Related-party supply contract at a family-owned construction company
Myanmar Golden Build Co is a private company incorporated under the Myanmar Companies Law 2017. It has three directors: U Aung (managing director), Daw Mya (finance director) and U Kyaw (independent). U Aung's brother owns a cement supplier. At a board meeting attended by U Aung and Daw Mya, the board approves a one-year cement supply contract worth 60,000,000 MMK with the brother's company. U Aung did not disclose his brother's ownership before the vote and did not abstain. The company's constitution requires directors to disclose any interest in a contract and prohibits an interested director from voting. The contract price is about 15% above the lowest competing quote. A minority shareholder, holding 10%, has just learned of the contract and wants it cancelled. The company has already received 20,000,000 MMK of cement.
1. Identify the legal and governance issues raised by the contract and explain whether the board approval was valid.
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The central issue is a conflict of interest. U Aung has an indirect interest because his brother owns the supplier. Under the Myanmar Companies Law 2017 and the company's constitution, a director must act in good faith in the company's best interests, avoid undisclosed conflicts and disclose any interest in a proposed contract. The constitution here goes further: it requires disclosure and prohibits the interested director from voting.
U Aung did neither. That undermines the board's approval. If the interested director is excluded, the meeting may also have lacked a valid quorum, depending on the constitution and the number of disinterested directors. The price being 15% above the lowest competing quote supports an inference that the transaction was not in the company's best interests. The approval is therefore likely to be invalid or at least voidable, not automatically void. The board should have recorded the disclosure, excluded U Aung from the discussion and vote, and considered whether shareholder approval was required. The company should also check whether the transaction must be disclosed in the register of directors' interests.
2. Advise the minority shareholder on the possible remedies and the practical steps she can take.
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She should first gather evidence: the board minutes, the supply contract, the competing quote, the register of directors' interests and the constitution. She should ask the board to review the transaction and, if necessary, requisition a general meeting using her members' rights under the constitution and the law. A disinterested shareholders' resolution may ratify the contract, but ratification should be fully informed and should not be used to excuse a director's breach of duty.
Possible remedies include seeking an injunction to stop further deliveries, bringing a derivative action on behalf of the company against U Aung for breach of fiduciary duty, and asking the company to recover the excess price. She may also seek U Aung's removal as a director if the constitution and law permit. Practical steps include writing a formal letter to the board, requesting an independent review of the pricing, and preserving documents. She should act promptly because delay may be treated as affirmation of the contract. If the company refuses to act, she should take advice on litigation and on any regulatory report.
3. If the contract is set aside, what should happen to the 20,000,000 MMK of cement already supplied, and what should the company do about the 15% price difference?
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Setting aside a contract does not automatically mean the cement must be returned. The company has received and presumably used the goods. The supplier may be entitled to restitution or a quantum meruit claim for the value of the benefit conferred, while the company may set off any loss caused by the breach. The parties should calculate the market value of the 20,000,000 MMK of cement and agree how much is payable for goods actually accepted.
The 15% excess over the lowest competing quote is a separate loss. If U Aung breached his duty by voting on an undisclosed related-party contract at an inflated price, the company can claim the excess from him personally as compensation or as an account of profits. The company should also consider whether the supplier knew of the breach. If the contract is affirmed by disinterested shareholders, the company may still have a claim against U Aung, but it cannot both affirm the contract and recover the same loss twice. The board should document the decision and correct the register of interests.