Shareholder Rights

Re-affirming Protection of Shareholder Rights. _ MS Fang Min V Uganda Hui Neng Mining Limited & Others HCCS No. 318 OF 2016.

  • Introduction

This decision re-echoes the concept of protection of shareholder rights.

On the 19th day September 2019, the Honourable Justice David Wangutusi delivered judgment in favour of the Plaintiff against the defendants declaring several of their actions that led to the fraudulent transfer of Exploration License No. 1178 illegal, null and void.

  • Background

Ms Fang Min hereinafter referred to as the Plaintiff through her lawyers Byenkya, Kihika & Co. Advocates sued Uganda Hui Neng Mining Limited (Nominal Defendant), Guangzhou Dong Song Energy Group Co. Ltd, L.V Weidong, Mao Jie, Yang Junjia and Guangzhou Dong Song Energy Group (U) Ltd who are referred to as the 1st,2nd,3rd,4th,5th and 6th Defendants respectively.

On the 22nd December 2014, the 2nd Defendant and 6th Defendant entered into a Mineral Development agreement with the Government of Uganda which paved the path for the exploration and development of extraction. The 2nd Defendant thereafter transferred the Exploration License and Mining Lease to the 6th Defendant. The Plaintiff contended that the transfer of license from the 1st Defendant to the 2nd Defendant without her consent deprived the 1st Defendant of her property. That the act also occasioned   loss to her as a minority share-holder.

The Plaintiff further contended that the 4th and 5th Defendants who participated in those transfers did so without capacity in as much they did not subscribe to any shares. The Plaintiff also contended that the acts of the 3rd, 4th and 5th   Defendants in transferring the exploration license to the 2nd Defendant and subsequently to the 6th Defendant was done fraudulently.

By way of Counterclaim the 2nd Defendant sought to recover USD 8,000,000, money unaccounted for by the Plaintiff.

  • Issues for determination

The issues as agreed by the parties for trial were;

  • Whether the transfer of Exploration License No. 1178 from the 1st Defendant to the 2nd Defendant and the subsequent transfer of the Exploration License together with Mining Lease No. 1393 to the 6th Defendant amounted to fraudulent deprivation of the Nominal Defendant of its assets?
  • Whether the Plaintiff’s personal action against the Defendants is tenable?
  • Whether the actions of the 3rd, 4th and 5th Defendants in purporting to transfer Exploration License No. 1178 from the 1st Defendant and the subsequent transfer to the 6th Defendant amounted to fraud on the minority?
  • Whether an order lifting the corporate veil of the 2nd and 6th Defendants respectively can be issued to allow for remedies against their shareholders and directors, having used the entities to perpetuate fraud on the 1st Defendant?
  • Whether the Plaintiff is under a duty to account for money as stated in the counterclaim?
  • Whether the Plaintiff is entitled to a set off as stated in the reply to the Counterclaim?
  • What remedies are available to the parties?
  • Court’s decision.

In the absence of proof of service of the notice of the directors’ meeting, the Plaintiff was not notified of the meeting.

The resolution to transfer the Exploration License No. 1178 from the 1st Defendant to the 2nd Defendant which was done based on a resolution that was a result of a meeting without quorum and where the only other director (Fang Min) was not notified is null and void.

While the proper Plaintiff in an action against a wrong done to the company is the company itself, the only way the Plaintiff could get redress is to allow her to duck the concept of separate personality.

The Plaintiff as one of the founders and only Director in Uganda at the time of inception of the 1st Defendant had a right to participate in the project.

The 2nd and 3rd Defendants breached their statutory duties as directors under Section 198 of the Companies Act to wit; failing to treat all shareholders equally, avoiding conflicts of interest and ensuring compliance with the Companies Act.

The 3rd, 4th and 5th Defendants were fraudulent. Holding meetings with people who were not qualified (4th and 5th Defendants) and acting willfully with intent to deceive that the resolutions that came out of those meetings were lawful knowing very well it would cause financial loss to the Nominal Defendant and bringing gain to the 3rd, 4th and 5th Defendants amounted to fraudulent conduct.

The failure to account by the Plaintiff was caused by the conduct of the 3rd Defendant in labeling her as a dealer of drugs and human trafficking.  The freezing of her accounts with amounts worth US$ 8,000,000 for alleged non-accountability was without foundation and illegal.

Since the issue of accountability had been dealt with, the claim under the counterclaim of US$ 8,000,000 was with no foundation and was dismissed with costs.

The corporate veil of the 2nd and 6th Defendants was lifted to allow the Plaintiff realise remedies against the Shareholders and Directors.

  • Conclusion

Court in this decision reaffirms a number of key principles under the Companies Act including but not limited;

The duties of company directors, notices before company meetings, those entitled to attend company meetings, those entitled to pass board resolutions, lifting the corporate veil, derivative actions, shareholder participation in affairs of the company.

Should you require more information on this article, please do not hesitate to contact our own;

  1. Ebert Byenkya, a senior partner at ebyenkya@byenkyakihika.co.ug
  2. Oscar John Kihika, the managing partner at okihika@byenkyakihika.co.ug
  3. Dinah Mukasa, a partner at dinah@byenkyakihika.co.ug.

 

 

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