Directors play an important role in ensuring good corporate governance in a company. This is easier said than done, especially when non-executive directors representing a minority shareholder are outnumbered by hostile directors appointed by the majority shareholder.
In Nautilus Tug & Towage Sdn Bhd v. Nautical Supreme Sdn Bhd & Ors [2022] 4 CLJ 594, the company, controlled by the majority shareholder and its nominated directors, sued two of its non-executive directors who represented the minority shareholder in respect of actions carried out to ensure good corporate governance, along with the minority shareholder.
The plaintiff is a joint venture company with two shareholders, the first defendant being the minority shareholder. The plaintiff’s board is controlled by four directors nominated by the majority shareholder. By comparison, the minority shareholder only has two appointees on the board i.e., the second and third defendants.
Against the backdrop of existing litigation and arbitration between the shareholders, the plaintiff sued the minority shareholder and its two nominated directors on the plaintiff’s board premised on the torts of conspiracy to injure and breach of fiduciary and directors’ duties.
It was alleged that the defendants had by their actions inter alia: (i) schemed and attempted to hijack the core project of the company; (ii) planned to exclude inter alia the CEO (who is the ultimate owner of the majority shareholder) from managing the company; (iii) caused strife and disharmony in the company; and (iv) interfered with the management of the company.
It was further alleged that the two non-executive directors had breached their fiduciary and/or directors’ duties e.g.: (i) to exercise powers for a proper purpose and in good faith in the best interest of the company; (ii) to exercise reasonable care, skill, and diligence; (iii) to exercise business judgment independently; (iv) not to subordinate their duty to act in the best interest of the company to their nominator; (v) not to use property or information of the company for their own personal benefit; (vi) to make timely disclosure; (vii) not to conceal material and relevant information; and (viii) not to cause harm and injury.
The defendants denied all these accusations on the basis that the minority non-executive directors’ actions were undertaken in the pursuit of good corporate governance on various issues of concern e.g., conflict of interest, transparency in the accounts and the decision- making process of the company, potential financial impropriety, etc.
After a lengthy trial, the High Court dismissed the Plaintiff’s claim in its entirety, thereby vindicating the minority non-executive directors’ actions carried out in the pursuit of good corporate governance.
On the tort of conspiracy to injure, the learned trial judge found that each of the acts complained of was attributable to concerns regarding the management of the company and occurred in circumstances where there had already existed an atmosphere of distrust between the directors in the company.
On the alleged breaches of fiduciary and directors’ duties, the learned trial judge held that the two non-executive directors did not breach their duties having regard to their legitimate concerns over the company’s finances, assets, and management.
This case stood out on its facts as it is highly unusual for a company to sue minority non- executive directors who do not have any powers to bind the company.
The judgment of the High Court is a relief to minority directors who may otherwise be intimidated into blind obedience and compliance by the directors who control the board, even 3 when they discover irregularities and wrongdoings by the majority shareholder or its nominated directors.
