claim to have a right to nominate three directors. As a matter of construction and not by implication of any term into the JVA, clause 5.1 ceased to apply.
• In relation to the clauses dealing with quorum and voting rights and the appointment of directors to specific positions, the Court of Appeal held that these provisions were "parasitic" upon clause 5.1 in that they were structured on the premise of the parties having the right to appoint directors under and in accordance with clause 5.1. If a party ceased to have any right to appoint a director under clause 5.1, then other provisions which were derived from clause 5.1 were subject to an implied term that such provisions would no longer apply once either party ceased to hold 50% of the shares.

The effect of the Court of Appeal decision is that the minority shareholder effectively had no protection under the JVA at least in so far as the clauses relating to board control was concerned.

There was no discussion of the reserved matters clause which required unanimous shareholder approval for certain matters. It is arguable whether the court would also have held that the reserved matters clause no longer applied once 50:50 ownership ceased.

Take away points

• Parties should always consider providing for the consequences if there is a direct or indirect change of control of the joint venture partner. Consequences could include a right of first refusal over the joint venture company shares or, as a more drastic measure, termination of the joint venture.
• At the time of negotiating a JVA, parties should foresee any potential changes in the shareholding structure and provide for the consequences. If the parties have not provided for such matters at inception, they should negotiate an amended JVA as part of the sale of shares resulting in the change of shareholding structure.
• If you are party to a JVA which is currently "out of date" because the shareholding structure has changed, you should consider the extent to which any of your rights and obligations in the JVA may have been affected by the change in share ownership.
• The "spirit of the JVA" clause in Sembcorp did not help to plug the gaps in the JVA. However, the Singapore Court of Appeal has considered in another case that an obligation in an existing contract to act in good faith to agree specific matters which are capable of being determined objectively would be enforceable. Therefore, depending on the context and the nature of the clause, "good faith" clauses may be of some use in a JVA.

Sembcorp involved a Singapore incorporated joint venture entity. If parties choose Singapore law as the governing law of a JVA (whether or not the joint venture entity is a Singapore company), the points in Sembcorp would still be relevant.