Share Transmissions and Pre-emption Clauses

Share Transmissions and Pre-Emption Clauses Longbow

Pre-emption clauses are typically used to exclude outsiders from the affairs of the company. However, such clauses, if not given due consideration at drafting stage, may have unintended consequence of thwarting parties’ succession plans. It is not uncommon, in share disputes, that opposing parties contest the applicability of a pre-emption clause.

In the recent case of Lim Beng Nga and another Yat Guan Pte Ltd and others [2020] SGHC 54, involving a family dispute arising from the disposition of certain shares of a family- owned company following the demise of two shareholders, Mr Lim Beng Sit (second eldest brother) and Mr Beng Qui (eldest brother).

  1. The second eldest brother passed away intestate on 7 January 2012 and his wife was appointed Administratrix over his Estate, Mr Lim Er Luen (7th Defendant) became the sole beneficiary to the 670 shares.
  2. Subsequently, the eldest brother passed away on 16th September 2015 and made a Will to transfer all his shares to Mr Lim Er Lin (his youngest son).
  3. Before the passing of the eldest and second eldest brother, Mr Lim Er Lin was appointed as the director of the Company, under the requirement on the transfer of one share from the eldest brother to Lin. No payment was made by Lin for the one share.
  4. The Plaintiffs filed a lawsuit arguing that all dispositions of shares are null and void as the identity of the transferee of shares where to specified. In addition, they argued the dispositions breached the pre-emption clause in the Memorandum and Articles of Association (“M&AA”), as they were transfers and not transmissions. Lastly, they argued that the transfer of one share by the late eldest brother to Lin was void as it breached the pre-emption clause in the M&AA.

Shares Transmission- Lim Family Tree Longbow

Facts of the Case:

This case concerns a family dispute involving family members of 4 brothers and 1 sister, arising from the disposition of certain shares (“Shares”) of a family-owned company (“Company”), following the demise of two elder brothers:
(Source: source/module-document/judgement/-2020-sghc-54- pdf.pdf)

  • The shares of the Company originated from the 1st Generation founder, Mr Lim Thiam Tee (“LTT”).
  • The original shareholders of the company are LTT & his eldest son, Mr Lim Beng Qui (“LBQ”).
  • There are no other shareholders at that point as other children are still studying.
  • LTT worked hard his entire life for the Company and for the family until he collapsed at the age of 78.
  • Upon LTT’s death, the estate split his shares of the company into 5 separate holdings to 4 sons and 1 daughter.
  • The 2nd son Mr Lim Beng Sit (“LBS”) died without a Will in 2012 and his shares were divided according  to intestate laws.
  • 3 of the beneficiaries of LBS’s estate, namely his wife and 2 children signed a Deed of Disclaimer to relinquish their claims to the shares of the company, to the last remaining beneficiary, Mr Lim Er Luen (“LEU”).
  • The eldest son, LBQ passed on leaving all his shares to his eldest son through a Will in 2015.
  • Both LBQ & LBS’s shares transfers were executed on 2016 in an EGM.
  • Mr Lim Er Lin (“LEL”), LBQ’s son was appointed as the sole Director for the company at the EGM when his father passed away. The EGM needed to appoint new Directors in order to comply with the regulation of having at least 2 Directors.
  • The transfers are only required to be approved by Board of Directors, with “LEL” being the sole Director, and not by the shareholders.
  • The shares were first transmitted by operation of law. They are then transferred via Director’s resolution at EGM.
  • In total, there were 2 Plaintiffs, and 8 Defendants in this case.

Shares Transmission- Flow of events Longbow

Hence, the Singapore High Court had the opportunity to consider:

  1. the proper characterisation of a disposition of shares from a personal representative (i.e. administrator, executor) to beneficiaries; and
  2. the general principles in interpreting pre-emption clauses in a company Constitution.

It is established law that a disposition of shares from a deceased shareholder to his Personal Representative constitutes a transmission, and not a transfer, and this was accepted by the parties.

In the case, the argument was made that if the dispositions of shares from the Personal Representatives of the deceased shareholders to the Beneficiaries were characterised as transfers and not transmissions, the dispositions would be caught by the pre-emption clause in the company’s Constitution, and consequently, would not be valid.

The Court held that a disposition of shares by a Personal Representative to a Beneficiary should properly be characterised as a transmission of the beneficial interest in the shares, and not the legal interest. For the legal interest to vest in the Beneficiaries, the shares had to be registered in their names by the company, which transfers the legal title.

On the interpretation of the pre-emption clause, the Court provided some useful guiding principles:

  1. Pre-emption clauses should be interpreted on a case-by- case basis as it is a matter of construction of the clause in the context of the articles as a whole. In general, similarly worded clauses should be interpreted in the same way, unless the context points otherwise.
  2. In most cases, the pre-emption clause is intended to refer to a bare legal transfer (“Ordinary Rule”). The Ordinary Rule may not apply in situations where the Constitution makes clear that it was only intended to pre-empt sale of shares or where the context makes clear that the Ordinary Rule does not apply.
  3. A clause in the Constitution which excludes the recognition of trusts supports the application of the Ordinary Rule as it shows that the company does not recognise beneficial interest in the shares and would only be concerned with legal transfers.

On the facts, the Court found that the Ordinary Rule applied. The dispositions of shares from the Personal Representatives to Beneficiaries constituted transmissions of the beneficial interests, which were not caught by the pre-emption clause, but the registration of shares in the Beneficiaries’ names constituted bare legal transfers which fell within the ambit of the clause. However, the company’s Constitution expressly stated that the pre-emption clause did not apply where the transfer of shares had been approved by the Board of Directors (which was the case on the facts) and hence, the pre-emption clause does not apply to these transfers and they do not breach the M&AA.

In conclusion, none of the declarations and orders sought by the Plaintiff were granted, and accordingly the application was dismissed in its entirety. The following cost orders were also made: (1) S$8,500 to be paid by the Plaintiffs to the 1st Defendant; and (2) S$7,000 to be paid by the Plaintiffs to the 3rd Defendant. These sums were inclusive of all disbursements.

The case illustrates the importance of giving proper considerations when drafting pre-emption clauses in the context of family-owned companies, where succession planning is always a key issue. It is also a timely reminder for everyone to consider preparing a Will in advance to facilitate the Grant of Probate subsequently, so that surviving family members need not go through a usually more complicated and lengthier Grant of Letter of Administration procedure.

Differentiation Btn Transfer and Transmission of Shares Longbow

Interpretation of Pre-Emption Clause Longbow

This article was first published in our newsletter, The Custodian Issue 14 on Jun, 2020. Click here to access our latest newsletter.

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