Minority Shareholders’ Protection

Majority Rule

1. The decision made by the majority of the company’s members will always take precedence over that of the minority. It makes no difference if some company members abstained from voting on a resolution as long as the majority approved it. Although a constitution may require the consent of all the members before a resolution can be passed, this is almost impossible to achieve except for companies with small number of the shareholders. Therefore, the ‘majority rule’ principle is important in streamlining the decision-making process of a company.

2. Generally, the court will not interfere with the resolution passed by the majority members as by agreeing to be a member in a company, the shareholders have agreed to submit to the will of the majority of the members.

3. Strict adherence to the majority rule could lead to problems especially when the majority shareholders’ powers are abused. The majority shareholders may utilise their voting powers to make any decisions that they want despite the objections and disagreements of the minority shareholders. In the worst-case scenario, a minority stakeholder who strongly opposes the decisions of the majority may be at risk of being expelled from the company.

4. Fortunately, the Companies Act 2016 provides some protections to the minority shareholders of a company whose rights are being ignored, disregarded, oppressed and unfairly prejudiced. Some of these protections will be discussed in this article.

Protections to Minority Shareholders under the Companies Act 2016 (“CA 2016”)

A. Oppression remedy under Section 346 of CA 2016

Section 346 of CA 2016 provides remedy to any member of a company where there is oppression or prejudice to the member. This remedy is also available to the majority shareholders and is not limited to only the minority shareholders.

According to Section 346 (1) of CA 2016, the aggrieved member can apply for the oppression remedy if: –

i) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive or in disregard of the interest of the member; or

ii) some act of the company has or is threatened to be done or some resolution of the members has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to the member

The followings are some examples of the oppressive conducts:-

i) Irregular financial transactions approved by the majority shareholders

ERIC LAU MAN HING v ERAMARA JAYA SDN BHD & ORS [1998] 7 MLJ 528

In this case, there had been irregular financial transactions by the majority shareholders purportedly on behalf of the company. The majority shareholders had granted temporary loans to a contractor of the company, which was not entitled to loans from the company. They had also paid a huge amount to a company which do not have any business dealings with the company, such company was owned by the relative of the majority shareholder. Additionally, the majority shareholders had made payment in excess of above the sum demanded by a creditor. The High Court ruled that the financial transactions were irregular and amounted to oppression practised on the minority shareholders who had not consented to any of the transactions.

ii) Mismanagement of the company

NG CHEE KEONG v NG TEONG KIAT HIGHLANDS PLANTATIONS LIMITED [1980] 1 MLJ 45

In this case, the company’s assets consisted of a tea plantation. The directors had neglected the tea plantation and failed to pay the quit rent, putting the plantation at risk of being forfeited by the state government. The court held that the indifferent conduct of the Board of Directors and the company in allowing the tea plantation to deteriorate from a profitable concern to one of near insolvency, together with their conduct in allowing the tea plantation land to be in arrears of quit rent to such an extent that the land was almost forfeited to the State Government clearly establish that the affairs of the company are being conducted in an oppressive manner.

iii) Wrongful removal of a directors by the majority shareholders of the company

TAN KIAN HUA V COLOUR IMAGE SCAN SDN BHD & ORS [2004] MLJU 178

The court held that there was oppression in the petitioner’s removal as a director of the company. There was an agreement between the original four shareholders of Colour Image that the petitioner would be one of the directors who played an active role in the company’s management. The petitioner held 30% whilst the remaining shares were held by the second, third and fourth respondents. Although the respondents were directors of the company, the second respondent and the petitioner were to be actively involved in management. The third and fourth respondents later sold their shares to the fifth respondent. There were irregular financial transactions by the second respondent when he made unauthorised payments to the third and fourth respondents and the petitioner was also removed as a director. The petitioner brought an action alleging that there was oppression. The court held that oppression existed because with his removal the petitioner would not receive any benefits, i.e salary, bonus or commission, which he was entitled to as agreed by the shareholders. Since the company did not declare dividends despite the substantial profits made, the petitioner would not receive any dividends.

8. Section 346(2) of CA 2016 gives the court wide powers to rectify the wrong suffered by the minority members if a case of oppression is established. The court may:-

(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.

B. Derivative Action under Section 347 of CA 2016

9. A derivative action is an action brought by a shareholder or director of a company in the name of and on behalf of that company in respect of a wrong done to the company, rather than to its shareholders. It is ‘derivative’ as the party bringing the action does not have the right to sue, but such a right is ‘derived’ from that of the company. Normally, the authority to take legal action lies with the board as it has management responsibility. However, where the alleged wrongdoers are the directors themselves who control the company, the law gives shareholders the ability to commence an action on behalf of the company.

10. Section 347 of CA 2016 outlines the provisions for a statutory derivative action in Malaysia. Pursuant to Section 348 of 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.’

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

12. To obtain the leave, the complainant must satisfy the Court that he is acting in good faith and the application is prima facie made in the best interest of the company.

13. The following are the examples where the leave was granted by the Court: –

a) Failure of directors to diligently pursue the recovery of the amount due from a foreign asset management company by the series of legal action that were not followed through and by their failure to file proof of debt;

b) Failure to obtain accurate audited accounts for a period of 10 years, misappropriation of funds by its directors and/or management and court actions to recover the misappropriated monies were not properly enforced; and

c) Failure to pay to the company the fees payable under the management agreement for services rendered to the director of the company and all proceeds collected by the director of the company.

14. Upon having granted the leave to commence derivative action in the name of the company, the Court may make the following orders: –

a) Authorizing the complainant or any other person to control the conduct of the proceedings;

b) Giving directions for the conduct of the proceedings;

c) For any person to provide assistance and information to the complainant, including to allow inspection of the company’s books;

d) Requiring the company to pay reasonable legal fees and disbursements incurred by the complainant in connection with the application or action, or pending the grant of the leave or pending the grant of any injunction by the Court hearing the application for leave under this section; or

e) The costs of the complainant, the company or any other person for proceedings taken under this secretion, including an order as to indemnity for costs.

Conclusion

15. While the oppression remedy outlined under Section 346 of CA 2016 and the derivative action as per Section 347 of CA 2016 are pivotal mechanisms in addressing the constraints of majority rule, they are however not the sole recourse available. As these are statutory measures, they provide not only certainty on the procedures to the aggrieved parties but also the reliefs that can be granted by the court.

16. Taking part in a company as a minority shareholder inherently carries risks. One can however minimize the risk of being exploited by the majority shareholders through careful pre-negotiations before the actual involvement or investment in the company. It is highly recommended to have a shareholder agreement that is comprehensively crafted which guarantees all the rights and interests of the minority shareholders are well protected, despite the limited influence.

About the Author

Jessica Wong Yi Sing
Associate
Harold & Lam Partnership
jessica@hlplawyers.com