Introduction
A company is generally defined as a body or an entity incorporated under the Companies Act 2016 (“the Act”). In a company with share capital, the shareholders (often referred to as members) are generally divided into the majority shareholders and the minority shareholders. It is a well-established law that a court will generally not interfere with the company’s affairs. Reference is made to a recent Federal Court case, Dato’ Seri Timor Shah Rafiq v. Nautilus Tug & Towage Sdn Bhd [2024] (“Nautilus"). However, this is not the end of the game. This article aims to provide a general understanding of the recourse available for minority shareholders in a company to seek justice against the majority.
The Majority Rule
It is well settled that the majority shareholders of a company always have the final say due to their greater voting rights. This can be derived from an English leading precedent Foss v Harbottle [1848] (“Foss”). The ‘majority rule’ essentially means that the wishes of the majority will prevail over those of the minority. Gopal Sri Ram JCA (as he then was) in ABDUL RAHIM BIN AKI v KRUBONG INDUSTRIAL PARK (MELAKA) SDN BHD & ORS [1995] held that a court will not interfere with the internal workings of a corporation, upon a matter which is capable of being ratified by a majority of shareholders present and voting at a general meeting of the company.
How to seek ‘Justice’ (Sue!)
What can the minority do when they disagree with the majority’s decision that, in their perspective, is not in the best interest of the company? Pursuant to the Act, inter alia, there are generally 2 ways for the minority in a company to commence a legal action against the majority,either by ‘oppression’ or ‘derivative action’.
Oppression
Notably, a company is a distinct legal entity from its members or directors. Reference is made to Wallersteiner v Moir (No 2) [1975] where Lord Denning MR affirmed that it is a fundamental principle that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which it alone is entitled.
The minority can either sue the company to seek redress for themselves through section 346 of the Act. Put it simply, the minority oppression suit comes into play when the minority feels oppressed by the conduct of the majority that is disregarding the interest of the minority or the decision of the majority to unfairly discriminate against the minority. It is, however, not easy to succeed. As the Privy Council in Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] held, 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 executive decisions, with which the complainant did not agree, was not enough to bring an action within section 181(1)(a) of the Companies Act1965 at all. The complaint must identify and prove "oppression" or "disregard". There must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder was entitled to expect before a case of oppression could be made out.
Note: Section 181(1)(a) of the old Companies Act 1965 is identical with Section 346 of the Companies Act 2016.
In other words, when dealing with relief under Section 346 of the Act, the Court will generally not interfere with merely internal matters of a company that can be resolved through an ordinary or special resolution in the company lawfully. [See also Hoy Pak Kwai v. Leong Kon Fah & Ors [2007]]
Interestingly, a removal of directors may constitute oppression towards the minority. Of course, this is not absolute. As in the recent case of Tan Ken Meng v Hsl Plastics Sdn Bhd & Ors [2019], the shareholding of the plaintiff was 35%, while the defendants’ holding a total of 65% of the shares. The plaintiff was subsequently removed as a director through the defendant’s majority decision. The court held that such a majority rule does not constitute oppression under section 346 of the Act.
Yet, the Singapore High Court in Re Gee Hoe Chan Trading Co Pte Ltd [1991], referring to Singapore Companies Act, held that it was grossly inequitable that the majority shareholders should make use of their controlling power in both the general meeting and the board of directors to adopt a policy which only benefited themselves and have hardly benefitted to the minority.
Note: Section 216 of the Singapore Companies Act also has a similar wording and effect as Malaysia Companies Act 2016.
Derivative Action
In addition to the minority suing the majority, seeking redress merely from themselves, there is another long existing common law cause of action that allows the minority to commence legal proceedings against the majority in the name of the company. This is the so called ‘derivative action’. In this regard, there is another settled common law principle (proper plaintiff rule) set down in Foss and later reiterated in Edwards v Halliwell [1950] which deserves extra concern. The ‘proper plaintiff rule’ provides that if a wrong is committed against a company, then the company is the proper claimant in respect of that wrong instead of the minority shareholders. However, the common law derivative action has been abolished through Section 347(3) of the Act.
Upon the enactment of the Act, a leave of court is now needed for the minority to commence a derivative action as stipulated under Section 348 of the Act. Section 347(1) and (2) of the Act allows a complainant (usually the minority shareholders), with the leave of court, to bring a derivative action if there has been an infringement to the rights of the company. Section 345 (a) of CA 2016 provides the interpretation of the complainant which includes a member of the company [see also Por Lin Chiang v Tanjung Aircond Engineering Sdn Bhd & Another (2019) 1 LNS 700].
In determining whether to grant a leave, the Federal Court in Nautilus specified the role of the Court to perform a kind and filtering process so that only genuine cases are permitted at the leave stage and the power to grant leave remains at the court’s discretion.
Section 348 (4) of CA 2016 also expressly stipulates the factors that the court may take into account prior to deciding whether to grant a leave. In the context of natural language, the word ‘may’ used in section 348(4) of CA 2016 sounds like the court is not bound to consider the factors. However, the Federal Court in Nautilus seems to hold a different point of view where the court held the element of ‘good faith’ is a requirement or a prerequisite under s. 348(4) of the Act and not merely a factor to be taken into account by the courts. Despite that, the Federal Court also appreciates the other factors such as notion of equity as stated in Swansson v R A Pratt Properties Pty Ltd and another [2002] where the court will import notions of equity into the good faith requirement, so that if the applicant seeks to receive a benefit which, in good conscience, he or she should not receive, then the application will not have been made in good faith even though the company itself also stands to benefit.
Can Both Actions Be Commenced Concurrently?
Generally, in derivative action, if there are other alternatives remedies for the minority, the court would likely exercise its discretion to refuse to grant leave. It is, in my view, vested in the discretion of the court as nothing in the Act prohibits such to happen.
Conclusion
“Just Because You Can Doesn't Mean You Should”
Bill Taylor (2011) in Harvard Business Review
In both the corporate and legal realms, the enduring principle of 'majority rule' remains the fundamental cornerstone, commonly practised and prevailing in most circumstances. However, as the saying goes, where there's a will, there's a way. The Companies Act 2016 expressly provides mechanisms for minority shareholders to seek remedies, whether for their own benefit or for the best interest of the company as a whole.
Written by: Lee Mann Heyy
Edited by: Nurul Adriana & Michelle Lee
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