Joyce Lim writes on a recent High Court decision on the oppression remedy in quasi-partnerships. Further, the decision confirms that oppression can arise from breaches of a shareholders’ agreement.
The High Court in the recent case of ISM Sendirian Berhad v Queensway Nominees (Asing) Sdn Bhd & Ors and other suits  MLJU 388 dealt with an oppression claim by a minority shareholder in quasi-partnerships (also known as Ebrahimi-type companies).
Summary of the Decision and Significance
The minority shareholder in question is ISM Sendirian Berhad (ISM), a private limited company. ISM is a 30% shareholder in five joint-venture companies (JV Companies). The majority shareholder in the JV Companies is MPHB Capital Berhad (MPHB) (directly and indirectly). MPHB is a public company listed on the Main Board of Bursa Malaysia.
Disputes arose between the parties. ISM brought an oppression claim against MPHB pursuant to section 181 of the Companies Act 1965 (now section 346 of the Companies Act 2016 (CA 2016)). ISM claimed that MPHB had engaged in acts that were oppressive to ISM’s rights as a minority shareholder of the JV Companies.
The High Court found that the allegations of oppressive conduct were made out. Consequently, the High Court ordered the shares held by ISM in the JV Companies to be bought by MPHB at fair value.
This decision is significant in three respects:
First, the High Court reiterated the elements which may be considered in determining whether a company is a quasi-partnership.
Second, the High Court established that in quasi-partnerships, beyond the company’s constitution and the shareholders’ agreement, standards of equitable and fair dealing between the shareholders can be imposed in determining whether there has been oppressive conduct.
Third, the High Court provided clarification that an oppression action can be based on breach of a shareholders’ agreement if the breach relates to the affairs of the company. This is a departure from the Federal Court decision of Jet-Tech Materials  2 MLJ 297 (Jet-Tech) (a brief case commentary is found here).
Oppression – A Quick Refresher
(1) The general principle for the governance of companies is majority rule. This means that the majority of the shareholders hold the decision-making power of the company. Oppression is an exception to the general principle of majority rule.
(2) In Malaysia, the remedy for oppression is provided for under section 346 of the CA 2016. The complainant must show that the conduct complained of fulfills one of the four categories proscribed by the provision. The conduct must have been oppressive to the aggrieved complainant, or carried out in disregard of his interests, or an act that unfairly discriminates against or is unfairly prejudicial to him. The test of unfairness is an objective one.
ISM entered into a joint venture with MPHB to undertake a large-scale integrated commercial development project in Kuala Lumpur. The JV Companies were used to acquire adjoining lots surrounding the lands for development. ISM held 30% of the equity in the JV Companies, and MPHB held the remaining 70%. There was no written shareholders’ agreement entered into between the parties in respect of any of the JV Companies. However, it was parties’ position that there was an oral shareholders’ agreement.
Disputes subsequently arose between the parties. The core issue related to the parties’ respective obligations to fund the JV Companies. ISM’s position was that the funding for the JV Companies was to be divided into a cash portion and a loan portion, apportioned on a 30:70 basis. Of the cash portion, ISM would be liable to contribute 30%. MPHB contended that the funding for the JV Companies was to be in proportion to the parties’ equity interests, i.e. on a 70:30 basis.
ISM brought an oppression claim against MPHB on the basis that MPHB had engaged in acts that were oppressive to ISM (“Alleged Oppressive Conduct”), including that MPHB had:
- demanded that ISM contributes 30% of the purchase price for a land acquired by one of the JV Companies;
- caused three of the JV Companies to undertake a rights issue exercise. This in turned caused the dilution of ISM’s shareholdings in those companies;
- imposed interest on the shareholder advances made by MPHB, but not the cash portion advanced by ISM;
- refused to re-elect Dato’ Ray (founder and director of ISM) as a director of the JV Companies; and
- caused the transfer of one share in three of the JV Companies to a third party (another company in the MPHB group of companies) to fulfil quorum requirements for shareholders’ meetings.
The High Court held that ISM’s claims of oppression, unfair prejudice and disregard of interests on the first three of the Alleged Oppressive Conduct were made out. Consequently, the High Court ordered that the shares held by ISM in the JV Companies be bought by MPHB at fair value.
The reasons behind the High Court’s decision are set out below.
Were the JV Companies in essence quasi-partnerships?
First, the High Court reiterated the non-exhaustive principles in the House of Lords decision of Ebrahimi v Westbourne Galleries  AC 360 (Ebrahimi) on what amounts to a quasi-partnership:
(1) an association formed or continued on the basis of a personal relationship, involving mutual confidence. This element will often be found where a pre-existing partnership has been converted into a limited company;
(2) an agreement, or understanding, that all, or some of the shareholders shall participate in the conduct of the business;
(3) restriction on the transfer of the members’ interest in the company. If confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.
Applying these principles, the High Court found that the relationship between ISM and MPHB was a quasi-partnership.
This was because the relationship between ISM and MPHB in relation to their joint venture in each of the JV Companies was not entirely commercial and at an arm’s length. Rather, the relationship was fundamentally based on mutual trust and confidence. The parties had proceeded with their business relationship even though there was no signed written shareholders’ agreement. Their business relationship was run based on a consensus between the parties – with Dato’ Ray leading the tactical acquisitions of the target real estate and MPHB primarily contributing capital.
Imposition of equitable principles in quasi-partnerships or Ebrahimi-type companies
Second, the High Court held that in determining whether there was oppression, disregard of interests, unfair discrimination or prejudice, the court may take into account the fact that the company in question is a quasi-partnership in the Ebrahimi sense. Where the company has been held to be a quasi-partnership, the law imposes standards of equitable and fair dealing on the relationship between the shareholders.
Thus, where an action by one shareholder contravenes the understanding and expectations of mutuality between the parties in a quasi-partnership, that act may be found to amount to oppressive conduct.
On this basis, the High Court imposed equitable principles in determining whether there had been oppression of ISM’s rights as the minority shareholder.
The High Court found that ISM’s claim of oppression was made out on (among others) the fact that the JV Companies were quasi-partnerships and that there was a breach of the oral shareholders’ agreement. The breaches were sufficient to amount to oppressive conduct and could form the basis for an oppression action. The terms that were breached include:
- that the equity in the JV Companies was to be held on a ratio of 30:70, with 30% to be held by ISM and 70% by MPHB;
- that the funding for the JV Companies was to be divided into a cash portion and a loan portion, apportioned on a 30:70 basis. Of the cash portion, ISM would be liable to contribute 30% (in other words, 30% of 30%, or 9% of the total funds required in respect of each JV Company). MPHB would be liable to contribute 70% of the cash portion, and would also be liable to fund the entire loan portion, at a rate of interest of 8% per annum; and
- that all decisions regarding the JV Companies were to be made on a consensus basis.
Breach of shareholders’ agreement can form basis for oppression
Third, the High Court clarified that an aggrieved shareholder is not precluded from bringing a claim for oppression premised on conduct amounting to breach of a shareholders’ agreement. The contended breach must pertain to a matter relating to the affairs of the company.
The High Court explained that the decision of Jet-Tech does not stand for the proposition that a case for minority oppression can never be brought premised upon breach of a shareholders’ agreement. Rather, the true reasoning in that case was that the breach merely related to matters affecting the shareholders inter se which did not affect matters relating to the affairs of the company.
Finally, the High Court also explained that the court would be unlikely to find oppression where the shareholders’ agreement provides for an alternative remedy. The court will only permit the action to be pursued under the statutory cause of action for shareholder oppression if the contractually provided alternative remedy is not adequate or appropriate. The Singapore Court of Appeal decision of Ho Yew Kong v Sakae Holdings Ltd  SGCA 33 (a case commentary is found here) was cited with approval.
This decision is useful precedent in setting out guidance on what amounts to a quasi-partnership and how equitable principles can be imposed in determining whether there has been oppression. It is also interesting that the High Court had limited the scope of Jet-Tech and clarified that breach of a shareholders’ agreement can form the basis of an oppression action if the breach relates to the affairs of the company.
While the CA 2016 provides for remedy in oppression cases, joint venture parties are reminded of the importance to have a comprehensive written shareholders’ agreement. As seen from this decision, areas for disputes that should be addressed clearly in the shareholders’ agreement would include, among others, obligations and contributions of each party and funding obligations. In cases of oppression, the terms of the shareholders agreement would be relevant for the determination of what is “commercially unfair” conduct and whether there had been oppression.