What happens if there is a shareholder dispute between the shareholders and they cannot see eye to eye anymore (regardless of whether the dispute is between majority shareholders or between majority-minority shareholders)? What can a shareholder do? In this article, we will discuss three remedies that are available in such a situation.
The general rule
The general rule, which can be found in Foss v Harbottle1 dictates that:
- Only the company (via the appropriate individual) can initiate, intervenes or defend a proceeding on behalf of the company; and
- If a majority shareholder of the company is in favor or willingly accepts the consequences of action i.e. wrongdoing for or against the company, no individual member can revisit the matter again (or in Latin, cadit quaestio).
Statutory derivative action
A statutory derivative action is a court application whereby an individual shareholder of a company (with leave from the court) initiates, intervenes, or defend a proceeding on behalf of the company2. This is an exception to the rule laid down in Foss v Harbottle. This is to prevent the company from being incapacitated by the wrongdoings of the shareholders of the company, especially if the wrongdoing is committed by the majority shareholder of the company or the wrongdoing is committed by a faction of the shareholders in a deadlocked company.
An aggrieved person must obtain leave from court before initiating derivative proceedings. In this regard:
- The person must give a 30-day notice to the directors of his intention to obtain leave from the court to initiate a derivatives action and3;
- The person must be acting in good faith4.
Generally5, a derivative action can only be instituted if there is no alternative recourse i.e. winding up on just and equitable ground6 that is available to a fraction of the company shareholders7. However, the above statement does not operate as an immediate or automatic bar to instituting a derivative action. The court held such rule is dependant on the circumstances and facts of each case i.e. the nature of the relief sought and whether the elements of such relief (i.e. just and equitable winding up) can be satisfied in each case8.
Minority oppression was defined in Re Kong Thai Sawmill (Miri) Sdn Bhd9 as conduct by the majority shareholders which visibly departs from the standards of fair dealing and a violation of the conditions of fair play against the minority shareholders10. For a minority shareholder to raise to successfully raise a claim on minority oppression, the court held that:
- There must be identifiable conduct that is deemed to be unfair against the minority shareholder before that conduct is deemed to be oppressive against the minority; and
- The oppression must not be a past oppression i.e. it must be a present one that continued on to the day of the proceedings.
While the court in Re Kong Thai Sawmill (Miri) Sdn Bhd11 held that minority shareholder cannot raise minority oppression merely because he cannot see eye to eye with the majority shareholder, The minority shareholder can only raise minority oppression if:
- He is protecting his interest as a shareholder i.e. he cannot raise minority oppression if he is protecting his interest as a director of the company12.
- The conduct of the majority shareholder is deliberate and indifferent that it causes financial losses to every shareholder of the company, including that of the minority shareholders when the majority shareholders clearly could have prevented such an outcome13; and
- The conduct or decision making by the majority of shareholders must have departed from the practices laid down in the company’s constitution/ articles of association or from the laws and regulations governing corporate affairs14.
Just and equitable winding up
Section 465 (1)(h) and Section 545 (1)(c)(iii) of the Companies Act15 allows the court to wound up a company if it is just and equitable to do so. What amounts to just and equitable was not defined in the act. In fact, it was initially created as common law (i.e. laws created not by legislation or statute but by the court) principle to supplement and recognize the rights of the members of a company that is not defined in the articles/ memorandum of association of the company16.
In Ebrahimi v Westbourne Galleries Ltd and others17 the court held that in cases where this principle is raised, individuals had banded together to form a company on the basis of probity, good faith, and mutual confidence between the individuals. Once the basis of forming the company is broken, it could be safely concluded that the cannot continue to function if there is no mutual confidence or trust between the members of the company. Therefore, it is better for the company to be put out of its misery than to allow it to continue to exist. To allow it to continue to be in existence would eventually create a ‘deadlocked’ company where no resolutions can be passed, thus putting the operation of the company at a standstill and rendering it inoperable18.
However, it must be noted that this principle can only be relied upon if there is a ‘complete deadlock’ within the company19 i.e. the relationship between the members is beyond the point of salvage and it is pointless to allow the company to continue to exist.
We have assisted numerous client regarding shareholder dispute:
1. (1843) 67 ER 189.
2. Section 347 (1), Companies Act 2016.
3. Section 348 (2), Companies Act 2016.
4. Section 348 (4)(a), Ibid.
5. Perak Integrated Network Services Sdn Bhd v Urban Domain Sdn Bhd & Anor  4 MLJ 1.
6. Section 465 (h), Ibid.
7. Barett v Duckett and others  1 BCLC 243.
8. Pang Yong Hock v PKS Contracts Services Pte Ltd.
9.  2 MLJ 227.
10. Elder v & Watson Ltd 1952 SC 49.
11.  2 MLJ 227.
12. Soh Jiun Jen v Advance Colour Laboratory Sdn Bhd & Ors  5 MLJ 342.
13. Ng Chee Keong v Ng Teong Kiat Highlands Plantations Limited  1 MLJ 45.
14. Re Coliseum Stand Car Service Ltd Abdul Khalik v Mohamed Jee & Ors  1 MLJ 109.
16. Ebrahimi v Westbourne Galleries Ltd and others  2 All ER 492 (‘Ebrahimi’). This was subsequently adopted by the Malaysian courts in cases such as Tien Ik Enterprises Sdn Bhd & Ors v Woodsville Sdn Bhd  1 MLJ 769, Dato Ting Check Sii v Datuk Haji Mohamad Tufail Bin Mahmud & Anor  7 MLJ 618 and Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd on behalf of themselves and Pins OSC & Maintenance Services Sdn Bhd through derivative action)  4 MLJ 1.
17.  2 All ER 492.
18. Perak Integrated Network Services Sdn Bhd v Urban Domain Sdn Bhd (on behalf of themselves and Pins OSC & Maintenance Services Sdn Bhd through derivative action) & Anor  4 MLJ 1.
19. Ng Eng Hiam v Ng Kee Wei & Ors  1 MLJ 238.