In the recent case of United Renewable Energy Co Ltd v TS Solartech Sdn Bhd [2019] 8 CLJ 721 ("United Renewable Energy"), the Malaysian High Court, for the first time, recognised the doctrine of universal succession and gave effect to the transmission of shares held in a Malaysian company by operation of law pursuant to a foreign merger.
DOCTRINE OF UNIVERSAL SUCCESSION
What is universal succession?
The doctrine of universal succession originates from Roman law.
It provides that where the law of incorporation recognises a
succession of corporate personality from one corporate entity to
another, then the law of the forum will recognise both the changed
status of the company, and the fact that the successor has
inherited all rights and liabilities of the preceding
company.
This doctrine has been widely recognised by the Commonwealth
Courts. Various authorities are set out below which recognise the
concept of a universal succession, where all assets and liabilities
are vested in the successor entity. It did not matter whether the
exercise was carried out pursuant to a statute that created a new
successor entity or through a private merger agreement.
United Kingdom
The leading case on this doctrine is the English House of
Lords' decision of National Bank of Greece and
Athens SA v Metliss [1958] AC 509
("Metliss"). This case laid down the principle
that as far as the law of the forum is concerned, once an entity is
recognised as having the status of a universal successor, then it
will be clothed with both the assets and liabilities of the
predecessor entity. In Metliss, the universal succession
was triggered by the amalgamation of companies under a statute
which provided that a new entity would inherit the rights and
obligations of two Greek banks. The Court held that the new entity
was bound by a guarantee issued by one of the predecessor
banks.
The English High Court decision of Astra SA Insurance and
Reinsurance Co v Sphere Drake Insurance Ltd (formerly Sphere Drake
Insurance plc, Sphere Drake Insurance plc and Odyssey Re (London)
Ltd) [2000] All ER (D) 672 ("Astra") is
also relevant. The question arose was whether Astra SA Insurance
and Reinsurance Co ("Astra SA") had, under Romanian law,
succeeded to the rights and liabilities of a former Romanian State
Insurance Company ("ADAS"), and was thus liable under
various international insurance and reinsurance contracts and bound
by the arbitration clauses contained in those contracts. Pursuant
to a development in Romanian Law, ADAS ceased to exist, and its
assets and liabilities were divided among three new companies, one
of which was Astra SA. It was held that the entire benefit and
burden of ADAS' international insurance and reinsurance
contracts had passed to Astra SA, and all the terms, including the
arbitration clauses, were enforceable against Astra SA.
In the context of the effect on an arbitration agreement where one
party ceases to exist by virtue of a universal succession, a
similar decision was reached in the English High Court decision of
Eurosteel Ltd v Stinnes AG [2000] 1 All ER (Comm) 964
("Eurosteel"). A German company
("Bayerischer") entered into a contract of affreightment
with an English company ("Eurosteel"), as charterers.
Both parties referred a dispute to arbitration in England under
English law. After the arbitration had commenced, Bayerischer was
merged with another German company, Stinnes AG
("Stinnes"). One of the questions before the Court was
whether the arbitration proceedings had come to an end on the
merger since Bayerischer no longer existed. It was held that as a
matter of the German law of universal succession, the rights under
the arbitration passed to Stinnes upon its merger with Bayerischer.
English law recognises that and accordingly the arbitral
proceedings did not lapse or conclude by reason of the merger. The
arbitration was entitled to continue.
Australia
In the Australian Federal Court decision of Re Sidex Australia
Pty Ltd (reg and mgr apptd); Sipad Holding ddpo and another v
Popovic and others [1995] 18 ACSR 436, a similar decision was
reached. By virtue of a law being passed in the former Republic of
Yugoslavia to allow the creation of privatised corporations, one of
the enterprises operating in Yugoslavia that was privatised applied
for a rectification of the register of its predecessor company to
reflect that it was now the owner of certain shares of an
Australian company formerly held by its predecessor company. The
rectification application was allowed as the Australian Federal
Court held that it will give effect to the transfer of assets and
assumption of liabilities for which the Yugoslavian law
provides.
Singapore
The doctrine of universal succession was, for the first time,
considered and approved by the Singapore courts in a landmark
decision of JX Holdings Inc and another v Singapore Airlines
Ltd [2016] SGHC 212 ("JX Holdings").
In JX Holdings, the issue was where a foreign entity (A)
succeeds to all the rights and liabilities of another foreign
entity (B) pursuant to a corporate action which (under the laws of
their jurisdiction of incorporation) deems A to be the successor of
all of B's rights and obligations, who should be registered as
the owner of shares which were originally owned by B? A related
issue was whether there was a "transfer of shares" or a
"transmission of shares". The distinction is crucial as
only the former would require an instrument of transfer.
The Singapore High Court recognised the doctrine of universal
succession and found that the status of a foreign corporation as it
exists under its law of incorporation will be recognised by the
Singapore courts out of comity. As such, the shares held by B had
been transmitted to A by operation of law and therefore A should be
registered as the owner of the shares originally owned by B.
On the issue of whether there was a transfer or a transmission of
shares, the Singapore High Court highlighted that a transfer is a
voluntary disposition of legal title to the shares brought by an
act of the shareholder, whereas a transmission is an automatic
devolution of title which takes place by operation of law upon the
occurrence of a legally significant event, which includes a merger.
As such, the shares in question had transmitted to the succeeding
company by operation of law and the succeeding company was entitled
to be registered as a shareholder in place of the predecessor
company without having to prepare and deliver a proper instrument
of transfer.
Another relevant case would be the Singapore International
Commercial Court (SICC) decision of BNP Paribas Wealth
Management v Jacob Agam and another [2017] 4 SLR 14. This
decision was upheld by the Court of Appeal in Jacob Agam and
another v BNP Paribas SA [2017] 2 SLR 1. BNP Paribas Wealth
Management ("BNPWM") and its wholly-owned subsidiary, BNP
Paribas SA ("BNPSA"), merged pursuant to a merger
agreement under French law. This resulted in all assets and
liabilities of BNPWM being assumed by BNPSA, including BNPWM's
business in Singapore. One of the issues to be determined by the
SICC was whether the assumption of BNPWM's business in
Singapore by BNPSA should not be given effect because it was in
breach of section 55B of the Singapore Banking Act (Cap 19, 2008
Rev Ed), which provides, among others, that Court approval must be
obtained for any voluntary transfer of business. However, the said
section also stated that the requirement for Court approval was
without prejudice to the right of a bank to transfer the whole or
any part of its business under any law.
The SICC cited JX Holdings with approval and held that
Court approval was not required. Although the merger may be
regarded as a voluntary act between the parties, BNPWM and BNPSA
are companies incorporated in France and the merger agreement was
effected through Article L.236-3 of the French Commercial Code,
which provides a means by which there can be a succession to
corporate personality in a merger. This was recognised by the
SICC.
MALAYSIAN COURT RECOGNISES THE DOCTRINE
In Malaysia, transmission of shares by operation of law is
usually seen in cases of bankruptcy or death of the registered
holder of the shares.
In United Renewable Energy, the Malaysian Court had the
opportunity for the first time to consider the doctrine of
universal succession in the context of a foreign merger, and the
issue of whether the successor company had assumed the shares of
the predecessor company through a transfer or a transmission by
operation of law.
Brief Facts
The plaintiff, United Renewable Energy Co Ltd ("URE"), is
a public-listed company in Taiwan and the successor company after a
merger between three solar-related Taiwan companies, namely
Solartech Energy Corp. ("Solartech"), Gintech Energy
Corporation ("Gintech") and Neo Solar Power Energy Corp.
("Neo Solar").
The defendant, TS Solartech Sdn. Bhd. ("TS Solartech"),
was originally formed as a joint venture company between Solartech
and Tek Seng Holdings Berhad ("Tek Seng"). Solartech held
97,700,693 shares in TS Solartech ("Subject Shares"). The
current shareholding of Tek Seng and Solartech in TS Solartech is
50.7% and 42.1% respectively.
In January 2018, Gintech, Solartech and Neo Solar entered into a
merger agreement where it was agreed that the parties shall be
merged into one corporation to build a flagship class solar
energy-oriented enterprise in Taiwan. It was also agreed that Neo
Solar be the surviving company pursuant to the merger. On 1 October
2018, Solartech merged with Gintech and Neo Solar
("Merger"), with one single merged entity existing: Neo
Solar. Neo Solar then changed its name to URE.
URE claimed ownership of the Subject Shares on the basis that the
Subject Shares were transmitted to URE by operation of law pursuant
to the Merger. Further, the various provisions under the laws of
Taiwan provide that the Merger had caused URE to assume all rights,
obligations, assets and properties of the predecessor companies.
URE argued that its ownership of the Subject Shares should be
recognised by virtue of the doctrine of universal succession.
TS Solartech refused to register URE as the owner of the Subject
Shares. As such, URE resorted to legal action, where it sought a
declaration that the Merger had carried into effect a transmission
of the Subject Shares to URE by operation of law. URE also sought
for consequential orders for the registration of the transmission
of shares and rectification of TS Solartech's register of
members ("ROM") to include URE's name as the new
registered owner of the Subject Shares.
TS Solartech contested the application and argued that:
- the wording of section 109(1) of the Companies Act 2016 in referring to a transmission by operation of law should only be restricted to transmission in cases of death and bankruptcy, and could not include a universal succession; and
- the Merger, being a voluntary commercial decision between the parties, had resulted in a transfer of shares, thereby requiring an instrument of transfer to be executed.
URE argued that:
- the wording of section 109(1) of the Companies Act 2016 does not limit transmission by operation of law to cases of death and bankruptcy. Rather, it is wide enough to include a universal succession;
- there was a transmission by operation of law of the Subject Shares from Solartech to URE, and not a transfer. The determining factor in deciding whether there was a transfer or a transmission, is whether there was an active act of a transfer of shares by a member or an automatic devolution of title. Even though the act of entering into the merger could be regarded as a voluntary commercial decision, the merger had caused an automatic devolution of title in respect of the Subject Shares; and
- there is no need for an instrument of transfer to be executed. In any event, it would be practically impossible to execute any instrument of transfer as the transferor, i.e. Solartech, has ceased to exist.
The High Court's Decision
The High Court found in favour of URE and held that the devolution
of ownership of the Subject Shares is one that took place by
operation of law, which is a process classified as a transmission,
rather than a transfer within the Companies Act 2016.
The High Court agreed with URE that section 109(1) of the Companies
Act 2016 on transmission of shares by operation of law is not
restricted to cases of death or bankruptcy. Rather, it is
sufficiently wide in scope to include a universal succession.
The High Court allowed URE's prayer for a declaration that the
Merger had carried into effect a transmission of the Subject Shares
to URE by operation of law. The High Court further ordered that TS
Solartech's ROM be rectified to include URE's name as the
new registered owner of the Subject Shares, without the need for an
instrument of transfer.
CONCLUSION
The United Renewable Energy case is significant as there
are no reported cases in Malaysia where the concept of universal
succession has been recognised by the Malaysian Courts in relation
to shares held by an entity that ceases to exist and its rights and
obligations are assumed by a successor entity by operation of
law.
This is also the first occasion where a Malaysian Court decided
that section 109(1) of the Companies Act 2016 is wide enough to
allow for the recognition of universal succession.
Non-Malaysian companies seeking to undertake mergers in their
countries will have comfort that such mergers are likely to be
recognised in Malaysia by virtue of the doctrine of universal
succession. The assumption of all assets, liabilities, obligations
and rights by the successor entity will be recognised as a
consequence of such mergers.
Where these assets include shares, the shares would be treated as
having been transmitted to the successor company by operation of
law. The successor company would be entitled to be registered as
the owner of the said shares without the need for any instrument of
transfer.
There is also significant importance from the dispute resolution
perspective. As can be seen from Astra and
Eurosteel, the successor entity would be allowed to
continue with arbitration or continue to enjoy the right under an
arbitration clause, pursuant to the assumption of rights and
liabilities under a foreign merger.
You may view the full issue of Skrine's Legal Insights Issue
3/2019 here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.