18. Private company Flashcards
- Private company
- not more than 50 members
- constitution contains a restriction on the transfer of shares
- normally constitution contain preemption clause for transfer of shares amongst members, and failing that, to a non-member subject to the directors’ consent.
General overview
[18.01] Section 18 sets out the parameters of a private company having a share capital as not having more than 50 members and where its constitution contains a restriction on the transfer of shares. Normally, the incorporators of a private company have a preemption clause in its constitution to allow the transfer of shares amongst members, and failing that, to a non-member subject to the directors’ consent.
[18.02] A private company having a share capital is one where there is a restriction on the transfer of shares and the number of members shall not exceed 50. A company shall continue as a private company even though the number of members exceed 50, so long as there is a restriction on the transfer of shares
Amendments to constitution
[18.03] Act No 36 of 2014 amended s 18 of the Act by deleting subsections (2), (3) and (4) and substituting new subsections that replace the words “memorandum and/or articles” with “the constitution”. Otherwise, the gist of the subsections remains the same.
Restriction on transfer of shares
- if no such restriction in constitution, it is deemed that co prohibit transfer of shares except to person approved by dirs
[18.04] Where the constitution of a private company does not contain a restriction on the transfer of shares, s 18(2) provides that such a restriction shall be deemed to be included in the company’s constitution. Such a restriction shall be deemed to be a restriction that prohibits a transfer of shares except to a person approved by the directors of the company: see s 18(2).
Preemption clauses
- “Transfer” means “transfer by the act of a member” while “transmission” means “transmission by operation of law”
[18.05] The scope of preemption clauses in private companies is purely a question of construction in the context of all the other related articles: Greenhalgh v Mallard [1943] 2 All ER 234 at 237 , per Lord Greene MR. A preemption clause is binding on a member and strictly enforced: Lyle & Scott Ltd [1959] 1 AC 763, HL. The Official Assignee of the Estate of Ng Eng Kiat, Bankrupt & Ors v Heap Huat Rubber Co Sdn Bhd & Anor [2000] SGHC 177, HC. A clause in the articles that provided that “only if the company failed to find a purchaser, was the proposing transferor at liberty to sell his shares to any person at any price” was strictly enforced. The court held that the agreement for sale of shares made contrary to the restrictions of sale imposed by the articles of association of the company was void and no rights, legal or equitable, arose between the parties under it: Gan Sin Tuan v Chew Kian Kor [1958] MLJ 62. In invoking a preemption clause, a member must show an “intention” to sell his shares to the other in accordance with the company’s articles of association: Re Sedgefield Steeplechase Co (1927) Ltd, Scotto v Petch [2000] 2 BCLC 211 , per Lord Hoffmann; followed Owens v GRA Property Trust Ltd (unreported, 10 July 1978) which held that “(i) the word [intends] relates exclusively to a state of mind; (ii) It relates to the state of mind of the transferor only; (iii) The intention must be made manifest in some way and must be unequivocal. … (v) The intention must be a present intention”. The sale of all the shares in the holding company, which owned 100% of the shares of a joint venture partner, did not allow the other joint venture partner who held 85% of the shares in the joint venture company to trigger the preemption clause: Sembcorp Marine Ltd v PPL Holdings Pte Ltd & Anor [2012] 3 SLR 801; [2012] SGHC 118, HC.
[18.06] The articles of association of a private company provided that no share should be transferred to any person not already a member without the consent of the directors, it was held that the directors’ consent is not required before the execution of the transfer: Re Copal Varnish Co Ltd [1917] 2 Ch 349, Ch D . Generally, the word “transfer” in preemption clauses referred to a transfer of legal title and not a transfer of beneficial title. However, the company’s constitution may clearly define it to refer to a transfer of legal title and not a transfer of beneficial title: Khoh Chen Yeh Shane (administrator of the estate of Ching Kwong Kuen, deceased) v Seng Realty & Development Pte Ltd & Anor [2012] 3 SLR 1; [2012] SGHC 79. “Transfer” means “transfer by the act of a member” while “transmission” means “transmission by operation of law”: Re Bentham Mills Spinning Co (1879) 11 Ch D 900 at 904–905 , per James LJ; Barton v London and Northern Western Rly Co (1889) 24 QBD 77 at 88 , per Lindley LJ; Moodie v W & J Shepherd (Bookbinders) Ltd [1949] 2 All ER 1044 at 1054, per Lord Reid; at 1050, per Lord Porter ; Scott v Frank F Scott (London) Ltd [1940] Ch 794 at 805 . An article which prohibited the transfer of shares to persons other than the male descendants of the deceased did not prevent the transmission of shares to the plaintiff’s deceased brother’s male descendants: Lee Eng Eow v Low Ah Lian & Anor [1992] 1 MLJ 678, HC. A preemption clause does not apply to a transmission of shares under the Intestate Succession Act (Cap 146) to a non-member: Guan Soon Development Pte Ltd v Yeo Gek Lang Susie (Administratrix of the Estate of Teo Lay Swee, deceased) & Ors [2006] 3 SLR(R) 387; [2006] SGCA 18, CA. An offer of shares to the other shareholder under the preemption clause must be accepted in whole and not in part. The offeror is entitled to sell the entire offer of shares to third parties
Subsection (4)
- can alter restriction on transfer of shares n limitation on no. of members in constitution by special reso (but shall not alter to include more than 50 members ) n shall remain private
[18.07] Notwithstanding subsection (2), s 18(4) provides that a private company, may by special resolution, alter any restriction on the right to transfer its shares that are included or deemed to be included in its constitution, and also alter the limitation on the number of its members but shall not alter its constitution to include more than 50 members and shall remain as a private company.
Constitution inconsistent with the Act
- constitution shall prevail
[18.08] In the case of inconsistency between subsection (2) and a provision on the restriction of transfer of shares in the constitution, the provision in the constitution shall prevail, to the extent of the inconsistency.
Procedures for transfer
- see new ss 126–129 of the Act.
[18.09] The procedures for the transfer of shares in a private company are contained in the new ss 126–129 of the Act.
Directors’ discretion is not absolute
[18.10] The right to transfer shares is subject to the approval of the directors but the directors’ absolute discretion is to be constrained by s 129(3) of the Act and subject to review by the courts whether it was exercised bona fide in the interests of the company: Xiamen International Bank & Ors v Sing Eng Pte Ltd [1993] 2 SLR(R) 176. The right to transfer shares could be restricted by agreement even though such restriction was outside the articles such as a moratorium of the sale or disposal of the shares: Pacrim Investments Pte Ltd v Tan Mui Keow Claire & Anor [2011] 2 SLR 438. Upon expiry of the moratorium, the shares, having been approved by the Singapore Exchange for trading, shall be traded and any clause imposing a restriction thereto would be against public policy
