Disputes Digest | Validation of Share Issuances Without Prior Company Approval

Specific Statutory Provisions Prevail over the Common Law “Duomatic Principle”

In family-run companies, corporate formalities are sometimes not strictly observed – for example, the issuance of shares to family members within the company.

Recently, in 𝙒𝙏𝙆 𝙍𝙚𝙖𝙡𝙩𝙮 𝙎𝙙𝙣 𝘽𝙝𝙙 𝙫 𝙆𝙖𝙩𝙝𝙧𝙮𝙣 𝙈𝙖 𝙒𝙖𝙞 𝙁𝙤𝙣𝙜 & 𝘼𝙣𝙤𝙧, the Federal Court considered the Court’s power to validate share issuance made without the shareholders’ prior approval, in breach of S.132D of the Companies Act 1965 (CA 1965).

While affirming the Court of Appeal’s decision to validate the share issuances, the Federal Court held that the validation should have been premised on the specific statutory provisions available – S.63 and/or S.355 CA 1965, not the common law “𝘋𝘶𝘰𝘮𝘢𝘵𝘪𝘤 𝘗𝘳𝘪𝘯𝘤𝘪𝘱𝘭𝘦”.

This differed from the Court of Appeal’s reasoning, which ordered the validation based on the common law “𝘋𝘶𝘰𝘮𝘢𝘵𝘪𝘤 𝘗𝘳𝘪𝘯𝘤𝘪𝘱𝘭𝘦” (see: 𝘐𝘯 𝘳𝘦 𝘋𝘶𝘰𝘮𝘢𝘵𝘪𝘤 𝘓𝘵𝘥 [1969] 2 𝘊𝘩 365), which laid down the proposition that matters which were to be done formally may be done informally, provided that it was assented to by the members of the company.

Brief Facts

Three siblings (WKN, WKY and WKC) held equal shares in three family-owned companies. In 2005 and 2007, new shares were issued solely to WKN without the company’s approval in a general meeting. No objections were raised until after WKN’s passing in 2013.

WKN’s widow then requested that the shares issued to WKN be registered in her name as the executrix of WKN’s estate. This was rejected. Legal proceedings were then initiated by WKY and WKC to nullify the share issuances due to non-compliance with S.132D CA 1965. WKN’s widow also initiated proceedings to validate the share issuances.

Decision

The Federal Court affirmed the Court of Appeal’s decision to validate the share issuances, but did so on a different basis – relying on the specific statutory provisions under S.63 and/or S.355 CA 1965.

Key Factors Considered by the Court:

• Admission that past issuances did not strictly comply with S.132D CA 1965;
• Years of acquiescence via approval of directors’ reports and audited accounts;
• 6–7-year delay before challenging the share issuances; and
• No refund offered for the funds paid by WKN to subscribe for the shares.