The case of Tempo Group Limited & Ors v Fortuna Development Corporation & Ors centred on a dispute between the three principal owners of Fortuna Development Corporation ("Fortuna"), a Cayman Islands incorporated holding company.  The main issues in question were whether the three owners had agreed that one of them, Dr Chen, was to be guaranteed a seat on the board of directors and whether his subsequent removal from the board at the extraordinary general meeting ("EGM") was valid.  On the first point, the Court found that there was no agreement which entitled Dr Chen to a position on the board.  However, Dr Chen was re-instated to the board because the EGM at which he was removed was found to be a nullity.

Background

Fortuna was established in 1994 to hold various significant investments in Vietnam including amongst others a power plant, a large land development and other infrastructure.  Its three major shareholders were holding companies, each of which owned by Dr Chen, Mr Ting and Mr Tsien, respectively.  On 22 June 2004, an EGM was held in Beijing.  Despite Dr Chen's objections, Mr Ting and Mr Tsien were successful in passing a number of special and ordinary resolutions.  These included the removal of Dr Chen from his position as a member of the board and greatly restricted his right to deal with his shares.  The special resolutions required approval by a two thirds majority of the value of the shares in the company.  The special resolutions could not have been passed without the support of Maxima Resources Corporation ("Maxima"), which owned 5 per cent of the outstanding shares.  Mr Niu claimed to be the sole director and shareholder of Maxima and sought admission to the EGM.  Mr Niu intended to support Dr Chen and thus prevent the special resolutions from being passed.  However, Mr Niu was refused entry to the EGM.  Instead Mr Tsien, the Chairman of the meeting, purported to vote in favour of all of the resolutions as the corporate representative of Maxima. 

The defendants claimed that the true beneficial owner of Maxima was Mr Niu's mother, and that she had authorised the issuance of bearer shares and given legal ownership of Maxima to Mr Tsien and his wife (Mrs Niu's daughter).  Furthermore, the defendants alleged that Maxima had authorised Mr Tsien to vote on its behalf at the EGM (the "Authorisation").  On the defendants' case, Mr Niu had no right to represent Maxima at the EGM and all of the resolutions, both ordinary and special, were and remained valid. 

The plaintiffs claimed that Mr Niu, and not his mother, was at all times the beneficial owner of Maxima and its sole director.  On the plaintiffs' case, the bearer shares were not validly issued so the legal ownership of Maxima remained with Mr Niu, its sole registered shareholder.  The issuance of the bearer shares and the Authorisation were not done in good faith.  Mr Niu was deliberately and dishonestly excluded from the EGM and this rendered the meeting and all business transacted at it a nullity and incapable of ratification. 

Decision

The Court found that the Chairman of the EGM had created the Authorisation unlawfully and relied upon it to exclude Mr Niu, the shareholder and actual representative of Maxima, in order to pass the special resolutions.  The Chairman of the EGM had no valid authority to represent Maxima at the meeting.      

It was held that Mr Niu's exclusion from the EGM was not the result of an accident, mistake or technical misunderstanding.  It was a deliberate decision made by Mr Tsien in the knowledge that such exclusion was illegitimate.  Consequently, neither the deeming provision in Fortuna's articles of association nor the principle of indoor management (established in Foss v Harbottle) applied to save the resolutions.  In order for them to do so, the majority shareholders would need to have acted regularly, or the misapplication of Maxima's vote would need to have occurred through an error, neither of which was so in this case.  Furthermore, the meeting's Chairman had not acted in good faith.  The Court relied on the principle as set out in Harben v Phillips.2

As a result it was held that the EGM was a nullity in its entirety.  Consequently, nothing decided at the EGM was decided validly and it is as if the meeting was never held.  Support for this position was found in Pender v Lushington3; Edwards v Halliwell4; and Byng v London Life Association5.  It was held that board resolutions passed irregularly but in good faith may be ratified by shareholders.  However, resolutions passed in bad faith, at a meeting which is itself a nullity, are incapable of ratification.  The Court drew support for this principle from Northwest Transport Company v Beatty6Burland v Earle7; and Clemens v Clemens Bros Ltd8. Accordingly, the ordinary resolutions were incapable of ratification. 

As a consequence, Dr Chen was reinstated to the board of directors of Fortuna.  Issues then arose as to who the other directors of Fortuna were and also the validity of actions taken by the board since the date of the EGM. 

Comment

This case is the subject of an appeal.  However, it is clear that care must be taken when conducting company meetings to ensure that minority shareholders and their representatives are not illegitimately prevented from participating.  Failure to do so can, in certain circumstances, risk the meeting being declared a nullity and all business conducted therein invalid and incapable of ratification.  
 


Cause No. FSD 125 of 2012 (AHJ).

(1883) 23 Ch D 14.

[1887] 6 Ch D 70.

[1950] 2 All ER 1064.

[1990] 1 Ch 170 (CA).

(1887) 12 App Cas 589.

[1902] AC 83 (PC).

[1976] 2 All ER 268.

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