Minority Oppression under Companies Act 2016

Introduction

Section 346(1) of Companies Act 2016 allows any member or debenture holder of a company who is oppressed to apply to the Court for an order under this section. This section gives the Court a wide discretion to make such order as the Court thinks fit with the view to bringing to an end or remedying the matters complained of and this order 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.

In this article, we will discuss some important points on the oppression of shareholders in light of Section 346(1). As many are aware, this provision is often referred to as a section for oppression of minority shareholders, however, it is important to note the wording of this section which does not restrict the applicant to any class of member of the company and thus allowing any oppressed member, either majority or minority, to bring an action under this section.

What shareholders should be more aware of when they decide to invoke this section is the fact that Courts, in decided cases, have been reluctant to interfere with matters relating to internal management of incorporated companies unless there is “real oppression”.

Section 346(1) and Decided Cases

It is not easy to prove oppression under this section. An act may only constitute oppression if (a) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or debenture holders including himself or in disregard of his or their interests as members, shareholders or debenture holders of the company; or (b) that some act of the company has been done or is threatened or that some resolution of the members, debenture holders or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or debenture holders, including himself.

To determine whether there is oppressive conduct, conduct in disregard of interests, unfairly discriminatory or prejudicial conduct, the Courts will look at the facts of each particular case¹. Oppression does not necessarily mean illegal or fraudulent nor does it require fraud²; a mere breach of fiduciary duty³ per se does not equate to oppression or disregard of interest⁴ but it must be established that any such breach constitutes oppressive conduct, conduct in disregard of interest, unfairly disregard conduct or prejudicial conduct; and a mere fact that majority shareholders that manage a company make policy or executive decisions, with which the complainant does not agree is also not oppression unless this majority rule passes over into rule oppressive of the minority⁵. This is on the basis that those who take interests in companies limited by shares have to accept the majority rule.⁶

As noted from the wordings of Section 346(1), oppression or disregard of interest must be that of the members or debenture holder of a company. Oppression or disregard of interest of other party, for example the director of the company, is not included under this section. As such, a claim that there is oppression because a director appointed by a shareholder is asked to resign is not does not fall under this section⁷.

The Courts have discussed oppression of shareholders in details⁸.

• In Chin Chee Fui v Kong Yin Siong & Ors [2017] MLJU 791, the act of a director of treating the company as his own company by causing the company to pay all his personal tax liabilities and obligations (including payment of professional service tax for tax computation and charge by his personal auditor), depositing company’s money into his personal account, using the company’s assets to finance personal investment and recorded the money expended by the company as an advance to him as a director (which advance is not subject to any interest and term of repayment), all without approval from the board of directors was held to be not only a breach of fiduciary duty, but also an act which is so serious because it indirectly inflated the costs of the company in doing business to the extent that it becomes unfair and prejudiced and disregards to the plaintiff’s rights and interests as the minority shareholders.
• In Tan Seng Chee & Ors v SLS Bearings (Malaysia) Sdn Bhd & Ors [2016] MLJU 580, the fact that the company paid for the wedding of the son of second defendant (a shareholder in the company) and the third defendant (the wife of the second defendant and a director and shareholder of the company) is not an act of oppression to the plaintiffs who are the minority shareholder of the company because it is a practice of the company to pay for such event (which is considered as an annual dinner of the company), and this practice is a benefit that is enjoyed by all the directors of the company.

This, and other claims by the plaintiffs were held by the Court to only be an internal management of the company, with which the Court would not interfere since it can be solved by the shareholders at general meeting.

• In Seah Eng Toh Daniel & Anor v. Kingsley Khoo Hoi Leng & Ors [2016] 2 CLJ, the issuance of rights issue for the genuine purpose of raising working capital of a company which results in the dilution of minority shareholder’s shareholding was held not to be oppression since there was an evidence that such issuance was made with bona fide due the fact that the losses suffered at the group level requires capital injection. In deciding so, the Court also stated that it has considered the fact that the plaintiff was not adversely affected as the increase of capital was across the board, it was also not a case of the defendants diluting the plaintiff majority (the plaintiffs were always the minority and will remain the minority after the increase of capital) and the increase of capital was also not done unilaterally or in secret nor was part of scheme to unfairly prejudice the minority shareholders’ interest.

Points to Note

Shareholders who wish to file for oppression should also take note of the following points discussed by the Courts in oppression cases:

• Time is of the essence

There should not be any delay by the applicant in acting to protect or further its rights when an alleged breach or violation of such right arose. A party who acted without expediency was held to sit on his rights and accept tacitly such practices or decisions adopted by a company in its business affairs over time and were denied relief prayed. The delay was regarded by the Court as acquiescence (i.e. acceptance of or consent to that situation)⁹ in the conduct complained about and the complains therefore were considered not made in good faith¹⁰.

• Agreements between the parties are paramount consideration

One of the first questions that the Court will ask in an oppression case is whether the conduct of which the shareholder complains was in accordance with the constitution of the company, since this is a document which provides the contractual terms governing the relationships of the shareholders with the company and each other. The Court regarded keeping promises and honoring agreements as probably the most important element of commercial fairness.¹¹ On this basis, shareholders (especially minority) should not disregard the importance of having a shareholders agreement that reflects the real intention of the shareholders when they invest in the company. This is because the terms of the shareholders agreement will eventually be incorporated into the constitution of the company (which will be first referred to in the event of a dispute).

It is also important to note that there are many cases where shareholders agreements are not incorporated into the constitution of the company, resulting in no obligation on the part of the company to observe the terms of the shareholders agreement. In this situation, in the event of inconsistencies between the shareholders agreement and the constitution, the constitution will prevail¹².

• Reflective loss principle

A shareholder is barred from directly bringing or relying on ‘losses’ of the company to seek relief for himself (unless by way of derivative action) because the shareholder’s alleged loss was merely a reflection of the company’s loss¹³ and not a personal loss¹⁴. Recovery by the shareholder of the loss he suffered is prohibited, as this would mean making the wrongdoer liable for the same wrong twice¹⁵.

The only exception to that rule is when the wrongdoer, by a breach of duty owed to the shareholder, has actually disabled the company from pursuing such course of action.¹⁶

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1. Pan Pacific Construction Holdings Sdn Bhd v. Ngiu Kee Corporation (M) Bhd & Anor [2010] 6 CLJ.
2. Jaya Medical Consultants Sdn Bhd v Island & Peninsular Bhd & 13 Ors [1993]1 LNS 32.
3. In a quasi partnership company (partners in joint venture business under the corporate umbrella) members are obliged in law to act in good faith to one another because there exist between them fiduciary duties as in a partnership. However, there is no general duty of good faith owed by shareholders in a company (not in the nature of quasi partnership) to each other as a share is a property which its holder as of right is entitled to utilize it in any manner he may wish (Pan Pacific Construction Holdings Sdn Bhd v. Ngiu Kee Corporation (M) Bhd & Anor [2010] 6 CLJ).
4. Chin Chee Fui v Kong Yin Siong & Ors [2017] MLJU 791.
5. As evidenced by a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect (e.g.. majority shareholders act to override or brush aside the minority interest which the majority is aware of).
6. Re Kong Thai Sawmill (Miri) Sdn Bhd; Kong Thai Sawmill (Miri) Sdn Bhd & Ors v. Ling Beng Sung [1978] 1 LNS 170; [1978] 2 MLJ 227.
7. Tan Seng Chee & Ors v SLS Bearings (Malaysia) Sdn Bhd & Ors [2016] MLJU 580.
8. Since Companies Act 2016 is a newly enforced Act, all cases on shareholders oppression this far were decided in light of Section 181 of Companies Act 1965, a section which is in pari materia with this new Section 346(1).
9. Mascon Rinota Sdn Bhd & Ors v. Rinota Construction Sdn Bhd [2016] 4 CLJ.
10. Re Senson Auto Supplies Sdn Bhd [1987] 1 LNS 110; [1988] 1 MLJ 326.
11. Pan Pacific Construction Holdings Sdn Bhd v. Ngiu Kee Corporation (M) Bhd & Anor [2010] 6 CLJ.
12. Nevertheless, the shareholders can still take action against each other for breach of the shareholders agreement under the laws of contract.
13. Mascon Rinota Sdn Bhd & Ors v. Rinota Construction Sdn Bhd [2016] 4 CLJ.
14. The shareholder’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participating, are not directly affected by the wrongdoing. The shareholder still holds all the shares as his own absolutely unencumbered property (Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2) [1982] 1 Ch 204).
15. Mascon Rinota Sdn Bhd & Ors v. Rinota Construction Sdn Bhd [2016] 4 CLJ.
16. Mascon Rinota Sdn Bhd & Ors v. Rinota Construction Sdn Bhd [2016] 4 CLJ.

Written by:

Suhara Mohamad Sidik (Partner) suhara@azmilaw.com

Siti Fitrah Mohamed Jamal (general@azmilaw.com)