Introduction

A shareholder does not have an automatic right to be a director of a company, unless otherwise provided in a shareholders’ agreement or the company’s constitution. Even if there is a right to directorship, a further issue arises as to its temporal scope.

The case of Debotosh highlights this temporal issue by distinguishing between a one-off right to directorship and a continuing right. Beneficiaries of the one-off right are entitled to be appointed directors of a company upon the agreed time or event, but there is no obligation to keep them there, unlike a continuing right extending into the future. Thus, if a continuing right to directorship is intended, clear and express words should be used to that effect, bearing in mind that the language of the clause would be the first port of call for the court in an exercise of contractual interpretation.

Background

In Debotosh, the plaintiff applied for an injunction to restrain a threatened breach of his alleged right to be a director of the second defendant so long as he remained its shareholder (Directorship Right). According to the plaintiff, the Directorship Right was a continuing right expressly conferred upon him by cl 4.1.3.2 of the agreement formed between the defendants and the management team including himself (Agreement). To support his argument, the plaintiff also relied on other provisions of the Agreement and the parties’ subsequent conduct.

In contrast, the defendants argued that cl 4.1.3.2 of the Agreement was static and only gave the plaintiff a one-off right to be appointed as a director of the second defendant upon completion of the Agreement (defined as 21 April 2003). Since that right did not extend into the future, the defendants are entitled to remove the plaintiff pursuant to the second defendant’s constitution and his application must fail.

Clause 4 of the Agreement read as follows:

“4. COMPLETION

4.1 On Completion Date:

…

4.1.3 [The first defendant] shall procure [the second defendant] to:

4.1.3.1 increase the issued and paid up capital of [the second defendant] to $1,000,000 divided into 1,000,000 shares of $1.00 each.

4.1.3.2 appoint 5 directors to its board comprising 3 persons nominated by [the first defendant] namely: … and two persons from the [management team], namely: [the plaintiff] and … [The plaintiff] shall be the Managing Director.

4.1.3.3 appoint a director nominated by [the first defendant] as the Chairman of [the second defendant]. The Chairman shall have a casting vote at meetings.

4.1.3.4 open a current account with a Singapore bank.

4.1.3.5 In relation to the said bank account, it is hereby agreed that [the first defendant] shall have the right to appoint 4 authorised signatories under Group A and the [management team] shall be entitled to appoint 3 authorised signatories, one of whom shall be a Group A signatory.

4.1.3.6 Each of the parties hereto shall be entitled at any time and from time to time to remove their appointees and appoint other persons in their place as signatories.

4.1.3.7 Unless superseded by a later board resolution, the said bank account shall be operated in the same manner as that of the C&E Business.”

Holding of the Singapore High Court

The Court dismissed the application because the plaintiff failed to establish his case.

First, the language of cl 4.1.3.2 did not support the plaintiff’s case. As “the text of a contract ought always to be the first port of call”, the Court started its analysis by making two observations from the language of cl 4:

1. cl 4 bore the prominent heading: “COMPLETION”, which was an indicator (though perhaps not very weighty) of the importance which the parties attached to the heading; and
2. all of cl 4 was subject to the introductory words of cl 4.1: “On Completion Date”.

Thus, the natural construction of cl 4 was that its purpose was to govern completion and to set out the rights and obligations of the parties on the completion date (and not thereafter). On that reading, cl 4.1.3.2 did not provide for a continuing right to directorship. The plaintiff argued otherwise, pointing particularly to cl 4.1.3.6 which governed the parties’ rights post-completion.

The Court rejected the plaintiff’s argument for failing to recognise a critical distinction between the language used in the first four limbs of cl 4.1.3 (i.e. cll 4.1.3.1 to 4.1.3.4) and its last three limbs (i.e. cll 4.1.3.5 to 4.1.3.7). The Court pointed out that:

1. unlike the self-contained language of the last three limbs, each of the first four limbs of cl 4.1.3 was drafted as a sentence fragment to be read with the introductory words of “On Completion Date” in cl 4.1;
2. further, unlike the last three limbs, each of the first four limbs also specified a one-off act that the first defendant was obliged to procure the second defendant to carry out upon completion of the Agreement;
3. there was nothing in the language of cll 4.1.3.1 to 4.1.3.4 that evinced an intention by the parties that these limbs were to govern their rights for the future, i.e. post-completion; and
4. in contrast, cll 4.1.3.5 to 4.1.3.7 did evince such an intention from their language used. Indeed, their sole purpose was to deal with the post-completion operation of the second defendant’s bank account, which would explain why they were inserted immediately below cl 4.1.3.4 governing the parties’ obligations regarding the opening of that bank account.

Second, apart from cl 4.1.3.2, the other terms of the Agreement also fell short of supporting the plaintiff’s case.

The Court rejected the plaintiff’s reliance on Recital C. Recital C recorded the management team’s desire of participating as shareholders of the second defendant. This had no bearing on the existence, let alone the enduring nature, of any other rights, which the parties might enjoy under the Agreement. In that regard, the concept of participation in ownership (as a shareholder) was quite distinct from the concept of participation in management (as a director). The Court also rejected the plaintiff’s argument on commercial absurdity: namely, if cl 4.1.3.2 only conferred upon him a right to be a director of the second defendant upon completion, that would undermine the entire commercial purpose of the Agreement as manifested in Recital C, since he could be removed in an instant after completion without breaching the Agreement. The Court found on the evidence that the risk of removal was either a risk which did not occur to the plaintiff to guard against in the Agreement or one which the plaintiff was willing to take when he entered into the Agreement. Accordingly, that risk of removal was not a basis for conjuring the Directorship Right out of cl 4.1.3.2 when it had no basis in the language of that clause.

Contrary to the plaintiff’s argument, the Court held that cl 16.2 could not extend the temporal scope of cl 4.1.3.2. Cl 16.2 stated: “As to any of the provisions of this Agreement remaining to be performed or capable of having effect after the Completion Date this Agreement shall remain in full force and effect notwithstanding Completion”. Cl 4.1.3.2 was not an obligation that remained to be performed, as it was done a year before completion, on 1 April 2002. Further, cl 4.1.3.2 did not regulate the parties’ rights post-completion. Hence, cl 16.2 did not operate on cl 4.1.3.2.

Third, the subsequent conduct of the parties was incapable of assisting the plaintiff. This is because subsequent conduct is generally not a legitimate aid when construing a contract, even under the contextual approach. In any case, the Court did not find the subsequent conduct to be inconsistent with the defendants’ position.

The Court therefore dismissed the plaintiff’s application with costs.

Conclusion

The case of Debotosh serves as a timely reminder that, if a continuing right is intended by the parties to extend into the future, clear and express words should be used to that effect. To that end, the decisions of Paillart Philippe Marcel Etienne and another v Eban Stuart Ashley and another [2007] 1 SLR(R) 132 and Cosmic Insurance Corp Ltd v Khoo Chiang Poh [1979-1980] SLR(R) 703 provide successful examples of providing for a continuing right to directorship.

Parties are advised to seek professional advice on the scope and effect of their existing right to directorship and/or the drafting of such a right. If you require such advice or would like to know how this decision might affect your business, please approach the key contact(s) listed in this article.

Dentons Rodyk acknowledges and thanks senior associate See Kwang Guan (Martin) for his contributions to this article.