Oppression of minority shareholders through failure to declare dividends

If the majority takes a policy decision that oppresses minority rights there is a serious issue to be looked at"

On November 9, 2010, a landmark order was made by Justice E.A.G.R. Ameresekera in the Commercial High Court in Case No. HC (Civil) 19-2007 (CO). The petitioner was myself and the respondents were Ace Cargo (Pvt) Ltd (a subsidiary of Aitken Spence & Co Ltd) and 10 others, including the Holding Company Aitken Spence & Co Ltd. What lends piquancy to this case is that I was a former Chairman of both these companies.

What adds a great deal of significance to this judgment is that for the first time a court has held that a company that does not pay a dividend to a minority shareholder when it could well afford to do so is guilty of oppression under Sections 224 and 225 of the Companies Act No7 of 2007.

Some appreciation of the background to this case is necessary to understand why an individual of advanced years would have undertaken a legal battle against one of the most powerful companies in this country.

Since 1978 when I was the Chairman of the Ceylon Chamber of Commerce, I had been waging a lone battle on behalf of minority shareholders against those rapacious boards of directors that unfairly minimise their dividends. In 1978, as chairman, I wrote a circular to chief executives who were members of the Chamber urging them to stop their practice of minimising their dividends and to pay annual reasonable cash dividends. I urged them to capitalise their revenue reserves built-up over the years by minimising their dividends, and to regularly revalue their assets and declare stock dividends (bonus issues). This circular, coming from the chairman of a successful company himself, caused dismay to those chairmen who believed that dividends were entirely a matter for boards to decide. Legally they were quite right but my argument was based on ethics; which was not a matter of great importance to most chairmen in those days. That lack of concern may be even more prevalent today.

A few years later (in 1982), the Chamber of Commerce published an innovative "Code of Ethics for Business". It spelt out clearly the responsibilities of directors to their customers, shareholders, employees, and society. It was a historic document far in advance of its time, and a reading of the History of the Chamber published in 2004 makes it evident that the Chamber was, and is, extremely proud of the code. I am proud of the fact that the entire section on the Obligations of Boards to their Shareholders was drafted by me.

In the light of the latest judgement it would be useful to quote the section in full:

"To recognize that the owners of a business are entitled to expect that the business earns a reasonable level of profit and that the directors of a company should at all times be conscious of the fact that the company and therefore its profits, belong to the shareholders. Expansion and diversification should therefore not be at the expense of reasonable, current cash dividends. It should also be accepted that undistributed profits should be capitalized at necessary intervals to the maximum extent possible and that shareholders should also be compensated for inflation by regular revaluation of assets followed by capitalization of the reserves created thereby."

On re-reading these words more than thirty years after they were written I cannot help feeling saddened by the extent to which boards today (like the ones in this case) have fallen short of the ethical standards expected of them.

The salient facts in the subject case were that Ace Cargo (Pvt) Ltd of which I was the sole individual minority shareholder (as a result of the holding company buying the shares of all the other shareholders in 1993 without informing me) did not declare any dividends for six years from 2000 to 2006 although they had earned substantial profits and had very substantial cash balances available to them.

The Judge made the following comments which I picked out from a lengthy judgement:

"A shareholder has a legitimate expectation that he can earn an income from his investment when the company's financial position is sound… I do not see any valid cause or justification for not declaring dividends during the relevant period."

"If the majority takes a policy decision that oppresses minority rights there is a serious issue to be looked at"

"What is quoted above supports the view that a dividend policy which is oppressive towards minority shareholders falls within the ambit of Section 224 of the Companyies’ Act".

"Non-declaration of dividends for six consecutive financial years when there were substantial profits without a reason- able cause oppresses the minority shareholder's rights".

"I accept the argument of the petitioner that good corporate governance demands that expansion and diversification should not be at the expense of reasonable divi- dends to shareholders. Without an acceptable explanation by the respondents placed before Court through evidence, it is my considered view non-declaration of dividends for six years constitutes oppression towards the petitioner".

"Oppression is proved as far as the nondeclaration of dividends is concerned. It is my considered view, as far as good corporate governance is concerned, such a finding by a Court brings the company disrepute which is prejudicial to the interest of the company. Though the company has earned profits, as oppressive conduct brings disrepute to the company, there has been mismanagement too."

The order given in this case should serve as a wake-up call to boards that have been systematically oppressing their minority shareholders. Unfortunately there has been no shareholder association in this country that has challenged such companies in courts. I took it upon myself to do so mainly because I have been preaching for thirty seven years, writing articles, and addressing seminars on the legitimate expectations of minority shareholders and the way companies had been oppressing them with impunity.