Litigation & Arbitration |  Aug 05, 2020

Shareholders precluded from bringing an unfair prejudice action once the Court has issued a buyout order

Authors: Jonathan de Maria, Nina Fauser

On the 13th of July 2020, the Civil Court (Commercial Section) gave what can be deemed to be a landmark decision.

The decision given in the case Raymond Vassallo et vs Anthony Parlato Trigona et has confirmed that a shareholder cannot file an action claiming unfair prejudice under Article 402 of the Companies Act (Chapter 385 of the Laws of Malta) once the Court has issued a buyout order, ordering the applicants to transfer their shares in the company.

In essence, Article 402 of the Companies Act creates the possibility for ‘any member of a company’ who feels that the company’s affairs are being conducted in a way which is oppressive, unfairly discriminatory or prejudicial to the interests of such member, or to a group of members, to petition the court for a remedy. If the applicant is successful, the court may give an order under such terms as it thinks fit –

  1. regulating the conduct of the company’s affairs in the future; or
  2. restricting or forbidding the carrying out of any proposed act; or
  3. requiring the company to do an act which the applicant has complained it has omitted to do; or
  4. providing for the purchase of the shares of any members of the company by other members of the company or by the company itself and, in the case of a purchase by the company, for the reduction accordingly of the company’s issued share capital; or
  5. directing the company to institute, defend, continue, or discontinue court proceedings, or authorising a member or members of the company to institute, defend, continue, or discontinue court proceedings in the name and on behalf of the company; or
  6. providing for the payment of compensation by such person as may have been found by the court responsible for loss or damage suffered as a result of the act or omission complained of, to the person suffering the said loss or damage; or
  7. dissolving the company and providing for its consequential winding up.

In this particular case, the applicants filed an application on the 1st of March 2018, asking the Court to give an order under the said Article 402, alleging that Regent Holdings Limited (Regent) had acted in an oppressive, unfairly prejudicial, and unfairly discriminatory manner towards them.

Whilst also alleging other abuses by the defendants, the applicants claimed that the company Regent paid a specified sum of money to each of its other shareholders and complained that they didn’t receive such a payment and that the applicant’s share was retained by the company and listed in the accounts as a “shareholders’ loan”.

The applicants then went on to ask the Court to order the defendants to pay out an amount being equivalent to that paid out to the other three shareholders together with interests, to liquidate the loss they suffered and to authorise them to initiate proceedings in the name and on behalf of Regent, against the other defendants.

The defendants contested the demands both on procedural grounds and also on the basis that the claims and allegations were unfounded.

From a procedural point of view, the defendants held that the applicants could not validly bring an action claiming oppressive, unfairly prejudicial, and unfairly discriminatory conduct under Article 402 of the Companies Act since the court had already issued a buyout order on the 31st of January 2017, ordering that the applicant’s shares in Regent were to be transferred to the other shareholders. The defendants therefore argued that the said buyout order of the 31st of January 2017 had brought an end to the chapter between the parties in respect of Regent, and that this meant that the applicants no longer had any right to bring an action under said Article 402 of the Companies Act in respect of Regent.

Whilst this court case was ongoing, the defendants presented a number of documents including the share transfer documents and the relative forms filed with the Registry of Companies (Form Ts) evidencing that the official transfer of the applicant’s shares in Regent took place on the 24th of June 2019. The defendants also stated that the applicants ceased to be listed as a shareholder of Regent following the buyout order.

In assessing whether or not the applicants possessed the necessary interest required in order to commence the court proceedings, the Court embraced the conclusions of previous decisions which confirm the ground rules that any person instituting a court case must have what is known as ‘juridical interest’. Indeed, the court proceeded to repeat the essential requisites regarding juridical interest, these being:

  1. For such an interest to be considered as being of a juridical nature, it must be capable of leading to a useful result and advantage for the person who wants to exercise the right being claimed in court, and that if the action cannot lead to producing such a result for the applicant, then the applicant would be deemed to lack the required juridical interest;
  2. That the applicant’s juridical interest must perforce subsist throughout the entire court case, since without it, the case against the defendant cannot subsist;
  3. That, in order to qualify as being juridical, the interest does not necessarily have to be one which is quantified in a certain sum of money or value; it may also exist where it aims to protect or give recognition to a moral or a subjective right, provided that the right invoked is not hypothetical.

The applicants maintained that their claims were pre-existent to the buyout order given on the 31st of January 2017 and that the applicant was entitled to receive his share of the dividend given to Regent’s shareholders on the 18th of May 2017, since they were still a shareholder as at that date.

The Court disagreed with this assertion, categorically stating that the decision of the 31st of January 2017 effectively brought an end to the applicants’ right to  participate as a shareholder of Regent, for the reason that the transfer of the applicant’s shares in Regent commenced when the order for the applicants to sell their shares in Regent to the other shareholders was given on the 31st of January 2017.

Furthermore, the Court also categorically stated that in view of the buyout order of the 31st of January 2017, the applicants ceased to have the juridical interest necessary to invoke further proceedings in terms of Article 402 of the Companies Act.

The Court held that were it the case that the applicants believed that they had a basis to contest the buyout order given on the 31st of January 2017, then they should have taken such action. Indeed, the court made reference to the decisions given in the cases Jonathan Shaw et pro et noe vs. David Alan Shaw et. and Suzanne Busuttil et vs. Francis Busuttil & Sons Ltd. et. These decisions established that an appeal cannot be entered in respect of a decision given by the Court regarding actions brought under Article 402 of the Companies Act. The Court also pointed out that these two decisions set the ground rules and that decisions given by the Court regarding actions brought under Article 402 of the Companies Act, may only be reviewed by means of a fresh lawsuit. Indeed, albeit in separate proceedings which are still subject to appeal, it has also been established that in conducting such a review, the reviewing court will only give a judgement (from which an appeal can be entered) providing a remedy if it results that:

  • the principles of natural justice were not adhered to;
  • there was a breach of any provision of law in the award of the decision;
  • where the judge acted ultra or extra petita.

Thus, the Court upheld the preliminary pleas raised by the defendants that the applicants lacked the juridical interest to prosecute an action under Article 402 of the Companies Act and accordingly, rejected the applicant’s claims.

Noticeably, this case was the first time that the Courts established that a shareholder cannot bring an action under Article 402 claiming unfairly prejudicial conduct within a company once the Court has already issued a buyout order, ordering the applicants to transfer their shares in the company to other shareholders.

If you require any assistance with corporate litigation matters, please contact us on litigation@gvzh.com.mt.

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