Minority Oppression and Derivative Action

Q1. The Directors of my company have made decisions without having regard to the interest of the minority shareholders. What the minority shareholders can do?

Answer: 

The minority shareholders (“the Complainant1”) may apply to the Court for relief under Section 346 of the Companies Act 2016 (“CA 2016”). To succeed in the application, the Complainant has to prove to Court the following: –

a. the affairs of the company are being conducted or the powers of the directors are being exercised in a manner which is oppressive to him or in disregards of his interests as a shareholder; or

b. some act or resolution of the company which has been done or proposed to be done is unfairly discriminates or is prejudicial to him as a shareholder.

As to what constitutes “oppression” and “disregard of interest”, the Court in the case of Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] 2 MLJ 227held that there must be a clear violation of the standard of fair dealing which a shareholder was entitled to expect before a case of oppression can be made out. Similarly, “disregard” involved something more than a failure to take account of the minority’s interest: there must be awareness of that interest and an evident decision to override it or brush it aside or to set at naught the proper company procedure. The Court has also held that “the mere fact that one or more of those managing the company possessed a majority of the voting power and, in reliance upon that power, made policy or executive decisions, with which the complainant did not agree, was not enough”.

Whether there is “oppression” or “disregard” is a question of facts which the Court will have to examine on case to case basis based on the evidence available. Hence, it is important for the Complainant to promptly record and compile contemporaneous evidence which may strengthen their case of oppression or disregard of their interest.

Q2. What are the possible remedies by the Court if the powers of the Directors are being exercised in an oppressive manner or disregard of the interest of the shareholders?

Answer: 

The reliefs which can be made by the Court under Section 346 CA 2016 are2: –

a. direct or prohibit any act or cancel or vary any transaction or resolution;

b. regulate the conduct of the affairs of the company in the future;

c. provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;

d. in the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or

e. provide that the company be wound up.

Q3. A director of the company have committed actions which have caused loss to the company. However, the Board of Directors has chosen not to take legal action against the director concerned. What is the action that the shareholders of the company can take?

Answer: 

The general rule in company law is that if a wrong is done to a company, only the company which has the right to bring an action to redress the wrong or to claim for damages (“Proper Plaintiff Rule”)3. However, a statutory exception to the Proper Plaintiff Rule is provided in Section 347 CA 2016 which allows shareholders, with the leave (or permission) of the Court, to bring an action on behalf of the company. Hence, the Complainant may bring a derivative action on behalf of the company against the director involved. It is to be highlighted that any relief obtained is for the company as the shareholder is not enforcing his personal rights.

To obtain the leave, the Complainant must satisfy the Court the following: –

a. The Complainant is acting on good faith. To satisfy this, the Complainant must prove to the Court that he/she honestly believe that a good cause of action exists, and the company has a reasonable prospect of success. Further, there must not be any collateral purposes or ulterior motive for the complainant in seeking to bring the derivative action4; and

b. it appears prima facie to be in the best interest of the company that the application for leave is granted. At the leave stage, the Court will not go into the merit of the case. Instead, the Court will have to weigh all the circumstances and decide whether the claim ought to be pursued. A relevant consideration at this stage is whether the company would gain substantially in money or money worth and that there were genuine commercial consideration for not wanting to pursue the claim.5

Q4. What is the procedure to commence a derivative action?

Answer: 

Pursuant to Section 348 CA 2016, the Complainant shall give thirty (30) days’ notice in writing to the directors of the company informing his intention to apply for leave of Court to commence a derivative action. The purpose of the notice is to ‘give an opportunity to the directors of the company to consider, respond and accede to a request by the complainant for proceedings to be commenced in the name of the company’6.

If the company failed to commence action upon the expiration of the thirty days’ notice, then the Complainant may file an Originating Summons pursuant to Section 347 and 348 CA 2016 to obtain the leave of the Court to commence a derivative action.

Upon the leave is granted by the Court, the Complainant may then file the intended suit on behalf of the company.

FOOTNOTES 

[1] “Complainant” is defined in Section 345 Companies Act 2016

[2] Section 346(2) Companies Act 2016

[3] Foss v Harbottle (1843) 67 ER 189

[4] Celcom (Malaysia) Berhad v Mohd Shuaib Ishak [2010] 7 CLJ 808, COA

[5] Abdul Rahim bin Suleiman (suing as the director and minority shareholder of Semangat Motor Sdn Bhd and in the interest of Semangat Motor Sdn Bhd) & Anor v Faridah bt Md Lazim & Ors [2016] 6 MLJ 44

[6] Independent Oil Tools Ltd v Dato’ Ramli bin Md Nor & Ors [2018] 5 CLJ 706

THIS FAQ IS PREPARED AND PUBLISHED BY GENERAL LITIGATION, CORPORATE INSOLVENCY AND APPELLATE DEPARTMENT OF THE DISPUTES RESOLUTION OF MESSRS GAN & ZUL, ADVOCATES & SOLICITORS.