A Shareholders’ Meeting of a family-owned company convened by the Court

The Civil Court (Commercial Section) (the “Court”) presided over by Hon. Judge Joseph Zammit McKeon on 18 June 2020, in the case “Anne Pace vs. X” unlocked corporate deadlock by exercising its discretionary power to order a general meeting to be held for a family owned company to be duly represented on a contract of sale with a third party external to the family business.

Facts of the Case

A Maltese couple, Mr. and Mrs. Pace, owned a family-run car dealership company. The majority ordinary voting shares were held by the husband and the wife had a minority voting stake in the mentioned company. Mr. Pace also occupied the role of sole director of the company and according to the Memorandum of Association of the company, its legal and judicial representation was vested solely in him. On 3 February 2020, Mr. Pace passed away and his shares did not devolve to his aventi diritto by way of transmission causa mortis.

On 21 November 2019, Mr. Pace as the legal representative of the company had entered into and executed a promise of sale agreement with Ms. Buhagiar, a third party, external to the family car dealership business mentioned above, promising the transfer of a Maltese property located in Mosta for the price and under the transfer conditions as laid out in this same agreement. This agreement was registered with the Commissioner of Inland Revenue.

A board of directors’ meeting which was held a few days before Mr. Pace’s death resolved to approve the appointment of the couple’s son as an authorised special attorney of the company with the power to inter alia represent the company on the final contract of sale of the mentioned Mosta property. Mr. Pace passed away before the company was able to conclude this final deed of sale. Upon Mr. Pace’s death, the delegation of the special powers mentioned above to the couple’s son lost its legal validity.

The wife, as a minority shareholder of the family-owned company, was not able to appoint a replacement director as the Articles of Association of the company prevented her from convening a quorate general meeting alone.

The tragic death of Mr. Pace triggered corporate deadlock and Mrs. Pace had no option but to institute this case requesting the Honorable Court to exercise its discretionary power under Article 132 of the Maltese Companies Act, 1995 (Chapter 386 of the Laws of Malta) to give those directions and issue those orders which it considers appropriate for the company to be in a position to honour its obligations arising from the promise of sale agreement which was signed at the end of 2019, including the possible appointment of the couple’s son as the legal representative of the company solely for the purposes of finalising and executing the final sale of property deed.

Article 132 of the Maltese Companies Act (Chapter 386 of the Laws of Malta, the “CA”)

Article 132 of the CA which was modelled on Section 371(1) of the UK Companies Act, 1985 (currently Section 306 of the UK Companies Act, 2006) provides that:

“(1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of the company may be called, or to conduct the meetings of that company in the manner prescribed by the articles or this Act, the court may, either on its own motion or on the demand of either of the parties to the proceedings during the course of such proceedings or, in the absence of any proceedings, on the application of any director of the company or of any member of the company who would be entitled to vote at the meeting, order a meeting of the company to be called, held and conducted in such manner as the court thinks fit and where any such order is made, may give such ancillary or consequential directions as it thinks expedient, including a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting.

(2) The provisions of sub-article (1) shall also apply to the calling of meetings of the board of directors of a company, if the court considers that the circumstances justify such course of action.”

As one may notice from the above CA extract, sub-article (1) deals with general meetings whereas sub-article (2) extends the power of the court to order board of directors’ meetings. The Court held that it was evident that sub-article (2) could not be applied to the case in question given that there was no board of directors which could be called.

Judge Zammit McKeon pointed out that under English corporate law, one would not find the equivalent of the Maltese Article 132(2) as the power of a UK court was only restricted to the convening of general meetings.

The Court referred to pages 1427-1428 of Profs. Andrew Muscat’s ‘Principles of Maltese Company Law’ (Second Edition, MUP, 2019). Profs. Muscat explains that:

“General meetings may also, in particular circumstances, be convened, held and conducted as directed by the Civil Court…The court should be entitled to direct that a meeting be held when it is impossible to hold a general meeting because of the persistent absence of a quorum at general meetings. The court should not however direct that a meeting be convened simply because the directors had rejected a request by a member to call a meeting. Nor should the court use its powers to overcome a deadlock in the company`s affairs where the deadlock is the result of a deliberately created parity of votes between two members. Indeed the legislative provision is designed to empower the court to ensure that meetings are held but not to alter the result that is likely to follow from that meeting…Where however the provisions of the articles are cynically exploited by some shareholders to block an effective meeting, the court should be able to exercise its powers…”

The Court’s Considerations and Decree

The Court referred to Article 139(4) of the CA which states

that: “unless otherwise provided in the memorandum or articles of a company, a director of a company other than the first directors shall be appointed by ordinary resolution of the company in gen

eral meeting.” In this case, the Memorandum and Articles were silent on the matter so the method of appointment had to follow the applicable Article 139(4) of the CA. A general meeting could not be convened by Mrs. Pace alone as she was the holder of one ordinary voting share and alone she could not convene a quorate shareholders’ meeting so the court had to intervene to resolve the deadlock. According to the Articles of Association of the company, the quorum for any shareholders’ meeting was that of two members present in person or by proxy holding not less than 70% of the issued paid up ordinary shares of the company. Hence, it was clear that Mrs. Pace could not do anything to change the

status quo of the company, except for reaching out to the Court for its direction.

The Court acknowledged the good intentions of the plaintiff and the reasons why she had to institute this case primarily to safeguard the interests of the company and to avoid prejudicing the interests of the third party who wanted to conclude the sale of the Mosta property. Moreover, the Court made a general remark on Maltese family owned businesses saying that very often it is customary for these businesses to be run by the

capo famiglia. Yet, as seen from this case, this may not always be the ideal way how such businesses should be run given that upon the death of the paterfamil

ias, problems would arise on the selection of an appropriate replacement. In this case, even though Mrs. Pace was a coowner, she was not involved in

prima persona in her husband’s business so she could not take on his entrepreneurial role in a seamless manner.

Due to the above-mentioned reasons, the Court accepted the plaintiff’s request and proceeded to order the convening of a general meeting of the company which had to be held on 22 June 2020. This meeting had to discuss, resolve on and approve one agenda item, which was that of appointing the couple’s son as the company’s legal representative for the purposes of negotiating, entering into and execution the final contract of sale with the third-party purchaser. The Court gave the necessary powers to the plaintiff for her to be able to vote both in her own personal name and for and on behalf of the heirs of her late husband, who were still unknown at that point in time.