How to Slay a Dragon – Shareholder Remedies in Malaysia

Within the corporate sphere, there is an ever-present tension between majority rule, where the majority shareholders are allowed to dominate the decision-making process, and that of protection of minority shareholders. Where majority rule is abused and is wielded in the majority’s self-interest rather than the interest of the company, then the minority shareholder may be able to seek court intervention for relief.

I have always found this area of company law fascinating and I will be writing more on this in future. This article will serve as a primer on some of the forms of shareholder remedies, especially in a Malaysian context.

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The Rule in Foss v Harbottle: The Fire-Breathing Dragon

The rule in Foss v Harbottle (a 19th century decision of the English courts) has sometimes served to keep the minority shareholders subdued and unable to seek relief. The rule in Foss v Harbottle has even been dubbed a “fire-breathing and possibly multiple-headed dragon.”

This dragon has two distinct heads.

The first is that of the ‘proper plaintiff rule’ being that the proper claimant to bring an action in respect of a wrong done to the company must prima facie be the company. Since the company is a separate entity from its shareholders, a shareholder may not sue to enforce a company’s rights.

The second is the general principle of majority rule being the right of the majority shareholders to decide how the company’s affairs are to be conducted.

This article will touch on the three main weapons in the minority’s arsenal in attempting to slay this dragon.

Statutory Derivative Action

Malaysia has moved in line with other jurisdictions in enacting statutory derivative action provisions. Sections 181A – 181E of the Companies Act allow a minority shareholder to take on the name of the company in order to bring an action against a wrong done to the company. This derivative action seeks to overcome the situation where the directors (often times under the control of the majority) or where the majority shareholders take no action for a wrong done to the company. This may range from directors acting in breach of their duties to the company or where company assets are being wrongly depleted.

Both the heads in Foss v Harbottle would have largely prevented (although certain limited exceptions do apply) an aggrieved minority shareholder from pursuing any action in relation to these wrongs.

Any shareholder (or a former shareholder in certain circumstances) or director can apply to the Court for permission in order to control the company in initiating or continuing court proceedings.

The first element that must be satisfied is that the applicant must provide a 30-day notice to the directors of the applicant’s intention to apply to the Court. Secondly, the applicant must demonstrate that he is acting in good faith and that it appears prima facie to be in the best interest of the company that the application be allowed.

This statutory derivative action is altruistic in nature, in that this is ultimately an action by the company (under the direction of the applicant) to seek relief for a wrong done to the company and any damages would flow back to the company itself. The applicant would not benefit directly from bringing such an action.

Unlike a few jurisdictions, Malaysia’s statutory derivative action maintains the age-old common law derivative action  provisions. This allows an aggrieved shareholder more options.

Oppression Remedy

The oppression remedy is embodied in section 181 of the Companies Act, which allows shareholders to seek relief for personal wrongs suffered in their personal capacity as shareholders.

While often relied on by the minority, even the majority shareholder can raise the issue of oppression where the majority is unable to exercise its majority views due to certain provisions in any written agreement among the shareholders

At the very heart of the oppression remedy is the question of whether there has been commercial unfairness. The starting point in determining commercial unfairness is an examination of the agreement between the shareholders, which would be the written contract and which could also include any implied understandings and legitimate expectations among the shareholders. If a breach of such an agreement has then led to prejudice, the shareholder may be entitled to seek the appropriate remedies.

A significant development in Malaysia is where the Federal Court (our apex court)  essentially held that breaches of a shareholders agreement cannot form the basis of an oppression action. Relief would then have to lie in contractual remedies and the shareholder cannot rely on the statutory remedy of oppression. This will unduly restrict the ability of a shareholder to rely on the full avenues of relief.

In ordering relief, the Court will be empowered to grant any remedy to bring the oppression to an end. Often, this could be an order that the majority shareholder purchase the minority’s shares at a fair price. This is normally the most reasonable remedy because it allows the minority to realise the value of their interest in the company and puts an end to the unfairness – but does not destroy the company. In Malaysia, this share buy-out order can only be made for a majority to buy up the minority and not vice versa.

Just and Equitable Winding Up

A shareholder may also apply to the Court to wind up a company where it is “just and equitable” to do so. This area of the law overlaps largely with that of the oppression remedy as the Court will also be guided by the concept of fairness.

Notwithstanding the corporate structure, the Court can impose equitable considerations. The cases decided in a just and equitable winding up often feature elements of quasi-partnership, and mutual trust and confidence among the shareholders. A breach of such elements may then justify the winding up of the company.

The jurisdiction under a just and equitable winding up is wider than that of oppression, as it can apply in a fault-neutral situation. For instance where there was a mutual breakdown in the relationship between the shareholders, with neither party at fault, or where there was the frustration of the underlying purpose of forming the company.

The only relief that can be granted by the Court is ultimately that of a winding up of a company. The shareholder would then only be entitled to any excess proceeds from the liquidation of the company’s assets.

Conclusion

These are merely three of the more important weaponry available to an aggrieved minority shareholder in attempting to seek relief against any abuse by the majority.

A statutory derivative action seeks relief and damages for the company. An oppression remedy is for a wide-range of personal relief for the shareholder, while the just and equitable remedy results in the winding up of a company.

While not outright slaying the dragon of Foss v Harbottle, these remedies, in appropriate circumstances, allow a minority to outflank the beast and thereby pierce the majority’s armour.

5 thoughts on “How to Slay a Dragon – Shareholder Remedies in Malaysia

  1. Richo May 5, 2018 / 4:27 pm

    Thank you for your insightful article on shareholder remedies. You mentioned that: “Federal Court (our apex court) essentially held that breaches of a shareholders agreement cannot form the basis of an oppression action.” Can I have the citation of the case? Thanks.

    • Lee Shih May 5, 2018 / 5:02 pm

      It is the Federal Court case of Jet-Tech: Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors and another appeal [2013] 2 MLJ 297

      • Gan Ming Jie June 24, 2018 / 4:02 am

        Hi Lee Shih. I really enjoyed your article.

        However let me pose a hypothetical situation. If it interests you, you may give your views. I would be really interested and appreciative in/of your views.

        Suppose there’s a private company in Malaysia that wants to get publicly listed.

        Owners of said company then obviously has to dilute their shareholding for the initial public offering(IPO) to occur.

        Let’s say there are only 3 shareholders.

        Shareholder A holds 40% of the company.
        Shareholder B holds 40% of the company.
        Shareholder C holds 20% of the company.

        Shareholder A and B wishes for all shareholders to have their share be diluted equally.

        Shareholder C refuses to have any of his shares diluted, insisting that only the other 2 shareholders dilute for the IPO.

        Shareholder A and B then decides to have a vote with the motion that ‘All shareholders of the company MUST dilute at an equal rate/amount.’

        With shareholder A and B having an overwhelming majority of 80% of the company’s shares, the motion/vote easily passes in their favour, which is to mandate that all shareholder’s must dilute their shares equally.

        Suppose shareholder C then sees this as ‘unfair’ and proceeds to, under section 181, classify this as ‘minority oppression’ and brings the other 2 shareholders to court.

        Question 1: Under such conditions, would you classify it as ‘minority oppression’?

        Question 2: If you accept these conditions as ‘minority oppression’, how will the penalties to shareholder A and B be determined?

        Question 3: Are there legal precedents to a situation like that in Malaysia or elsewhere? If so, where could I find them?

        I apologize for the lengthy question. I hope to year your views. Thank you for reading.

        • Lee Shih June 26, 2018 / 9:55 am

          My brief replies are:

          Question 1: Under such conditions, would you classify it as ‘minority oppression’?
          [Offhand, it may be difficult to classify this alone as minority oppression. Oppression stems from some sort of unfairness. Unfairness is measured against some sort of agreement or expectation. So the question is whether there was any sort of agreement or expectation to specially have Shareholder C have a unique position so that the 20% is not diluted? Absent such an agreement, may be difficult for C to establish oppression. Especially when A and B are trying to treat all the shareholders equally/fairly by having equal dilution. Factually, will have to go back to the time when company formed and when A, B and C came together. What was the agreement then? What was the discussion then? How did the discussion evolve as the company became successful? Was IPO always on the cards even when the company was formed?]

          Question 2: If you accept these conditions as ‘minority oppression’, how will the penalties to shareholder A and B be determined?
          [If there is a finding of oppression, the most common remedy the court will grant is that of a share buy-out. A and B to buy out C’s shares. Then the court will have to determined the proper price.]

          Question 3: Are there legal precedents to a situation like that in Malaysia or elsewhere? If so, where could I find them?
          [Best to read books and to see the cases cited. Loh Siew Cheang’s Corporate Powers Accountability 3rd edition has a very comprehensive chapter on oppression and cites a lot of cases. My book ‘Companies Act 2016: New Dynamics’ has a chapter on shareholder remedies.]

          • Gan Ming Jie June 26, 2018 / 8:26 pm

            Thanks for taking the time to answer my question Lee.

            Since this is a hypothetical, let’s just say there was no intention since the beginning for an IPO. Perhaps the IPO was just a recent development.

            However, suppose that there was a specific agreement between shareholder C and the rest that he won’t be allowed to dilute his shareholding. Then ‘minority oppression’ makes sense?

            Thank you for providing research materials. Really appreciated it.

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