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“ The Unanimous Shareholder
Agreement: A Bane Or Boon For Shareholders?” ______________________________________________________ Brief Description of Paper: The Unanimous Shareholder Agreement (“USA”) provides a statutory solution to the common law rule in Canada that shareholders could not, even by unanimous agreement, fetter or interfere with the discretion of directors in the exercise of their powers. However, by being parties to a USA, the shareholders become fiduciaries with all the rights, powers, duties and liabilities of the directors, and hence many of the advantages of a shareholder agreement are lost. In Trinidad and Tobago, and possibly Barbados, the Companies Act provides an alternative vehicle via the Articles of a company which may, in whole or in part, restrict the powers of the directors to manage the business and affairs of the company. This is consistent with the historical role of the Articles of Association under the Companies Ordinance in Trinidad and Tobago (following the English system), and may not lead to shareholders automatically becoming fiduciaries with respect to decisions on these matters restricted by the Articles.
1. INTRODUCTION In the Explanatory Note to the Companies Bill, 1993 the unanimous shareholder agreement (“USA”) is described as follows: “An unanimous shareholder agreement (described in Clause 141) is a North American device that enables a closely held company to be run with the utmost informality. To the extent that it restricts the discretion or powers of directors to manage the business and affairs of the company, the directors are to that extent relieved of their duties and liabilities and the shareholders assume them.” This paragraph is a replica of the equivalent paragraph in the Explanatory Memorandum prepared by the Caribbean Law Institute for the Companies Bill, 1991 . The final language in Section 137 of the Companies Act, Chap.81:01 of Trinidad and Tobago (“the Companies Act”) is very similar to Section 133 of the Companies Act Cap. 308 of Barbados (“the Barbadian Companies Act”) and would appear to be derived from the language of Section 146 of the Canada Business Corporations Act (“CBCA”), though it is more similar in certain respects to Section 108 of the Ontario Business Corporations Act. Did the Trinidad and Tobago Parliament fully understand the complexities of a USA when this unique statutory phenomenon was introduced into our law? It does not appear so; at least if our Parliament did, this is not evident from the debates as recorded in Hansard . The purpose of this paper is to examine the historical basis of the USA in Canada and to consider the attributes of a USA, its advantages and disadvantages, particularly with regard to the imposition of fiduciary duties and liabilities on shareholders who are parties to a USA. Finally, to consider the prospect of the Articles being used as an alternative statutory vehicle to restrict the powers of the directors to manage the business and affairs of a company without the attendant disadvantage of shareholders automatically becoming fiduciaries with respect to decisions on such matters restricted by the Articles. 2. THE HISTORICAL DEVELOPMENT OF THE USA CONCEPT IN CANADA AND ITS RELEVANCE TO TRINIDAD AND TOBAGO AND BARBADOS Mr. Justice Iacobucci of the Supreme Court of Canada in the recent decision in Duha Printers (Western) Ltd. v. The Queen points to the Dickerson Report in his discourse on the origin of the USA in Canadian corporate law. The Dickerson Report explains that the USA reverses the common law rule in Canada, that neither directors nor shareholders could validly bind themselves by agreement to fetter the discretion of directors in the exercise of their powers . This rationale is also recognised by other authors on the Canadian legislation . Professor Bruce Welling in his textbook on Corporate Law in Canada expresses the view that the statutory provision for USAs operates as a reversal of the English common law rule in Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame . According to Professor Welling , the USA allows the shareholders to strip the directors of their managerial powers without going through the time - consuming procedure of giving notice of and convening a shareholders’ meeting to remove the directors from the board. The effect is instantaneous. The USA does not remove the directors from their positions. It simply removes the powers that go with the position of director, to the extent set out in the USA. Mr. Justice Iacobucci in the Duha Printers (Western) Ltd. case acknowledges Professor Welling’s rationale by recognising that prior to the statutory provision for USAs, the ability of shareholders to control a corporation incorporated in Canadian jurisdictions (which did not follow the English memorandum and articles of association system of incorporation) was in reality limited to the power to elect and dismiss directors. Mr. Justice Iacobucci summarised the concept of the USA as follows :- “[64] The advent of the USA, first in the CBCA and then in other statutes modelled after it, materially altered this situation by providing a mechanism by which the shareholders, through a unanimous agreement, could strip the directors of some or all of their managerial powers as desired by the shareholders. Rather than removing the directors from their positions, a USA simply relieves them of their powers, rights, duties, and associated responsibilities. This may be accomplished without specific formality; all that is required appears to be some unanimous written expression of shareholder will. The result, however, amounts to a fundamental change in the management of the company, as s. 140(5) of the Corporations Act provides that the shareholders who are parties to the USA assume all the rights, powers, duties and liabilities of the directors which are removed by the agreement, and that the directors are relieved of their duties and liabilities to the same extent. As I have already intimated, what is in effect created is an ‘incorporated partnership’ with statutory force.” Prior to the new Companies legislation, Trinidad and Tobago and Barbados followed the English memorandum and articles system of incorporation. Hence, it is questionable whether the Canadian common law principle (that shareholders cannot contract to fetter the discretion of directors) would have been relevant to corporate practice in Trinidad and Tobago and Barbados. The Canadian authority of Motherwell vs. Schoof , cited in the Dickerson Report, appears to be based on the enabling legislation in Canada under which the directors had statutory power to administer the affairs of the company . On the other hand, under the English system of incorporation, the shareholders control the company and delegate the powers of management to the Board of Directors via the Articles of Association . Hence, it was not unusual for shareholders in Trinidad and Tobago and Barbados to fetter the powers of directors to manage the affairs of the company under the Articles of Association since the directors’ powers are derived from the Articles of Association. If a particular power is not delegated to the directors in the first place, but reserved in the Articles for decision by the shareholders, it follows that there is no power vested in the directors to be fettered. Furthermore, following the principle enunciated In re Duomatic Limited in the English system of incorporation, all the shareholders can, by unanimous agreement, override the Articles of Association and restrict the directors’ powers in the Articles in matters which are intra vires the company . As you will see developed further in this paper, the Articles may have retained much of their vigour in Trinidad and Tobago and possibly Barbados, notwithstanding the advent of the new Companies legislation. 3. HAS THE STATUTORY RATIONALE OF A USA PUT FORWARD BY THE DICKERSON REPORT BEEN FULFILLED? In the author’s respectful submission, the statutory rationale of the USA given in the Dickerson Report, falls short of a satisfactory legislative solution for this Canadian common law rule. While statutory recognition is now provided for “an otherwise lawful written agreement” among shareholders to restrict, in whole or in part, the powers of the directors to manage the business and affairs of the company , there is further statutory provision that a shareholder who is a party to the USA has all the rights, powers and duties of a director to the extent that such agreement restricts the powers of directors to manage the business and affairs of the company (“the Restricted Matters”), and the directors are thereby relieved of their duties and liabilities to the same extent . Hence, the shareholders would appear to be transformed into directors through the USA in respect of the Restricted Matters and a significant purpose of a shareholder agreement as to voting agreements on the exercise of their powers as shareholders, is undermined. The shareholders, having inherited the directors’ duties and liabilities, will now become fiduciaries and cannot validly agree among themselves (as is usually provided for in a shareholder agreement) in advance as to how each shareholder will exercise his judgment in the future when voting on these Restricted Matters . While the shareholders can now lawfully fetter the powers of directors in the USA, that benefit must be measured against their assumption of fiduciary duties and obligations of the directors whom they supplant in respect of the Restricted Matters. The author hastens to point out that his interpretation of a shareholder’s fiduciary duty on the Restricted Matters under a USA, though in good company (as it follows that of Professor Welling), is the subject of some academic debate in Canada and indeed was rejected in a recent decision at first instance in Newfoundland by Mr. Justice Mercer in Ming Minerals Inc. v. Blagdon and Dimmell . The Judgment of Mr. Justice Mercer brings into sharp focus the opposing views on this point of Mr. Michael Disney and Professor Welling and Mr. Justice Mercer simply prefers Mr. Disney’s view without adding to his rationale. The opposing arguments and the Judge’s decision, as set out at pages 361 to 362 of the report, are repeated below. “[22]…Counsel referred to the differences of opinion
respecting the effect of the wording of statutory provisions permitting
unanimous shareholder agreements. Section 245(3) states that a shareholder
who is a party to the unanimous shareholder agreement has all the
“rights, powers and duties and incurs the liabilities of a
director”. A commentator, Michael Disney, posed the question: [23] Bruce Welling gives an affirmative answer to the latter question:- “… the effect is to catapult each shareholder into a director’s role vis-à-vis certain defined subject matters. If each shareholder then owes the corporation the same types of equitable duties as a director would, then each shareholder qua acting director will be obliged to make up his mind afresh as he is confronted by each new problem within the scope of the agreement. He cannot agree in advance as to how he will decide because he will have inherited the director’s obligation to decide each issue as then appears to be to the corporate advantage. Far from being free, as a shareholder, to contract, sell or give away his precious vote, each shareholder qua acting director will be caught by the rule in Motherwell v. Schoof: he who owes a fiduciary obligation (here, each shareholder, because of the unanimous shareholder agreement) cannot fetter his discretion; he is required to remain free to vary his opinion as seems to him to suit the occasion and the person (here, the corporation) to whom the duty is owed. In short, a unanimous shareholder agreement is an agreement by 100 per cent of the shareholders setting out certain areas of corporate endeavour in which the directors’ power is to be limited; it is not a binding agreement as to how each of the shareholders will exercise his judgment in the future when voting on corporate affairs.” (Welling, supra at pp. 483 and 484.) [24] I concur with Disney’s view that the above analysis is not in accordance with the general view of legal practitioners, does not represent the statutory intent and leads to an absurd result: “Although the Dickerson Report did not discuss the subject at great length, it seems reasonably clear that it intended to change the law so as to permit shareholders to agree unanimously [to fetter their discretion qua directors, precisely what was prohibited by Motherwell v Schoof. There is no apparent reason why shareholders of a closely-held corporation should not be permitted to agree unanimously] , as they frequently wish to do, that (for example), the corporation will lease space from one shareholder at an agreed rent, obtain services at an agreed remuneration from another, buy widgets from a third at an agreed price, and so on. Applying the principle against fettering of discretion to shareholders acting under a unanimous shareholder agreement would generally make the agreement virtually useless. Welling’s interpretation is not required by the words of the CBCA. Section 146(2) could be read as validating an agreement restricting the exercise of the powers of management normally allocated to the directors, regardless of whether these powers are exercisable by the directors, as is usually the case under the CBCA, or by the shareholders under a unanimous shareholder agreement. The powers transferred to the shareholders pursuant to section 146(5) could be read as referring to such powers as restricted by the agreement.” (Disney, supra, p. 120). Mr. Justice Mercer followed the majority decision of the Federal Court of Appeal in Canada v. Duha Printers (Western) Ltd. and held that a USA does not have to restrict the powers of directors. This decision of the Court of Appeal was overruled by the Supreme Court of Canada in the Duha Printers (Western) Ltd. case, admittedly for a different reason in the context of determining de jure or de facto control of a corporation for tax purposes, but Mr. Justice Iacobucci was emphatic on this point. Indeed, the learned judge stated “unlike an ‘ordinary’ shareholder agreement, which cannot interfere with the exercise of the directors’ powers, a USA can and must do so.” Hence, the author respectfully submits that the decision in the Ming Minerals Inc. case should not be followed by Trinidadian or Barbadian Courts. Furthermore, it is the author’s view that a USA does create fiduciary obligations for shareholders who are parties to it in respect of the Restricted Matters. Also, notwithstanding these fiduciary obligations, a USA still has its uses. In these respects the author joins the academic debate from Trinidad and Tobago and respectfully disagrees with the arguments advanced by Mr. Disney and adopted by Mr. Justice Mercer for the following reasons:- (1) The language of Section 137(2) of the Companies Act and Section 133(2) of the Barbadian Companies Act is very clear and indeed, clearer than the equivalent Section 146(5) of the CBCA. It expressly provides, that a shareholder who is a party to any USA:- “…has all the rights, powers and duties, and incurs all the liabilities of a director of the company to which the agreement relates, to the extent that the agreement restricts the [discretion or] powers of the directors to manage the business and affairs of the company;…” (author’s emphasis). Hence, it follows that shareholders will acquire the fiduciary obligations of directors whom they supplant under a USA, limited however to the extent of the Restricted Matters. (2) While the author sympathises with the position taken by Mr. Disney, it is questionable whether Mr. Disney’s interpretation of Section 146(2) and more importantly, Section 146(5) of the CBCA is consistent with the language of these sub-sections and whether Mr. Disney’s secondary meaning can be wrought from the sub-sections. It is well established that, notwithstanding an apparently absurd result, the “golden rule” of statutory interpretation should only be applied by our Courts when a secondary meaning for the language in question is available. It is only when a secondary meaning is available that there can be any question of the Courts abandoning a primary meaning simply because it produces a result which they believe is contrary to the purpose of the Act. . Hence, Lord Scarman made the following statement in Duport Steels Ltd. v. Sirs :- “In this field Parliament makes, and un-makes, the law;
the judge’s duty is to interpret and to apply the law, not
to change it to meet the judge’s idea of what justice requires.
Interpretation does, of course, imply in the interpreter a power
of choice where differing constructions are possible. But our law
requires the judge to choose the construction which in his judgment
best meets the legislative purpose of the enactment. If the result
be unjust but inevitable, the judge must say so and invite Parliament
to reconsider its position. But he must not deny the statute.” (3) The debate between Professor Welling and Mr. Disney in the context of the Canadian decision of Motherwell v. Schoof, supra, in essence, revolves on whether shareholders are prohibited under a USA from entering into a “voting contract” on the Restricted Matters. That disability would not render the USA virtually useless as a single shareholder can by declaration create a USA and a voting agreement would not be required for a wholly owned subsidiary. (4) Even when there is more than one shareholder, the consequential liability of shareholders under a USA becoming fiduciaries does not totally undermine the function of the USA and thereby provide an absurd result. Notwithstanding this disability, the USA can still serve many purposes. For example, consider the case of subsidiaries where the principal shareholder often exercises significant control over the board of directors who are employees of such shareholder’s group of companies. Once that subsidiary remains solvent, and the shareholders are aligned, there may be few disputes, if any, over fiduciary issues. The shareholders’ fiduciary obligations under a USA could become an issue, however, if creditors’ rights are affected and the company became insolvent. (5) A USA still provides a quick solution to override the common law rule in Automatic Self-Cleansing Filter Syndicate case. (6) Finally, it may still be possible for shareholders acting qua directors to agree at the time of entering into a USA to lease space or buy widgets from each other and provide in the USA for the implementation of that contract. If directors, in the bona fide exercise of their discretion, enter into a contract on behalf of the company, they should be able to bind themselves to take such further action as is necessary to carry out such contract . Similarly, shareholders in a USA. However, this additional obligation of shareholders becoming fiduciaries
under a USA, serves as a useful platform to examine how a USA can
restrict the powers of directors to manage the business and affairs
of a company in the Caribbean context. This is an important concept for Caribbean practitioners of corporate law to grasp. Particularly those Attorneys who have been schooled in corporate law under legislation that is based on the United Kingdom Companies legislation as applied in Trinidad and Tobago and Barbados . Under such British based legislation the shareholders have control of the corporate structure of the company but provision is usually made for the directors to manage the business of the company via the Articles (as opposed to the statute) as is seen from Regulation 67 of the First Schedule Table A to the Companies Ordinance of Trinidad and Tobago. In contrast to this, under the Companies Act, the directors’ power to manage the business and affairs of the company is now derived from the statute itself . The Companies Act also provides for many matters of corporate governance as falling within the powers of directors which a Caribbean Attorney-at-Law trained in the British system of company law, might find surprising. A traditional approach to establishing a joint venture company with several shareholders is to provide in the shareholder agreement and the Articles for the separation of powers between those matters to be decided upon by the shareholders and by the directors. Practitioners drafting shareholder agreements can no longer follow this separation of powers principle as they may find that the shareholder agreement is a USA with the unfortunate consequence of shareholders becoming fiduciaries for these particular matters where the directors’ powers are restricted. It is useful, therefore, to examine the usual components of a USA to determine the extent of this potential danger. In this regard, Mr. Justice Iacobucci in his seminal judgment in the Duha Printers (Western) Ltd. case, supra, cited various statutory provisions in the CBCA which make reference to the USA in the context of the “fundamental aspects of the running of the corporation” and further stated as follows:- “[78] Generally speaking, USAs exist to deal with major issues facing a corporation: corporate structure, issuance of shares, declaration of dividends, election of directors, appointment of officers, and the like. General business decisions are not ordinarily touched by such arrangements, and with good reason: it would not be efficient, for business purposes, to remit every decision, however minor, to a shareholder vote, let alone to require unanimous agreement among the shareholders on such decisions.” We will now examine below certain sections of a precedent of a USA taken from Canadian Corporation Precedents which illustrate how directors’ powers can be fettered by a USA in Canada :- 1. Restrictions on the Directors’ Power to Issue Shares The directors now have statutory power to issue shares, unless restricted by the Articles, the By-Laws or by a USA. If a shareholder agreement provides that the directors shall not issue shares without the consent of the shareholders, that would amount to a restriction on the directors’ power to manage the business and affairs of the company and make the shareholder agreement a USA as was seen from the decision of the Supreme Court of Canada in Duha Printers (Western) Ltd. On the other hand, under the Companies Ordinance of Trinidad and Tobago, the issue of new shares was often a matter for the shareholders in general meeting . 2. Provisions pertaining to the making, amendment or repeal of By-Laws for the regulation of the business and affairs of the Company The Articles of Association under the Companies Ordinance may be the equivalent of most By-Laws under the new Companies legislation. Section 66 of the Companies Act now provides for the directors to have power by resolution to make, amend or repeal By-Laws, unless qualified by a USA or the Articles. While several companies in Trinidad and Tobago on continuance have preserved the right of shareholders to make and amend By-Laws and have fettered the statutory rights of directors in that regard, many companies have opted for the flexibility of directors making and amending By-Laws with immediate effect subject to ratification at the next shareholders’ meeting. A fetter in a shareholder agreement on the directors’ statutory power in respect of By-Laws, would apparently make that agreement a USA. 3. The Payment of Dividends While Section 55 of the Companies Act does not expressly state who makes the decision to pay a dividend, it is apparently accepted as a directors’ power as opposed to a shareholders’ power; presumably because of the liabilities of directors who pay a dividend contrary to Sections 54 and 55 of the Companies Act (see Section 88(b) of the Companies Act). This is also the premise in standard By-Law No. 1 taken from the Companies Regulations . The declaration of dividends is cited by Mr. Justice Iacobucci as a feature of a USA and is included in the Canadian precedent . In contrast, under the Companies Ordinance it was standard practice for shareholders in general meeting to declare dividends within the confines of the directors’ recommendation (see Regulation 89 of Table A) with directors having power only to pay interim dividends (see Regulation 90 of Table A). 4. The Designation and Appointment of Officers This is a matter reserved for directors under Section 97 of the Companies Act, subject however to the provisions of the Companies Act, the Articles, By-Laws or a USA. A provision in a shareholder agreement prior to the advent of the CBCA as to the employment of a general manager is invalid as it is a fetter on the directors’ power to manage the affairs of the company (see Motherwell v. Schoof ). Similarly, a provision in a shareholder agreement on the employment of a mine manager or chief geologist in the Ming Minerals case. Under standard Articles of Association for companies incorporated under the Companies Ordinance, the directors usually had power to appoint a managing director or manager (see Regulation 68 of Table A) and to delegate their powers; though it was not unusual for a joint venture shareholder agreement to specify that the shareholders had to concur in the appointment of a managing director. Such a provision in a shareholder agreement under the Companies Act would apparently make that agreement a USA. The above is not by any means an exhaustive list, but it illustrates the different assumptions a Caribbean practitioner of corporate law might have under the prior legislation based on the United Kingdom model as opposed to the new Companies Act or Barbadian Companies Act, which are principally based on the Canadian legislation. Hence, care must be taken in drafting shareholder agreements to avoid the incidence of fiduciary obligations on shareholders via a USA as well as explaining these novel concepts of corporate governance to our clients. We now turn to the disadvantages of a USA as it applies to shareholders. 5. THE DISADVANTAGES OF A USA - THE BANES FOR SHAREHOLDERS While there is no express provision in the Companies Act identifying the various directors’ obligations that will apply to shareholders (in their new capacity of shareholders/directors) under a USA, the wide language of Section 137(2) must be addressed. It is the author’s view that the disadvantages of a USA to shareholders outweigh the advantages in the case of a joint venture company with several shareholders, many of whom usually have minority interests. These disadvantages are summarised below:- (1) The shareholders become fiduciaries on the Restricted Matters: It has been long accepted as part of the English jurisprudence applicable in Trinidad and Tobago, that shareholders, in exercising their voting rights, are not, in most instances, fiduciaries and can exercise their voting rights in their own interests as opposed to those of the company . Indeed, it has been recently held in Canada that majority shareholders owe no fiduciary duty to minority shareholders . On the other hand, directors are fiduciaries and now have enhanced statutory duties under the Companies Act and Barbadian Companies Act to exercise the care, diligence and skill of a reasonably prudent person as well as to act honestly and in good faith with a view to the best interests of the company . With the advent of a USA, the shareholders shall have all the rights, powers, duties and liabilities of directors and to quote Professor Welling, each shareholder is “catapulted” into a director’s role vis-à-vis certain matters in the USA which restrict the powers of the directors to manage the business and affairs of the company. When the shareholders decide on those Restricted Matters in a USA, they should now do so as fiduciaries acting in the best interests of the company and measured against an objective standard of prudence. Hence, these newly established fiduciary obligations can undermine the flexibility and freedom of shareholders in making decisions in their own respective interests as was contemplated in many shareholder agreements. (2) There can no longer be a voting contract in respect of the Restricted Matters in a USA: It has long been established that a shareholder’s vote is a right of personal property and hence agreements among shareholders to vote in a certain way are lawful and can be enforced by injunction . Indeed, this English principle is also upheld in Canada as far as shareholders are concerned. On the other hand, it is well established that directors cannot exercise their voting rights in a pre-determined manner pursuant to a contract but must preserve their independent judgment and not fetter their discretion to act in the best interests of the company at the time of the particular decision. It would follow that a voting agreement in a USA whereby the shareholders contract to vote in a pre-determined way in the future would not be enforceable among shareholders in their new fiduciary role. (3) Conflicts of Interest in Material Contracts with the Company:
If a shareholder under a USA incurs all the liabilities of a director
with respect to the Restricted Matters, it would follow that the
provisions of Section 93 of the Companies Act governing conflicts
of interests between directors or officers of a company who are
parties to material or proposed material contracts with the company,
should also apply to shareholders in this new capacity. Hence, such
a shareholder should not be present at, form part of a quorum or
vote on any resolution to approve a contract in which he has an
interest unless the contract falls within the specific exceptions
in the legislation. However, if the shareholders under a USA have all the liabilities of directors (in respect of the Restricted Matters) then it would seem to follow that no provision in a contract, the articles, by-laws or any resolution, can relieve such shareholders from the duty to act in accordance with the Companies Act or Regulations, or relieve them from liability for breach of the Companies Act or Regulations (vide Section 99(6) of the Companies Act) . Note Section 99(6) has one qualification, the phrase “subject to Section 137(2)” which refers to a USA. However, the author’s view is that this qualification only pertains to any director who is relieved of these duties by virtue of a USA under Section 137(2). Thus, if the shareholder replaces the relieved director, it should follow that the shareholder cannot be relieved by the said USA. (5) Separation of powers with regard to reserved matters in Shareholder Agreements: It has been an accepted practice in Trinidad and Tobago to follow United Kingdom precedents providing for minority protection with veto rights or special majorities required for reserved matters in a multi-party, joint venture shareholder agreement. These reserved matters are often at the shareholder level because of the absence of fiduciary obligations and often provide for unanimity on certain important decisions. A few examples are the entry into a new business, the issue of shares other than to existing shareholders in agreed proportions, or the assumption of certain levels of debt . Since many of these critical “reserved matters” would restrict the power of the Board to manage the business and affairs of the company, it would follow that these provisions would make a shareholder agreement a USA and impose fiduciary obligations on the shareholders in exercising these rights under the USA. This would seem to defeat the purpose of these “reserved matters” which are designed to give minority shareholders special rights to vote in their own interest on certain issues fundamental to the joint venture. (6.) Dispute Resolution by Arbitration may not be available: It is standard practice in shareholder agreements for disputes to be determined by arbitration as opposed to the judicial process . In Motherwell v. Schoof, it was held by the Alberta Supreme Court that a provision in a shareholder agreement for directors, in the case of disagreement, to abide by the decision of an arbitrator on matters pertaining to the management and business of the company was invalid. This is so as it would enable the arbitrator (in the event of disagreement among Board members) to supplant the Board of directors and control the business of the company in respect of the disputed matter, contrary to the requirements of the Act that the directors should control such matters. By parity of reasoning, if the shareholders in a USA had a dispute over a shareholder decision, such as, the issue of new shares which the USA provided for determination by arbitration, it would seem that such an arbitration agreement may be unenforceable. (7.) Special Provisions in Shareholder Agreements with the company
providing for an Agreement among Shareholders may be of questionable
validity: By way of example, it is quite common to provide in a
shareholder agreement that the agreement will have precedence over
the Articles of a company in the event of a conflict and, as such,
the agreement may also often oblige the shareholders to exercise
their voting and other powers to amend the Articles for consistency
with the shareholder agreement. As was seen from the decision of
the House of Lords in Russell v. Northern Bank Development Corp.
Ltd. and Others , such a provision in a shareholder agreement to
which the company was also a party in reference to an increase in
capital was found invalid as against the company as it amounted
to an undertaking not to exercise its statutory powers. However,
since the obligations of the shareholders amongst themselves in
that case were severable from those of the company, there was no
reason why the latter agreement should not be enforceable by the
shareholders inter se, as a personal agreement which in no way fettered
the company in the exercise of its statutory powers. Nevertheless, while the disadvantages are in the author’s opinion more significant for companies with several shareholders, there are also advantages to a USA, particularly, for a wholly owned subsidiary. 6. THE ADVANTAGES OF A USA- THE BOONS FOR SHAREHOLDERS These advantages may be summarised as follows:- (1.) The USA is given statutory recognition in the Companies legislation: There are many powers of directors in the Companies Act which the legislation expressly permits to be qualified by the USA. These include the power to issue shares , provisions affecting the management of the business and affairs of the company by its directors , provisions altering the normal procedure whereby the directors may make, amend or repeal By-Laws , provisions regulating the designation and appointment of officers and provisions restricting directors’ powers to fix the remuneration of officers and employees . Indeed, as Mr. Justice Iacobucci noted in the Duha Printers Ltd. case while considering Section 6(3) of the CBCA which enables the Articles or a USA to require a greater number of votes of directors or shareholders than required by the Act to effect any action, the sole qualification was that the Articles may not require a greater number of votes to remove a director than required elsewhere by the Act, but there was no such limitation on a USA. There are similar statutory provisions in Trinidad and Tobago and Barbados . (2.) Directors and Officers are obliged to comply with a USA: This is a further consequence of statutory recognition as seen from Section 99(5) of the Companies Act and the equivalent provision in Barbados . On the other hand, Directors are not parties to and are not obliged to comply with the provisions of an ordinary shareholder agreement. (3.) The USA provides statutory relief for Directors: Section 137(2) of the Companies Act relieves the directors of their duties and liabilities to the same extent as these are curtailed by the shareholders in a USA. Section 99(6) prohibits such relief for a director or officer save as provided in Section 137(2). (4.) It has been upheld as a Constitutional Document of the Company: This was the decision of the Supreme Court of Canada in the Duha Printers case, supra., albeit delivered on a taxation issue. As Mr. Justice Iacobucci pointed out in that case , a USA gives rise to obligations that are not only contractual, but also legal and constitutional in nature. (5.) It enables a Company to be operated much like a Partnership: Mr. Justice Iacobucci in the Duha Printers case stated that the USA creates an “incorporated partnership” with statutory force whereby shareholders can provide themselves with the internal flexibility of less formal associations, while deriving some of the benefits of the corporate form such as continuing existence, transferability of shares and the capacity to hold property, to contract, to sue and be sued as a legal and distinct entity. The authors of the Canadian Corporation Manual also point out that the corporate form utilising the USA can be more advantageous than the limited partnership form for a potential investor seeking limited liability since the investor can participate in the management of the corporation, but not of the limited partnership, if he intends to maintain limited liability. (6.) A Quick Remedy to restrain a Board of Directors: As Professor Welling pointed out, since the USA overrules the common law principle in Automatic Self-Cleansing Filter Syndicate Co. case, it can provide a quick remedy to restrain a suddenly troublesome Board of directors. The shareholders would not have to convene a meeting to remove the Board; they can simply enter into a USA. All in all, a USA can be useful in the case of a wholly owned subsidiary of a large conglomerate in Trinidad and Tobago and Barbados where the subsidiaries would invariably be staffed by directors who are employees of the Group and would usually follow Group policy directives set by the holding company. Similarly, a State enterprise wholly owned by the State, as noted in the contribution of Senator Phillip Marshall in the debate on the Companies (Amendment) Bill of Trinidad and Tobago. Where such principal shareholders wield such power as a matter of practice anyway, perhaps USAs should generally be used to relieve such directors of liabilities. However, in the author’s view, a USA can be disadvantageous and fraught with difficulties and complications in the case of a multi-party joint venture company with various minority shareholders. The many advantages of a shareholder agreement in that situation are often closely tied to the shareholders being able to vote in their own interests and such flexibility will be undermined by such shareholders becoming fiduciaries under a USA. 7. A STATUTORY ALTERNATIVE IN TRINIDAD AND TOBAGO, AND POSSIBLY BARBADOS Unlike the CBCA, Trinidad and Tobago and Barbados recognise the Articles as an alternative statutory vehicle to restrict the powers of directors to manage the business and affairs of the company. Listed below in three columns are the relevant Sections in the Companies Act, the Barbadian Companies Act and CBCA for comparison:- THE COMPANIES ACT THE BARBADIAN COMPANIES ACT CBCA The proposed use of the Articles as an alternative to provide for some measure of shareholder control, is not unique to the Caribbean since there are still jurisdictions in Canada, such as British Columbia, which do not permit USAs. Indeed, Ewasiuk in his text on Drafting Shareholder Agreements notes that in Canadian jurisdictions which do not permit USAs, this sort of flexibility is possible only through enabling clauses in the constitution itself, i. e. customised clauses in the Articles or Memorandum of Association. Ewasiuk points out, however, that these are more susceptible to change by a special resolution and would also become a matter of public record. While such provisions in the Articles for a Trinidadian or Barbadian company will become a matter of public record, they are not as susceptible to change as other provisions in the Articles but rather, are elevated to a special status by Section 214(2) of the Companies Act and Section 197(3) of the Barbadian Companies Act as such a provision will require the consent of all shareholders for amendment. Indeed, this is similar to most shareholder agreements which require unanimity for amendment. It should also be noted that the Dickerson Report contemplated a similar flexibility in the Draft Canada Business Corporations Act which provided for the Articles, the By-Laws and any USA to qualify the directors’ power to manage the business and affairs of the company . Indeed, at Paragraph 191 of the Dickerson Report the following was stated in reference to this proposal:- “There seems no reason in principle or policy why shareholders should not be free to agree to a different structure of management, either by a provision in the Articles, or in the By-Laws, or in an unanimous shareholders agreement. This more flexible arrangement is especially apt to a closely-held corporation, and is permitted by s.9.01(1).” This provision was not incorporated into Section 102 of the final CBCA which only contemplates the USA as a sole exception . However, the alternative of the Articles is provided for in Sections 60 and 65 of the Companies Act and appears to be available in Barbados by virtue of Sections 60 and 197(3) of the Barbadian Companies Act. One must also appreciate that the Articles are clearly a “constitutional document” as in the case of a USA, and are given statutory force in all of the other provisions of the Companies Act which fetter or restrict the power of directors to manage the business and affairs of a company referred to above. In this regard, see the power to issue shares, the provisions affecting the management of the business and affairs of the company, provisions altering the director’s power to make, amend and repeal By-Laws, provisions regulating the designation and appointment of officers, provisions restricting the borrowing powers of directors and provisions restricting the director’s power to fix the remuneration of officers. Furthermore, the language of sections which provide for the Articles to restrict, in whole or in part, the power of the directors to manage the business and affairs of the company is similar to the sections which afford a USA similar powers. However, only those sections dealing with the USA provide for the transfer of the directors’ duties and liabilities to the shareholders. Finally, as in the case of a USA, directors and officers are obliged by statute to comply with the Articles of the company (Section 99(5) of the Companies Act) . This statutory duty is supplemented by Section 249 of the Companies Act enabling present or former directors or shareholders as well as creditors to apply for a court order directing any director, officer or employee to comply with the Articles. Accordingly, relying on these unique statutory provisions, a solution proposed for Trinidad and Tobago and possibly Barbados, in the case of a multi-shareholder joint venture company, to avoid the consequences of shareholders becoming fiduciaries under a USA is as follows:- (1) to revise the provisions in the standard shareholder agreement following the United Kingdom precedents often used in Trinidad and Tobago, and possibly Barbados, to delete therefrom any reserved or veto matters for decision by shareholders which could amount to a fetter on the directors’ power to manage the business and affairs of the company; and (2) to insert these Restricted Matters for shareholder decision in the Articles and provide in the Articles for the directors and officers of the company to implement these shareholder decisions. 8. POSSIBLE ARGUMENTS AGAINST THIS PROPOSED SOLUTION The author appreciates that many of you reading this paper may find this proposed solution far too simple a method of (arguably), subverting the fiduciary obligations now placed on shareholders in a USA. Let us consider, in devil’s advocate fashion, some possible arguments that may be used against or to qualify this proposed solution:- (a) The Articles are also a USA and should have the same consequences: While it is true that unanimity is required to amend a Restricted Matter in the Articles , this does not make the Articles a contract among all the shareholders. The Articles are not a written contract required to be signed by all the shareholders and a USA must take the form of a written contract. Articles under the new Companies legislation are no longer deemed to be a contract among shareholders by statute as was the case under Section 22 of the Companies Ordinance. Welling distinguishes between the English memorandum and articles or “contractarian” model and the statutory division of powers model found in Canadian statutes adopting the CBCA. In the CBCA model, the corporate constitution does not constitute a contract among the shareholders who do not need to refer to such a contract to seek redress . Furthermore, it is quite clear that there are separate and different definitions of “Articles” and “USA” in our legislation and, most importantly, Section 60 of the Companies Act refers to both as separate concepts. Hence, in the author’s view, the Articles do not amount to a USA. (b) A Fiduciary Vacuum: A possible argument is that if the directors are not responsible for decisions on such Restricted Matters in the Articles, the shareholders should be, as in the case of a USA, as the Company will be without recourse to a fiduciary for decisions on these Reserved Matters. This argument is proposed in an interesting article on USAs by Richard James Hay and Lucinda Ann Smith. These authors opined that little is to be gained by an elaborate scheme (in the Articles) designed to restrict the directorate while avoiding the devolution of responsibility upon the shareholders. The logical method for shareholders who wish to exercise specific and direct control over the corporation is through the mechanism of the USA. However, their article did not address our unique statutory provisions. The author’s response is simply that the automatic imposition of fiduciary duties on shareholders is a novel concept introduced for the first time by statute and is limited by the said statute to a USA. Under the English system, the Articles could reserve corporate matters for decision by shareholders without such shareholders becoming fiduciaries, and this historical concept appears to be preserved in the hybrid Companies Act and Barbadian Companies Act. Unlike the USA, there is no similar provision imposing these fiduciary obligations in the legislation in reference to the Articles. Since the statutory concept of fiduciary obligations on a shareholder is novel and imposes a liability on shareholders which was not previously there, our Courts should be reluctant to expand the application of this new statutory liability beyond the express provisions of a USA. (c) Shareholders can have obligations akin to fiduciaries in particular circumstances: The author’s concern is to avoid the consequences of shareholders automatically becoming fiduciaries as a result of being parties to a USA. This does not mean that shareholders cannot have restraints on the exercise of their voting power as is seen from the development of the English equitable rules dealing with fraud on a minority, the expropriation of company assets or even the desired predominant purpose of reducing a minority shareholder’s rights to negative control. However, now that the new Companies legislation in Trinidad and
Barbados provides for very expanded remedies relating to oppression,
there seems no need to further expand the boundaries of fiduciaries
to shareholders. Indeed, this was the finding of the Court of Appeal
of Ontario in Brant Investments Ltd. et al v. KeepRite Inc. et al.
which held that majority shareholders owe no fiduciary duty to minority
shareholders. Justice of Appeal McKinlay at page 301 of the report
in reference to the equivalent Canadian legislation stated :- Hence, we should give meaning in Trinidad and Tobago and in Barbados to the consistent reference to the Articles as an alternative statutory vehicle whereby the powers of directors may be restricted, in whole or in part. Sections 60, 65 and 214(2) of the Companies Act are unique to Trinidad and Tobago as are Sections 60 and 197(3) of the Barbadian Companies Act. There are no similar provisions to be found in the CBCA. Perhaps the reason for their inclusion in our legislation relates to our long established Caribbean corporate practice following the United Kingdom model of using the Articles of Association as an important tool of corporate governance. Perhaps, the reason was to offer flexibility for shareholders as was recommended in the Dickerson Report . For whatever reason these provisions were included, the fact remains that they are here in our legislation and offer a statutory alternative to the problems associated with a USA.
In his thorough and comprehensive article on the USA in Canada, Mr. Michael Disney recognises that if the USA is to fulfill its purpose in Canada, statutory reform is needed. This call for statutory reform is echoed in the discussion paper published by Industry Canada on Unanimous Shareholder Agreements in April 1996, which paper contains a comprehensive business impact consultation seeking views from the Canadian community. As is seen from the list of disadvantages of a USA set out in Chapter 5 of this paper and the issues raised on our hybrid statutory provisions dealing with the Articles, there is also a need for statutory reform in Trinidad and Tobago and Barbados to clarify many of these issues. For example, to identify specifically the parts of the Companies Act that apply to shareholders acting qua directors under a USA, to address the fiduciary issue, voting agreements and arbitration agreements in a USA, to resolve conflict issues and address the separation of powers. It is hoped that USAs will be on the agenda of the Legislative Sub-Committee to review the Companies Act in Trinidad and Tobago chaired by the Honourable Minister of Legal Affairs. Thus far in the Caribbean there has not been significant litigation on corporate commercial matters which are often settled behind closed doors of Board Rooms or at Shareholder Meetings. While the oppression remedy in the new legislation will surely change this landscape, it is important for practitioners of corporate law through workshops such as the Caribbean Commercial Law Workshop sponsored by the University of the West Indies on the 26th and 27th August 1999, to air our various views and opinions on corporate matters for debate among our peers to augment the jurisprudence in this area. More so, as the author has attempted to identify in this paper, where our statutory provisions are unique and we may not be able to look to Canada for solutions. 10. CONCLUSION There are many advantages to a USA which, indeed, can be a boon for some shareholders. In the author’s view, however, a USA is most useful for wholly-owned subsidiaries of large corporations or State enterprises where the use of the USA recognises the status quo as to how these corporations are often run according to the policy directives of the shareholder with directors as employees of these corporations. The USA, in those circumstances, will provide some comfort for the directors who are relieved of their duties and liabilities. In the case of a multi-party shareholder agreement where there are several minority shareholders, certainly in Trinidad and Tobago and possibly also in Barbados, practitioners and their clients may wish to preserve the separation of powers between directors and shareholders often previously set out in a flexible fashion in such shareholder agreements with reserved or veto matters for shareholder decision, voting agreements, indemnities and agreements among shareholders. However, because of the enhanced statutory powers given to directors in the new Companies legislation, such standard provisions may amount to a fetter on the directors’ powers to manage the business and affairs of the company and make such a shareholder agreement a USA with attendant fiduciary obligations on the shareholders. Hence care should be taken by practitioners when drafting shareholder agreements to avoid these consequences of a USA, if so instructed by their clients. Shareholders making such decisions may prefer the flexibility to vote in their own interests, and not in the capacity of a director, so as to have their decision questioned on fiduciary grounds by a disgruntled minority shareholder. Disgruntled shareholders can always make use of the oppression remedies in the new Companies legislation where the facts permit such relief. There is no need, in addition, to further expand the boundaries of fiduciaries to include shareholders making such decisions on important Restricted Matters in the Articles. In Trinidad and Tobago, and to a lesser extent Barbados, the historical importance and vigour of the Articles has been to some extent preserved. We have a statutory alternative in the Articles to restrict, in whole or in part, the power of directors to manage the business and affairs of the company. In the case of a multi-party joint venture, it may be possible to retain the benefits of flexibility and have shareholders vote in their own interests on these Restricted Matters in the Articles in a manner in which Trinidadian and, perhaps, Barbadian shareholders have grown accustomed under the English system. Statutory reform is often useful and as seen in Canada as well
as Trinidad and Tobago and Barbados is required to answer many of
the complex issues which apply to this novel concept of the USA.
In the interim, however, we in Trinidad and Tobago and possibly
Barbados at least have the statutory alternative of the Articles
and we should be able to have recourse to these unique hybrid provisions
in our legislation.
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