Breaches of shareholders’ agreement cannot form oppression

[Republishing my old article from March 2013.]

The Federal Court in Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors and another appeal [2013] 2 MLJ 297 (see the Federal Court Grounds of Judgment) set out an important (and another possibly controversial) clarification on the law concerning oppression proceedings under section 181 of the Companies Act 1965 (“the Act”).

Raus Sharif PCA (delivering the judgment of the Court) first held that the just and equitable principle under 218(1)(i) of the Act, being principles emanating from the House of Lords decision of Ebrahimi, would equally apply in a situation involving section 181 of the Act. This is very useful. It helps streamline our Malaysia approach to the English approach already set out in the House of Lords decision of O’Neill v Phillips. In O’Neill v Phillips, the concept of unfairness under section 210 of the English Companies Act (the equivalent of section 181 of the Act) is parallel to the concept of “just and equitable” expounded in Ebrahimi.

But the Federal Court seems to have made a sweeping finding at [37] that matters concerning a shareholders’ agreement and the breach of such an agreement are not matters relating to the affairs of the company. Therefore, such breaches cannot form the basis for a section 181 action. It was held that these are only private matters enforceable by the parties to the shareholders agreement. I do not think other jurisdictions and other cases in Malaysia have actually made such a far-reaching finding.

Oppression under section 181 of the Act revolves around whether there is commercial unfairness. Such unfairness is judged by the agreement, both formal and informal, reached among the parties. That is why the Articles of Association and, I would have thought, any shareholders’ agreement would be the primary assessment of whether any of the acts are unfair and are in breach of those formal agreements.

So say for instance, a typical situation where a shareholders’ agreement provides that there are reserved matters that will require the vote of the minority shareholder / nominated director of the minority shareholder. The shareholders’ agreement could contain a clause that the Articles of Association would be amended to reflect the terms of the agreement but it is quite common to see, due to an oversight, that the Articles of Association was not amended. If the majority shareholder pushes through certain resolutions (for instance to transfer out assets) which is oppressive against the minority, a direct application of the Jet-Tech decision would mean that the minority shareholder would not be able to rely on section 181 of the Act. The minority’s remedy may only be to sue for damages for a breach of the shareholders agreement.

I don’t think any Malaysian case or authorities from other jurisdictions have made such a sweeping finding before, in that breaches of a shareholder agreement cannot form the basis of oppression.

On a related note, this statement by the Federal Court, applied directly, may be used in support of the conflict between an arbitration clause in a shareholders agreement and statutory relief under section 218/181 of the Act (see for instance, the English Court of Appeal decision in Fulham Football Club (1987) Ltd The Football Conference Ltd [2011] EWCA Civ 855). It is now quite common to find an arbitration clause in a shareholders’ agreement. Therefore, if a breach of the shareholders agreement is only a private matter, then there may not be section 181 relief and parties may only be able to rely on the arbitration clause and have the dispute (for instance, the above example of the resolutions passed in breach of the agreement) referred to arbitration.