Malta: The Rights Granted To Minority Shareholders Under The Maltese Companies Act

"The rights of minority shareholders are an important and rapidly developing branch of law. It raises difficult questions of principle: the conflicts between the letter and the spirit of the company's constitution; between the sanctity of the bargain between shareholders embodied in the articles and unfair treatment; between giving a remedy which is effective and allowing it to become an institution of abuse; between the attainment of fairness and the amount of money parties can spend on litigation".1

Majority rule vs minority protection. These are the diametrically opposed fundamental underpinnings of corporate law that have shaped and continue to shape our corporate law environment, creating a finely balanced situation where the majority could be said to rule, but only to a limited extent. The majority's power has been curbed by both judicial and statutory intervention. Whether this intervention has created an appropriate set of checks and balances, or led to the tyranny of the minority has become a bone of significant contention.

While the Maltese Companies Act provides for a broad array of rights which are given to minority shareholders, this article will focus on the two articles most frequently invoked. That is the unfair prejudice remedy, article 402 of the Companies Act, and the winding up of a company on 'grounds of sufficient gravity', article 214(2)(b)(iii) of the Companies Act.

A list of other protection measures granted to minority shareholders under the Companies Act, may be found towards the end of this article.

The Unfair Prejudice Remedy, Article 402, Companies Act

This article gives any shareholder the company (whether majority shareholder or otherwise) the opportunity to make an application to the court if he/she feels that the:

"[A]ffairs of the company have been or are being or are likely to be conducted in a manner that is, or that any acts or omissions of the company have been or are likely to be, oppressive, unfairly discriminatory against or unfairly prejudicial to a member or members or in a manner that is contrary to the interests of the members as a whole".

The court is granted a wide breadth of discretion on the appropriate redress to apply in each particular situation. Thus, we find that the Court may, if it is of the opinion that the complaint is well-founded, and that it is just and equitable to do so, make orders:

"(a) regulating the conduct of the company's affairs in the future; or

(b) restricting or forbidding the carrying out of any proposed act; or

(c) requiring the company to do an act which the applicant has complained it has omitted to do; or

(d) 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

(e) 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

(f) 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

(g) dissolving the company and providing for its consequential winding up."

Furthermore, in terms of the said article of the law, the Court may order that the company amend its Memorandum and Articles of Association.

A point duly settled by the Maltese Courts is that in order for an Article 402 action to be successful, the conduct complained of must be deemed by the Court to be oppressive, unfairly discriminatory and unfairly prejudicial, but not necessarily to the plaintiff. It is sufficient that the acts or omissions complained of are oppressive, discriminatory or unfairly prejudicial with respect to another member of the company, or to the interests of the shareholders. The Court has noted that it is not sufficient to simply complain that the conduct in question was contrary to the interests of the members as whole.2

Furthermore, in relation to determining whether conduct as described above has occurred, the Court3 declared that one must first look at whether the affairs of the company were being conducted according to the statute of the company. However, in the application of this provision, which is inspired from principles of equity rather than rights which are strictly legal, the Court should take legitimate expectations into consideration. These rights are often wider than those strictly legal provisions which emerge from the statute of the company. These legitimate expectations emanate from personal relationships between the shareholders. In the well-known case of Ebrahimi v Westbourne Galleries Limited ([1973] AC 360) Lord Wilberforce listed a number of situations where this remedy could be given, situations which are often found in small private company often called quasi-partnerships, such as:

  • an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company;
  • an agreement, or understanding, that all, or some (for there may be "sleeping members") of the shareholders shall participate in the conduct of the business;
  • restriction upon the transfer of the members' interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

The Court appears to have imported notions developed by English jurisprudence in relation to the liquidation of companies on the 'just and equitable' ground, to the doctrine of the unfair prejudice remedy. Furthermore, in the case of Ronald Azzopardi vs. Taormina Holdings Limited et,4 the Court declared that the Courts have a wide breadth of discretion in order to decide whether the behaviour to the detriment of the minority as described by Article 402 occurred, as well as in the remedy it may grant.

However, the Court does not appear to apply this principle in the context of public companies. In fact, the Maltese Court in the case of Ivor John Zammit vs. Bank of Valletta,5 the Court quoted the case Re Astec BSR Ltd,6 where it was stated that "the concept of legitimate expectations...can have no place in the context of public listed companies". The Court went on to quote Sealy:

"The more clearly and fully the parties have spelt out their arrangement, the less scope there will be for the court to find that there were other, unrecorded 'expectations'. And if the company is a public company...the court is most unlikely to take notice of any alleged arrangement that is not recorded in the company's published documents, for to do so would fly in the face of the principle that all material information must be disclosed to potential investors."

This remedy is quite clearly the greatest protection granted to minority shareholders. Apart from its far-reaching consequences, the uncertainty which its wide breadth creates leaves majority shareholders very wary of having this article invoked. It is noteworthy that Article 402 may be invoked by any member of the company, and is therefore also open to majority shareholders, not just minority shareholders.

The Dissolution and Consequential Winding up of a Company, Article 214 Companies Act

Article 214 Companies Act defines the parameters in relation to when and how a company is to be dissolved and consequently wound-up. This Article differentiates between instances where the Court has discretion to wind-up a company, and those where the court has no such discretion, and must proceed to order its winding up.

Whilst most of the scenarios envisaged by this Article refer to clear, well-defined instances when the Court 'may' (or 'shall' – depending on the circumstances) dissolve a company, there is one ground where the Court is awarded a large margin of discretion, that is where grounds of 'sufficient gravity' which warrant the dissolution of the company exist. This article does not require that other remedies be exhausted prior to the institution of this action, however any such previously pursued remedies will be taken into consideration by the Court when determining whether grounds of sufficient gravity exist.

The Courts have declared that they possess a wide margin of discretion in relation to deciding whether these grounds of 'sufficient gravity' exist. The law, unfortunately does not provide the Court with any guidance whatsoever as to what does and what does not constitute such a ground. And this was clearly a deliberate discretion allowed to the Courts as a catch-all remedy to be applied where circumstances so warrant.

Once such grounds of 'sufficient gravity' are deemed to exist, the Court has no further option other than that of ordering that the company is duly dissolved and wound up. It has been established by jurisprudence that the Courts are not only permitted to regard conduct which occurred prior to the institution of this action, but may also take cognisance of anything which happens during the course of proceedings, until the Court reaches final judgment. Suffice it to say that this article has developed into a rather powerful tool in the hands of the minority, and that it must be carefully applied by the Courts given the final nature of the dissolution.

The Overlap between the Article 402(3)(g) and article 214(2)(b)(iii) Companies Act

While there appears to be some overlap between the above captioned articles, in relation to the dissolution and winding up of a company, the criteria required to invoke the two differ quite substantially.

In order for a winding up order to be given under article 214(2)(b)(iii) Companies Act, the applicant need only demonstrate grounds of sufficient gravity. However, under article 402(3)(g) of the Companies Act, the applicant must first prove either oppression, unfair prejudice or unfair discrimination. Once this is proven, the demand must then pass the 'just and equitable' test.

Therefore, whilst Article 402 is arguably the best weapon in the hands on the minority, and provides for a vast array of remedies in relation to the request for dissolution and winding up of a company, article 214(2)(b)(iii) Companies Act seems to be a more apt choice for an aggrieved minority shareholder.

However, the latter suffers from weakness at remedial level. If the company is prospering, dissolving the company could be tantamount to killing the goose that just might lay the golden egg. This said, the threat to litigation may motivate parties to negotiate an alternative solution.

Other Rights granted to Minority Shareholders under the Maltese Companies Act

Besides the remedies considered above, it is worth mentioning that the Maltese Companies Act provides for additional mechanisms and remedies intended to protect minority shareholders. These are set out below in tabular form for ease of reference.

Individual Membership Rights

  • Right to receive notice of general meetings
  • Right to request the court to order the holding of a general meeting
  • Right to request the court to appoint a director, if the number of directors falls below the statutory minimum (for private companies this is one (1))
  • Right to request the court appoint an auditor

Qualified Minority Rights

Qualification on shareholding Other conditions necessary
Right to requisition an extraordinary general meeting. 1/10th of paid up share capital with voting rights, at date of the requisition.
Right to demand a poll
  • Not less than 5 members (with voting rights); or
  • by a member/s representing not less than 1/10th of paid up share capital with voting rights; or
  • by a member/s holding shares in the company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.
Right to apply for an investigation into the affairs of the company to be undertaken
  • at least 200 members; or
  • members holding at least 1/10th of issued share capital; or
  • at the request of the company.
The request is to be supported by evidence for the purpose of showing good reason for requiring the investigation.

The person/s making the request may be obliged to give security as required for payment of the expenses of the investigation.
Right to apply for an investigation into the membership of the company
  • at least 200 members; or
  • members holding at least 1/10th of the issued share capital; or
  • at the request of the company.
The person/s making the request may be obliged to give security as required for payment of expenses of the investigation.
Removal of a Director A resolution at general meeting, passed by more than 50% of the voting rights

Conclusion

Maltese law provides for a number of mechanisms and procedures intended to protect and safeguard the interests of minority shareholders, whilst on the other hand ensuring that companies continue to operate unhindered in the face of malicious or vexatious claims brought by shareholders whose personal interests effectively eclipse those of the company as a whole. Indeed, when the Courts are faced with such disputes, they are charged with a tremendous responsibility of carefully considering the facts and circumstances at hand, ensuring that the wider commercial interests of the company in question are properly and effectively handled to minimise the prejudice caused to the various stakeholder and within the spirit of the law. A balancing act which, no doubt, will continue to challenge our Courts, academics and corporate practitioners alike.

Footnotes

[1] Nicholas Grier, UK Company Law (1st, John Wiley & Sons 1998) 310-313

[2] George Borg vs. Primrose Poultry Products Limited et, First Hall of the Civil Court, 16th January 2012.

[3] Philomena Ellul vs. Charles Ellul, Court of Appeal (Superior), 31st January 2003.

[4] First Hall of the Civil Court, 13th June 2011

[5] First Hall of the Civil Court, 31st May 2006

[6] [1998] 2 BCLC 556

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions